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Restaurant Stock Q2 Earnings Due on Aug 2: YUM, WING & SHAK

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The second-quarter earnings season is underway with 265 S&P 500 members having released their quarterly numbers (as of Jul 27). Per the latest Earnings Preview, 80.8% of the companies, which have already reported their results, surpassed earnings estimates while 72.1% beat revenue estimates. Further, the total earnings of these companies increased 23.6% from the same period last year on 10.1% higher revenues.

The report projects 23.6% year-over-year rise in the total earnings for S&P 500 companies, with revenues likely to increase 8.8%. This compares with the year-over-year increase of 24.6% for earnings and 8.6% year-over-year revenue growth in the first quarter.

Retail Sector Earnings Expectations

The majority of the Zacks broader sectors (12 out of 16) are expected to report double-digit growth in the second quarter. Restaurants in the wider Retail-Wholesale sector seem to have a solid footing as well. The latest earnings outlook predicts 26.1% rise in the sector’s second-quarter earnings compared with 21.1% growth in the last reported quarter. Revenues are expected to rise 7.8% (a little lower than the first quarter’s 8.8%). Margins are anticipated to increase 0.7% compared with the last reported quarter’s increase of 0.5%.

Restaurant Industry Looks Up

After surviving declining comps for seven quarters, the restaurant industry made a spectacular comeback in the fourth quarter of 2017. Ever since the industry has been recovering slowly yet steadily. Per TDn2K’s The Restaurant Industry Snapshot, the industry witnessed comps growth in three straight quarters — 0.4% in fourth-quarter 2017, 0.1% in first-quarter 2018 and 0.8% in the second quarter. In the first half of 2018, overall sales inched up 0.5% against 1.2% fall in the first half of 2017.

Growth in comps throughout the first half of 2018 can be attributed to rise in consumer demand and discretionary spending. This is evident from the guest check’s growth in the recent quarters. For the first six months of 2018, average check increased 2.9%, up from the 2.2% rise a year ago.

Despite the improving trend, a few concerns hover. The overall Retail – Restaurants industry’s year-to-date collective decline has been 2.8% against the S&P Composite market’s increase of 5.1%. Persistent erosion in traffic is the foremost concern. Notably, per TDN2K, same-store traffic was down 2% in the second quarter of 2018, proving that only guest checks and not guest counts are contributing to restaurant sales.

Restaurant Stocks to Report Q2 Earnings on Aug 2

YUM! Brands, Inc. (YUM - Free Report) is known for its de-risking strategy via which the company is continuously reducing the ownership of restaurants and expanding its franchise business. We believe that the company might have seen slight sales lag as continued refranchising initiatives might have reduced sales. Consequently, the Zacks Consensus Estimate for the to-be-reported quarter’s revenues is pegged at $1.4 billion, with a projection of a 5.6% decline from the year-ago quarter.

However, these refranchising initiatives are expected to reduce the company’s capital requirements and facilitate earnings-per-share growth. We expect second-quarter earnings to have benefitted from such efforts. The consensus estimate pegs second-quarter earnings at 74 cents, mirroring an 8.8% increase from the year-ago quarter. (Read More: Refranchising Strategy to Aid YUM! Brands Q2 Earnings)

The company currently carries a Zacks Rank #3 (Hold) and an Earnings ESP of +0.64%, a combination that indicates a likely beat. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Yum! Brands, Inc. Price and EPS Surprise

Shake Shack Inc.’s (SHAK - Free Report)  top line has been constantly improving over the last few quarters. The momentum is expected to continue in the second quarter as well. Subsequently, the consensus estimate for revenues is $110.2 million, up 20.7% from the prior year’s actual figure. Top-line growth is attributed to the company’s continual efforts to cash on the diversification of its licensing business, the resource-light and efficient model, the low-risk royalty stream, and the opportunity to reach places that it could not reach domestically. 

However, on the earnings front, the company is likely to witness a decline in the second quarter, due to higher labor and pre-opening costs and unfavorable foreign exchange translations. The consensus estimate for second-quarter earnings is pegged at 17 cents, lower than 20 cents recorded in the year-ago quarter. (Read More: Will Robust Sales Drive Shake Shack's Q2 Earnings?)

Shake Shack presently has a Zacks Rank #3 and an Earnings ESP of -7.84%, decreasing the odds of a beat.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Shake Shack, Inc. Price and EPS Surprise

Wingstop, Inc. (WING - Free Report) relies on robust top-line growth, favored by the company’s relentless focus on menu innovation and unit expansion. Various sales-building initiatives have driven Wingstop’s comparable sales in the last reported quarter. We believe that consistent menu innovation in order to increase the customer base should have driven sales in the second quarter as well. Subsequently, the consensus estimate for the to-be-reported quarter’s revenues is pegged at $37.2 million, predicting year-over-year growth of 50.8%.

Notably, a robust top line resulted in 31% growth in Wingstop’s adjusted EBITDA in the first quarter of 2018. Favorable pricing of menu is also helping the company to witness strong margins for some time now. The trend is expected to have continued in the second quarter. The consensus estimate for second-quarter earnings is pegged at 21 cents, suggesting growth of 16.7% from the year-ago quarter. (Read More: Sales Building Efforts to Aid Wingstop's Q2 Earnings)

Despite carrying a Zacks Rank #1, Wingstop’s Earnings ESP is -1.16%. Therefore, chances of a beat in second-quarter earnings are difficult for the company.

Wingstop Inc. Price and EPS Surprise

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