What's in Store for Wendy's Company (WEN) this Earnings? - Analyst Blog
The Wendy's Company ( WEN ) is set to report fourth-quarter 2014 results this month. Last quarter, it posted a negative earnings surprise of 11.11%. Let's see how things are shaping up for this announcement.
Factors to Consider this Quarter
On Feb 3, 2015, Wendy's posted preliminary fourth-quarter 2014 results. The company expects fourth-quarter 2014 adjusted earnings to be 10 cents, up 43% year over year. Comps at company-operated restaurants are expected to increase 1.9% in the fourth quarter while comps at North American franchise-operated restaurants are expected to be up 1.6%. North America company-operated restaurant margin is expected to increase 50 basis points to 16.8% in the fourth quarter of 2014. The improvement in comps and margins reflects the initiatives taken by the company to boost sales. However, higher commodity costs are expected to take a toll over these initiatives.
Total revenue in the fourth quarter is expected to decline 15% year over year to $502 million. The decline reflects reduction in the number of company-operated restaurants as a result of the company's system optimization initiative. As part of its brand transformation program, the company undertook a system optimization initiative in Jul 2013 and continues to focus on it. This initiative aims at changing its business to a franchise-based model and lowering the ownership of outlets. Though the reduction in ownership is currently weighing on near-term revenues, franchising a large chunk of its system is helping to lower overhead expenses and thereby boost earnings.
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: The Most Accurate estimate and the Zacks Consensus Estimate both stand at 5 cents. Hence, the difference is 0.00%.
Zacks Rank #3 (Hold): Wendy's Zacks Rank #3 increases our predictive power. Then again, the 0.00% ESP makes surprise prediction difficult.
We caution against stocks with a Zacks Rank #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.
Stocks to Consider
Other stocks in the restaurant industry and the broader consumer discretionary sector that have both a positive earnings ESP and a favorable Zacks Rank include:
Kona Grill Inc. ( KONA ) with an Earnings ESP of +11.11% and a Zacks Rank #1 (Strong Buy).
Diversified Restaurant Holdings, Inc. ( BAGR ) with an Earnings ESP of +33.33% and a Zacks Rank #2 (Buy).
Texas Roadhouse, Inc. ( TXRH ) with an Earnings ESP of +3.85% and a Zacks Rank #2.