Can Wendy's (WEN) Earnings Surprise Estimates in Q3? - Analyst Blog

The Wendy's Company ( WEN ) is set to report third-quarter 2014 results on Nov 6, 2014. In the last quarter, the company posted in line results. Let's see how things are shaping up for the upcoming announcement.

Factors to Consider This Quarter

Wendy's earnings have beaten or remained in line with the Zacks Consensus Estimate since the beginning of 2013. Moreover, revenues have been able to beat the consensus mark in the first half of the year. These upsides reflect positive comps and improvement in margins owing to sales initiatives. In fact, the company has posted six consecutive quarters of comps growth since the beginning of 2013.

Wendy's focuses on brand transformation, which includes menu innovation, promotional offers and bold new packaging. These initiatives are expected to aid the top line in the soon-to-be-reported quarter.

Also, the company's efforts to reimage its restaurants have gained traction in the past two years while leading to increased traffic and higher sales. On the promotional front, the company is using digital devices and social media like Facebook and YouTube. All these initiatives are expected to improve its top line and margins. These measures would help the company to continue the trend.

However, like other food and restaurant companies, rising food costs pose a major challenge to Wendy's as well. In fact, margins are expected to be negatively impacted by food costs, particularly due to the higher-than-expected pressure on beef prices. Also, worldwide wage increases and costs incurred to fulfill its sales boost initiatives would compound woes.

One other factor that remains a concern over the near term is franchising of restaurants, a system optimization initiative undertaken by the company in Jul 2013. Though franchising a large chunk of its system will lower Wendy's general and administrative expenses and thereby boost earnings over long term, it would weigh on near-term revenues. In fact, as a result of franchising, the company's revenues have been declining year over year.

Also, revenues are expected to be dampened by temporary restaurant closures due to speeding up of reimaging activity. Owing to the temporary closure of its units, the company expects same restaurant sales growth in the third quarter to be slightly less than the full-year comps growth guidance of 2.5% to 3.5%.

Earnings Whispers?

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

Zacks ESP: Both the Most Accurate estimate and the Zacks Consensus Estimate stand at 9 cents. Hence, the difference is 0.00%.

Zacks Rank #2 (Buy): Though Zacks Ranks #1, 2 or 3 increase the predictive power of ESP, the company's ESP of 0.00% makes surprise prediction difficult. Note that the Sell-rated stocks (#4 and 5) should never be considered going into an earnings announcement.

Stocks to Consider

Other stocks in the broader consumer discretionary sector that have both a positive earnings ESP and a favorable Zacks Rank are:

The Walt Disney Company ( DIS ) with Earnings ESP of +3.41% and a Zacks Rank #2.

Pinnacle Entertainment Inc. ( PNK ) with Earnings ESP of +4.55% and a Zacks Rank #3 (Hold).

Isle of Capri Casinos, Inc. ( ISLE ) with Earnings ESP of +40.00% and a Zacks Rank #3.

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ISLE OF CAPRI (ISLE): 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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