4 Restaurant Stocks Poised to Trump Estimates in Q2 Earnings

Restaurant companies’ top lines in second-quarter 2022 are likely to reflect robust off-premise sales, an uptick in demand and a sequential improvement in comparable store sales. However, higher cost of employee wages, benefits and insurance, and inflation are likely to have negatively impacted the bottom line.

The latest Earnings Trend report suggests that the Zacks Retail-Wholesale sector’s second-quarter earnings are expected to decline 20.8% from the year-ago period’s reported figure. The previous quarter recorded a 17.5% decrease. The sector’s revenues are projected to increase 5.9%, indicating a fall from the previous quarter’s 6.6% rise. However, margins are expected to decline 1.6%, implying deterioration from the 1.3% decrease in the prior quarter.

Let us discuss the factors that might have played a key role in shaping the performance of the restaurant stocks in the June quarter.

Key Factors to Consider for Restaurant Stocks

Restaurant operators’ top lines in second-quarter 2022 are likely to have benefited from digital innovation and sales-building endeavors. With the growing influence of the Internet, digital innovation became the need of the hour. The industry operators are benefiting from partnerships with delivery channels and digital platforms.

The industry has been gaining from the increase in off-premise sales, which primarily include delivery, takeout, drive-thru, catering, meal kits and off-site options, such as kiosks and food trucks, owing to the coronavirus pandemic. Most restaurant operators initiated testing ghost or virtual kitchens. The idea of providing off-premise offerings and a connected curbside service is steadily garnering positive customer feedback.

However, high cost of operation continues to hurt the industry operators. Rise in wages and food cost inflation are likely to have squeezed margins in second-quarter 2022. Higher pre-opening costs, marketing expenses and costs related to sales-boosting initiatives are weighing on the companies’ margins. The spike in meat and seafood costs, including ribs, prime rib, ribeye and tri-tip, and salmon, is affecting the industry.

How to Make the Right Pick?

Given the wide range of companies in this space, the task is by no means easy. While it is impossible to be sure of the outperformers, our proprietary methodology — a positive Earnings ESP along with a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — makes it relatively simple. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP is our proprietary methodology for identifying stocks with high chances of delivering a surprise in their upcoming earnings announcements. It shows the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate. Our research shows that for stocks with the above-mentioned combination, chances of a positive earnings surprise are as high as 70%.

Our Choices

Here are a few restaurant companies that investors can check out.

McDonald's Corporation MCD is scheduled to report second-quarter 2022 results on July 26, before the opening bell. MCD currently has a Zacks Rank #3 and an Earnings ESP of +3.13%. You can see the complete list of today’s Zacks #1 Rank stocks here.

McDonald's second-quarter performance is likely to have benefited from digital efforts, strong marketing campaigns, robust drive-thru presence and expansion initiatives. Besides, solid enrolment and participation in the loyalty program, frequent visits from loyalty customers (driven by loyalty usage and app-exclusive promotions) and an increased app adoption are likely to have aided MCD’s performance in the to-be-reported quarter.

MCD’s June-quarter top-line result is likely to reflect better comps on average check growth, higher menu prices and compelling value programs. On the previous quarter’searnings call McDonald's mentioned witnessing positive comps growth in the United States, Japan and Latin America. With heightened digital engagement and strong menu initiatives, the momentum is likely to have continued in the second quarter as well.

The Zacks Consensus Estimate for second-quarter 2022 earnings is pegged at $2.46 per share, suggesting growth of 3.8% from $2.37 reported in the prior-year quarter.

McDonald's Corporation Price and EPS Surprise

McDonald's Corporation price-eps-surprise | McDonald's Corporation Quote

Papa John's International, Inc. PZZA is scheduled to report second-quarter 2022 results on Aug 4, before the opening bell. PZZA currently has a Zacks Rank of 3 and an Earnings ESP of +2.74%.

PZZA’s second-quarter top-line is likely to have benefited from product innovation, partnerships, international expansion and franchising initiatives. Papa John's comps are likely to have been aided by menu innovation, strategic pricing actions and higher unit counts. However, high costs are likely to have negatively impacted the bottom line.

The Zacks Consensus Estimate for second-quarter 2022 earnings is pegged at 73 cents per share, suggesting a decline of 21.5% from 93 cents reported in the prior-year quarter.

Papa John's International, Inc. Price and EPS Surprise

Papa John's International, Inc. price-eps-surprise | Papa John's International, Inc. Quote

The Wendy's Company WEN is scheduled to report second-quarter 2022 results on Aug 10, before the opening bell. WEN is currently Zacks #3 Ranked and has an Earnings ESP of +0.46%.

Wendy's top line in the quarter to be reported is likely to have been aided by a robust breakfast business, focus on menu innovation, technological upgrades and an international expansion. However, higher labor rate, increased commodity costs and a decline in customer counts are likely to have dented its bottom line in second-quarter 2022.

The Zacks Consensus Estimate for second-quarter 2022 earnings is pegged at 22 cents per share, suggesting a decline of 18.5% from 27 cents reported in the prior-year quarter.

The Wendy's Company Price and EPS Surprise

The Wendy's Company price-eps-surprise | The Wendy's Company Quote

Texas Roadhouse, Inc. TXRH is slated to report second-quarter 2022 results on July 28, before the opening bell. TXRH currently has a Zacks Rank #2 and an Earnings ESP of +1.01%.

Texas Roadhouse’s second-quarter 2022 revenues are likely to have benefited from an increase in average weekly sales at company restaurants and comparable restaurant sales growth. However, commodity cost inflation, and wage and other labor inflation  might have been headwinds.

The Zacks Consensus Estimate for second-quarter 2022 earnings is pegged at $1.01 per share, suggesting a decline of 6.5% from $1.08 reported in the prior-year quarter.

Texas Roadhouse, Inc. Price and EPS Surprise

Texas Roadhouse, Inc. price-eps-surprise | Texas Roadhouse, Inc. Quote

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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.