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Can Wendy's (WEN) Beat Earnings in Q4 on Comps Growth?

The Wendy's CompanyWEN is set to report fourth-quarter and full-year 2015 results on Feb 9, before the opening bell.

Last quarter, the company posted a positive earnings surprise of 12.50% bringing the trailing four-quarter average to 5.35%.

Let's see how things are shaping up for the upcoming announcement.

Factors at Play

Wendy's revenues have been sluggish for a while now due to the system optimization initiative undertaken since Jul 2013 that included franchising of restaurants. Though franchising a large chunk of the company's system will lower the general and administrative expenses and boost earnings over the long term, it is currently weighing on revenues. Also, revenues are expected to be hurt by temporary restaurant closures to speed up the reimaging activity.

In fact, Wendy's expects comps to remain under pressure in the to-be-reported quarter owing to the timing and composition of reimaged restaurants as well as the sale of restaurants under the system optimization initiative.

On the costs front, rising food costs pose a major challenge to Wendy's. In fact, margins are expected to be hurt by increased cost of beef. Also, worldwide wage increases and costs related to the sales boosting initiatives would dampen margins further.

However, revenue declines are expected to be partially mitigated by Wendy's' focus on menu innovation, value-based promotional offers and bold new packaging to increase traffic. In fact, the company has posted continuous comps growth since the beginning of 2013 backed by these initiatives. Meanwhile, to enhance guests' convenience, the company has incorporated digital initiatives - which should aid the top line as well as margins in the fourth quarter.

Earnings Whispers

Our proven model does not conclusively show that Wendy's is likely to beat earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here as you will see below.

Zacks ESP : The company's ESP is 0.00% as both the Most Accurate estimate and the Zacks Consensus Estimate stand at 11 cents.

Zacks Rank : Wendy's' Zacks Rank #2 when combined with 0.00% ESP makes surprise prediction difficult.

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

Stocks to Consider

Some stocks in the restaurant that have both a positive Earnings ESP and a favorable Zacks Rank are:

Jack in the Box Inc. JACK , with an Earnings ESP of +0.97% and a Zacks Rank #1.

Dave & Buster's Entertainment, Inc. PLAY , with an Earnings ESP of +4.76% and a Zacks Rank #1.

Zoe's Kitchen, Inc. ZOES , with an Earnings ESP of +14.29% and a Zacks Rank #2.

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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 report

WENDYS CO/THE (WEN): Free Stock Analysis Report

JACK IN THE BOX (JACK): Free Stock Analysis Report

DAVE&BUSTRS ENT (PLAY): Free Stock Analysis Report

ZOES KITCHEN (ZOES): Free Stock Analysis Report

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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.


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

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