Wendy's (WEN) Q3 Earnings to Gain From System Optimization

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The Wendy's CompanyWEN is slated to release third-quarter 2018 results on Nov 6, after the closing bell.

In the third quarter, the company's top line is expected to have benefited from continued sales-boosting efforts. Additionally, system optimization initiatives are likely to give a boost to the bottom line as well.

Wendy's initiatives like menu innovation, technological upgrades, international expansion and re-imaging of units have helped its shares to gain 13.9% in the past year, outperforming the industry 's 8.6% rally.

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

Top Line Picture

After witnessing sales decline in a few quarters of 2017, Wendy's witnessed 5.4% and 3.9% year-over-year increase in revenues in the first and second quarter of 2018, respectively. 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 third quarter is pegged at $406.4 million, reflecting a 31.9% 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.

Comps Growth in the Cards

Notably, second-quarter 2018 marked the 21st 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 third quarter of 2018, the consensus estimate for company-operated comps is projected to grow 2.5%, comparing favorably with 2% growth recorded in the second quarter. Moreover, franchised comps are projected to increase 2%.

Earnings to Gain

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 third quarter, the consensus estimate for earnings stands at 15 cents, reflecting 66.7% year-over-year growth.

In the last reported quarter, system optimization favored the company's adjusted EBITDA, which grew 1.5% from the year-ago level. Earnings in the first quarter also grew 7.7% year over year on higher revenues.

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 0.00% and a Zacks Rank #2, a combination that decreases the likelihood of an earnings beat.

The Wendy's Company Price and EPS Surprise

The Wendy's Company Price and EPS Surprise | The Wendy's Company Quote

Stocks to Consider

Here are some companies in the Retail- Wholesale space, which per our model have the right combination of elements to post an earnings beat in the respective quarters.

RH RH currently sports a Zacks Rank #1 and has an Earnings ESP of +1.39%. The company is expected to report quarterly results on Dec 4.

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

Jack in the Box Inc. JACK has an Earnings ESP of +2.38% and a Zacks Rank #3. The company is anticipated to report quarterly results on Dec 5.

American Eagle Outfitters AEO has an Earnings ESP of +2.95% and a Zacks Rank #3. The company is anticipated to report quarterly results on Dec 5.

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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 , Earnings
Referenced Symbols: AEO , WEN , JACK , RH

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