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Will Revenue Growth Drive El Pollo Loco's (LOCO) Q3 Earnings?

El Pollo Loco Holdings, Inc. LOCO is scheduled to report third-quarter 2017 results on Nov 2, after market close.

Last quarter, El Pollo Loco Holdings came up with a positive earnings surprise of 5.00%. In fact, the company has surpassed earnings in two of the trailing four quarters, recording an average beat of 1.59%.

Consistent unit development is likely to drive the company’s top line in the quarter. For the current quarter, the Zacks Consensus Estimate for revenues is pegged at $97 million and $6.3 million for company-operated restaurant and franchise, reflecting a year-over-year increase of 7.8% and 3.1%, respectively.

Notably, El Pollo Loco is known for its various sales building efforts. The company’s relentless focus on providing excellent service, reasonable pricing and its advertising campaign are expected to continue to boost comps. Banking on menu innovation, limited time offers and a strong brand positioning, the company witnessed traffic growth in the last reported quarter. The trend is expected to continue in the to-be-reported quarter.

Notably, the consensus estimate for system-wide comps growth in the third quarter is pegged at 2.3% as compared with 1.6% recorded in the prior-year quarter.

In the third quarter, comps at company-operated restaurants are estimated to grow 2.1% year over year whereas the same at Franchise restaurants are projected to rise 2.4%. In the year-ago quarter, comps at company-operated restaurants and Franchise restaurants grew 1.4% and 1.8%, respectively.

In addition to its sales-boosting efforts, El Pollo Loco has made significant progress in various technology initiatives, designed to provide convenience to its loyalty customers. In the second quarter, the company had initiated its partnership with Olo's Dispatch Delivery service, which covers 40% of El Polo Loco’s system-wide locations. The company expects the technological and delivery initiatives to be one of the major sales drivers in the to-be-reported quarter. The consensus estimate for current-quarter revenues is at $103.2 million, reflecting a 7.7% year-over-year increase.

However, the recent hurricanes — Harvey and Irma — are likely to impact the company’s performance in the third quarter. In fact, according to data from Black Box Intelligence, overall restaurant comps declined 1.9% year over year in the month of September.

Shares of a number of restaurants including El Pollo Loco plummeted after the storms hit the United States. In the past three months, the company lost 13.4%, comparing unfavorably with the industry’s gain of 3%.

Meanwhile, higher labor costs, pre-opening costs of outlets and expenses related with the execution of various initiatives are expected to keep profits under pressure.

Nevertheless, higher revenues are expected to propel earnings in the to-be-reported quarter. The consensus estimate for earnings in the quarter is pegged at 18 cents, reflecting 1.1% year-over-year growth.

Our predictive quantitative model also shows that El Pollo Loco has the right combination of two main ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat.

Zacks ESP: El Pollo Loco has an Earnings ESP of +1.65%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: The company currently has a Zacks Rank #2 (Buy).

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


Stocks to Consider

Here is a list of companies in the Retail-Wholesale sector, which, as our model shows, have the right combination of elements to post an earnings beat this quarter.

Noodles & Company NDLS  has an Earnings ESP of +66.7% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

DineEquity, Inc. DIN has an Earnings ESP of +5.14% and a Zacks Rank #3.

Alibaba Group Holding Limited BABA has an Earnings ESP of +2.52% and a Zacks Rank #3.

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