Strong Top Line to Drive El Pollo Loco (LOCO) Q2 Earnings

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El Pollo Loco Holdings, Inc.LOCO is scheduled to report second-quarter 2018 results on Aug 2, after the market closes .

The company's strong sales-building strategies and the consistent unit development are likely to reflect in the second quarter's top line. Despite the high cost of operations, earnings might have gained from tax benefits and the closure of restaurants.

Notably, shares of El Pollo Loco have underperformed the industry in the past year. The stock has lost 10.9% against the industry's collective increase of 4.6%.

Let's find out how the company will shape up in second-quarter results.

Overall Top-Line Scenario

The Zacks Consensus Estimate for El Pollo Loco's second-quarter revenues is pegged at $111.5 million, suggesting growth of 5.7% from the second quarter of 2017. This estimated growth is attributable to the company's various sales-building efforts. The company's relentless focus on providing excellent service and reasonable pricing, and its advertising campaigns are expected to continue boosting revenues. Banking on menu innovation, limited-time offers and a strong brand positioning, the company witnessed sales growth in the last reported quarter. The trend is expected to continue in the to-be-reported quarter.

In addition to these innovative strategies, El Pollo Loco has made significant progress with various technology initiatives, designed to provide convenience to loyalty customers. Last year, the company initiated a partnership with Olo's Dispatch Delivery service, which currently covers 65% of El Polo Loco's system-wide locations.

While these initiatives are likely to have boosted the company's traffic, an overall reduction in average check may have affected its second-quarter comps. During the first quarter, the company also closed two restaurants in Texas. Subsequently, the consensus estimate indicates a decline of 1.2% in system-wide comps in the second quarter, comparing unfavorably with 2.9% growth in the year-ago quarter and 1.1% fall in the prior quarter. Moreover, franchise and company-owned comps in the second quarter are estimated to fall 0.7% and 1.9%, respectively, comparing unfavorably with the prior-year quarter's comps.

Earnings Likely to Gain Despite High Costs

The consensus estimate for second-quarter earnings is pegged at 22 cents, suggesting 4.8% growth from the year-ago quarter. Although higher labor costs, pre-opening cost of outlets and expenses related to the execution of various sales-building initiatives are supposed to have affected profits, strong top-line momentum is likely to have offset the woes. Also, the company expects to realize synergies related to the tax cut and lower cost of commodities.

Our Quantitative Model Predicts a Beat

El Pollo Loco has the right combination of two main ingredients - a positive  Earnings ESP  and a Zacks Rank #3 (Hold) or higher - for increasing the odds of an earnings beat.

Earnings ESP:  The company has an Earnings ESP of +2.27%. You can uncover the best stocks to buy or sell before they're reported with our  Earnings ESP Filter .

Zacks Rank:  The restaurant presently has a Zacks Rank #2 (Buy). You can see  the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .

Meanwhile, we caution against stocks with a Zacks Rank #4 or 5 (Sell-rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

El Pollo Loco Holdings, Inc. Price and EPS Surprise

El Pollo Loco Holdings, Inc. Price and EPS Surprise | El Pollo Loco Holdings, Inc. Quote

Other Stocks to Consider

Here are some other companies in the restaurant space, per our model, which, too, have the right combination of elements to deliver an earnings beat this quarter.

Restaurant Brands QSR currently carries a Zacks Rank #3 and has an Earnings ESP of +1.17%. It is scheduled to release second-quarter results on Aug 1, before the market opens.

With a Zacks Rank #2 (Buy), Wendy's WEN has an Earnings ESP of +1.59%. The company is slated to report its quarterly results on Aug 7, after the market closes.

Brinker EAT has an Earnings ESP of +1.47% and it currently has a Zacks Rank #3. The company is expected to report quarterly results on Aug 9.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Business , Earnings , Stocks
Referenced Symbols: WEN , QSR , EAT , LOCO

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