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Will Wendy's (WEN) Q2 Earnings Benefit From Comps Growth?

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The Wendy’s Company (WEN - Free Report) is slated to release second-quarter 2018 results on Aug 7, after the closing bell.

The company’s top line is expected to have benefited from the continued sales boosting efforts. Moreover, system optimization initiatives are likely to give a boost to the bottom line in the quarter to be reported.

In a year’s time, the company’s shares have rallied 8.6%, outperforming the industry’s 3.4% increase.

Given this backdrop, let’s delve deeper to find out the factors that are likely to have a bearing on the company’s second-quarter results.

Overall Top Line to Gain

After witnessing a sales decline in a few quarters, Wendy’s witnessed a 5.4% year-over-year increase in revenues in the first quarter of 2018. Revenues were favored by increased rental revenues related to Franchise Flips completed in 2017 and positive comps recorded at both company-operated and franchise-operated restaurants.

We expect the upside trend in the top line to have continued in the to-be-reported quarter as well. The Zacks Consensus Estimate for revenues in the second quarter is pegged at $407.6 million, reflecting a 27.2% increase compared with the year-ago quarter’s actual figure. We believe that increased investments in technology like mobile payment and ordering, and customer self-order kiosks, as well as efforts like re-imaging of restaurants and new menu offering, are likely to have boosted traffic and thereby sales.

Same-Store Sales to Grow

Notably, first-quarter 2018 marked the 20th consecutive quarter of same-store sales growth for Wendy’s. This indicates the brand’s long-term strength and relevance. We expect the company to maintain the trend in the soon-to-be-reported quarter through its solid menu pipeline, limited time offers (LTO), marketing initiatives, and increased emphasis on core and price value offerings. In fact, for the second quarter of 2018, the consensus estimate for company-operated comps is projected to grow 1.5%, comparing favorably with 0.8% growth recorded in the last-reported quarter. Also, franchised comps are projected to increase 1.7%, same as the first quarter’s recorded growth.

System Optimization Initiatives to Boost Earnings

Although increased costs, related to sales-boosting initiatives and higher wages, might weigh on margins, the system optimization initiatives are likely to boost the to-be-reported quarter’s earnings on reduced expenses. For the second quarter, the consensus estimate for earnings stands at 16 cents, reflecting 6.7% growth year over year.

In the last-reported quarter, system optimization favored the company’s adjusted EBITDA, which grew 5.4% from the year-ago level. Earnings in the first quarter also grew 37.5% year over year on higher revenues, which is expected to have driven second-quarter earnings as well.

Our Model Suggests a Beat

According to the Zacks model, a company with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) has a good chance of beating estimates if it also has a positive Earnings ESP. Sell-rated stocks (Zacks Rank #4 or 5) are best avoided. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Presently, Wendy’s has an Earnings ESP of +1.59%, and a Zacks Rank #3, a combination that suggests an earnings beat.

The Wendy's Company Price and EPS Surprise

Other Stocks to Consider

Here are some other companies in the restaurant space, which, per our model, have the right combination of elements to post an earnings beat in the to-be-reported quarter.

Jack in the Box (JACK - Free Report) has an Earnings ESP of +0.88% and carries a Zacks Rank #3. The company is scheduled to report quarterly results on Aug 8.

Brinker (EAT - Free Report) , with a Zacks Rank #3, has an Earnings ESP of +2.03%. The company is expected to report quarterly results on Aug 9.

Dave & Buster’s (PLAY - Free Report) has an Earnings ESP of +10.72% and it currently carries a Zacks Rank #2. The company is anticipated to report quarterly results on Sep 4.

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