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Can System Optimization Efforts Aid Wendy's (WEN) Q1 Earnings?

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The Wendy's Company (WEN - Free Report) is scheduled to report first-quarter 2019 numbers on May 8, before the market opens.

The company’s initiatives like menu innovation, technological upgrades, international expansion and re-imaging of units are continuing to drive revenue growth. In the first quarter, the company’s top line is expected to have benefited from continued sales-boosting efforts. Additionally, system optimization initiatives are likely to have given a boost to the bottom line.

Wendy’s earnings surpassed the Zacks Consensus Estimate in three of the trailing four quarters, the average beat being 4.4%. Backed by a decent earnings trend and other efforts, shares of the company have gained 19.1% so far this year, outperforming the industry’s 7% rally.


 

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

Top Line to Gain

In 2018, Wendy’s total revenues increased 3.8%. This upside trend is likely to have continued in the first quarter. Subsequently, the Zacks Consensus Estimate for revenues for the first quarter is pegged at $399.4 million, suggesting 5% growth from the year-ago quarter’s reported figure.

Revenues are being favored by increased rental revenues related to Franchise Flips completed in 2017 and positive comps recorded at company-operated and franchise-operated restaurants.

We believe that increased investments in technology like mobile payment and ordering, customer self-order kiosks, and efforts like re-imaging of restaurants and new menu offering are likely to have boosted traffic and thereby sales.

Comps Growth to Persist

Notably, fourth-quarter 2018 marked the 23rd 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 the solid menu pipeline, limited time offers (LTO), marketing initiatives, and increased emphasis on core and price value offerings.

In fact, for the first quarter of 2019, the consensus estimate for company-operated comps is projected to grow 1.7%, comparing favorably with 0.8% rise recorded in the prior-year quarter. Moreover, franchised comps are projected to increase 1.5% compared with1.7% rise in comps in the first quarter of 2018.

How Will Earnings Shape Up?

Although increased costs related to sales-boosting initiatives and higher wages might weigh on margins, system optimization initiatives are likely to boost the to-be-reported quarter’s earnings on reduced expenses. For the first quarter, the consensus estimate for earnings stands at 12 cents, reflecting 9.1% year-over-year growth.

In the last reported quarter, system optimization favored the company’s adjusted EBITDA, which grew 9.8% from the year-ago level. Earnings in the fourth quarter also grew 77.8% year over year on higher revenues, effective tax rate and strong EBITDA margins.

Our Model Doesn’t Suggest 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 -5.17% and a Zacks Rank #3, a combination that decreases the likelihood of an earnings beat.

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

The Wendy's Company Price and EPS Surprise

 

Peer Releases

Darden (DRI - Free Report) reported third-quarter fiscal 2019 results, wherein earnings and revenues surpassed the Zacks Consensus Estimate. Adjusted earnings of $1.80 per share beat the Zacks Consensus Estimate of $1.75. Moreover, the bottom line increased 5.3% year over year on the back of higher revenues.

Chipotle (CMG - Free Report) reported better-than-expected results in the first quarter of 2019. Adjusted earnings of $3.40 per share surpassed the Zacks Consensus Estimate of $3.01 by 13%. The bottom line also grew 59.6% from the year-ago quarter, backed by increased revenues and lower food costs.

Domino’s (DPZ - Free Report) reported mixed first-quarter 2019 financial numbers, wherein earnings outpaced the Zacks Consensus Estimate but revenues missed the same. Adjusted earnings of $2.20 per share surpassed the Zacks Consensus Estimate of $2.07 and increased 10% on a year-over-year basis. The bottom-line improvement was driven by higher net income and lower diluted share count as a result of share repurchases.

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