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Will Higher Costs Hurt BJ's Restaurants' (BJRI) Q3 Earnings?

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BJ's Restaurants, Inc.BJRI is set to report third-quarter 2015 results on Oct 22, after the market closes. Last quarter, the company posted a positive earnings surprise of 20.51%.

Meanwhile, the company has surpassed earnings estimates in all the four trailing quarters with an average positive earnings surprise of 43.41%.

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

Factors to Consider

With a unique position in the commoditized hyper-competitive bar and grill segment, BJ's Restaurants is well poised to sustain the growth momentum backed by improved operating efficiencies and innovative offerings. Moreover, the California-based fast casual restaurant operator has been streamlining its menu to improve traffic. The restaurateur is offering seasonal beers and several appetizers which should boost traffic.

Moreover, the company's Project Q, focused at improving kitchen productivity, is reducing complexity and simplifying recipes. This initiative has enhanced the overall consistency and quality of its menu. The company's new prototype restaurant, which costs approximately $1 million less than its previous prototype, would aid margins. These initiatives are expected to generate profits in the third quarter and beyond.

However, we expect the company's margins to be under pressure due to increase in wages, especially in California. The implementation of the Affordable Care Act along with an increase in restaurant weeks would result in labor costs, as a percentage of sales, remaining at an elevated level of around 35%.

Further, restaurant opening costs are expected to increase as the company plans to open 16 outlets in 2015. Higher marketing costs are also expected to hurt margins. Due to the aforementioned factors, the company expects cost of sales, as a percentage of sales, to be in the upper 24% range in the third quarter.

Earnings Whispers

Our proven model does not conclusively show that BJ's Restaurants is likely to beat earnings this quarter. That 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 Earnings ESP is -3.33%. This is because the Most Accurate estimate stands at 29 cents and the Zacks Consensus Estimate is pegged higher at 30 cents.

Zacks Rank : BJ's Restaurants' Zacks Rank #3 increases the predictive power of ESP. However, we need to have a positive ESP to be confident about an earnings surprise.

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

Here are a few companies in the restaurant industry which have a favorable Zacks Rank and a positive Earnings ESP and are therefore likely to beat earnings:

Starbucks Corp. SBUX , with an Earnings ESP of +2.33% and a Zacks Rank #2 (Buy).

Wingstop Inc. WING , with an Earnings ESP of +11.11% and a Zacks Rank #2.

Noodles & Co. NDLS , with an Earnings ESP of +14.29% and a Zacks Rank #3.

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BJ'S RESTAURANT (BJRI): Free Stock Analysis Report

STARBUCKS CORP (SBUX): Free Stock Analysis Report

NOODLES & CO (NDLS): Free Stock Analysis Report

WINGSTOP INC (WING): 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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