The restaurant industry has been witnessing a series of changes lately. Apart from continuously trying to strategize and retain their competitive positions, restaurant operators are partnering with delivery channels and digital platforms to drive incremental sales. Furthermore, digital innovations have become the need of the hour with the growing clout of internet.
Though these strategic efforts will help rev up sales, margins will continue to be under pressure due to high operating costs. Also, sales-building efforts such as promotional activities and a convincing pricing strategy are detrimental to the industry operators' margins. The industry has been struggling with lower foot traffic as well.
Per TDn2K's The Restaurant Industry Snapshot, the industry witnessed comps growth of 0.4%, 0.1%, 0.8% and 1.2% in fourth-quarter 2017 and the first, second and third quarter of 2018, respectively. Rise in consumer demand and discretionary spending led to comps growth.
However, according to TDn2K, erosion in traffic is a pressing concern. Notably, same-store traffic decreased 1.3% in the third quarter of 2018, proving that only guest checks and not guest counts are contributing to restaurant sales.
Majority of the Zacks sectors (14 out of 16) are expected to perform well in the third quarter of 2018. Restaurants, which are part of the broader Zacks Retail wholesale sector seem to have a solid footing as well. According to the Zacks Earnings Preview report, as of Oct 24, the sector's aggregate third-quarter EPS is expected to increase 15.4% compared to 31.8% in the last reported quarter. Revenues are expected to increase 6.2%, lower than 8.9% in the second quarter. Margins in the quarter under review are anticipated to expand 0.4% compared with the previous quarter's increase of 0.9%.
How to Make the Right Pick?
Amid a wide range of restaurant stocks, it is by no means an easy task for investors to arrive at stocks that have the potential to deliver better-than-expected earnings.
While it is impossible to be sure of the outperformers, our proprietary methodology - a positive Earnings ESP along with a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) - makes it relatively simple. You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .
Earnings ESP is our proprietary methodology for identifying stocks that have high chances of surprising in their upcoming earnings announcement. It shows the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate. Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.
Here are a few restaurant companies that might interest investors.
Brinker International, Inc.EAT surpassed earnings estimates in two of the trailing three quarters, the average beat being 8.9%. With a Zacks Rank #3 and an Earnings ESP of +7.88%, the company is likely to beat estimates in the to-be-reported quarter. The Zacks Consensus Estimate for the quarter is pegged at 42 cents, flat year over year. Brinker is scheduled to release first-quarter fiscal 2018 results on Oct 30. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .
Brinker International, Inc. Price and EPS Surprise
Brinker International, Inc. Price and EPS Surprise | Brinker International, Inc. Quote
Starbucks CorporationSBUX is slated to report fourth-quarter fiscal 2018 results on Nov 1. Apart from carrying a Zacks Rank #3, the company has an Earnings ESP of +1.04% which increases our predictive power for a beat this quarter. Moreover, the consensus estimate for earnings is pegged at 59 cents, projecting 7.3% growth from the year-ago level. In the trailing four quarters, the company's earnings have surpassed the consensus mark by an average of 4.3%.
Starbucks Corporation Price and EPS Surprise
Starbucks Corporation Price and EPS Surprise | Starbucks Corporation Quote
The Wendy's Company 's WEN Earnings ESP of +0.84% and a Zacks Rank #2, indicating a likely earnings beat in the second quarter of 2018. Also, earnings estimates for the quarter are pegged at 15 cents, suggesting 66.7% year-over-year growth. However, the company missed bottom-line expectations in three of the last four quarters, leading to an average negative surprise of 9%. Wendy's is scheduled to release its quarterly numbers on Nov 6.
The Wendy's Company Price and EPS Surprise
The Wendy's Company Price and EPS Surprise | The Wendy's Company Quote
Shake Shack Inc.SHAK is slated to report third-quarter 2018 results on Nov 1. The company has a Zacks Rank #3 and an Earnings ESP of +8.17%. The consensus estimate for third-quarter earnings is pegged at 13 cents. Moreover, the company posted a positive earnings surprise in each of the trailing four quarters, the average being 67.4%.
Shake Shack, Inc. Price and EPS Surprise
Shake Shack, Inc. Price and EPS Surprise | Shake Shack, Inc. Quote
BJ's Restaurants, Inc.BJRI has an Earnings ESP of +15.94% and a Zacks Rank #3 for the third quarter of 2018. The consensus estimate for earnings is pegged at 23 cents, mirroring growth of 53.3% from the year-ago level. Moreover, the company posted a positive earnings surprise in each of the trailing three quarters, the average being 21%. The company is scheduled to report earnings on Oct 30.
BJ's Restaurants, Inc. Price and EPS Surprise
BJ's Restaurants, Inc. Price and EPS Surprise | BJ's Restaurants, Inc. Quote
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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free reportStarbucks Corporation (SBUX): Free Stock Analysis ReportThe Wendy's Company (WEN): Free Stock Analysis ReportShake Shack, Inc. (SHAK): Free Stock Analysis ReportBrinker International, Inc. (EAT): Free Stock Analysis ReportBJ's Restaurants, Inc. (BJRI): Free Stock Analysis ReportTo read this article on Zacks.com click here.Zacks Investment Research