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Restaurants: Third-quarter earnings preview

The major restaurant companies generally are expected to report higher third-quarter earnings, although labor costs and softer sales trends could bring some disappointments, according to analysts.

Earnings season kicks off in earnest when Yum Brands reports third-quarter results after the market close Tuesday. The operator of Taco Bell, KFC and Pizza Hut restaurants is forecast to post a per-share profit increase of 22 percent in the September quarter as it benefits from weak year-ago comparisons, although analysts say the near-term outlook for China's fast food sector remains challenging.

"If the 3Q comp in China turns out to be positive, we would not read too much into it as the sales recovery thus far has been choppy," Goldman Sachs analyst Karen Holthouse wrote in a note published Monday. "We see macro, industry and YUM-specific risks to the trajectory as well as ongoing risks to sustainably positive comps."

One caution sign for future growth is the National Restaurant Association's Restaurant Performance Index (RPI) for August — a monthly survey of restaurant operators' expectations. The latest RPI showed weakness due to softer same-store sales and customer traffic levels.

Investors appear to have brushed off any worries. Restaurant stocks as measured by the S&P restaurant index (+19 percent year to date) are handily beating the broad market so far this year...