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Will Increased Expenses Hurt Wingstop's (WING) Q3 Earnings?

Wingstop, Inc. WING is set to report third-quarter 2017 results on Nov 2, after the market closes. Markedly, this will be the company’s tenth quarterly result since its IPO in June 2015.

In fact, Wingstop has surpassed the Zacks Consensus Estimate in each of the last nine quarters. However, our proven model does not conclusively show earnings beat for the company in the -to-be-reported quarter. This is because a stock needs to have both — a positive Earnings ESP and a Zacks Rank #3 (Hold) or better — for this to happen. Unfortunately, that is not the case here.

Zacks ESP: Wingstop has an Earnings ESP of -0.62%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Wingstop has a Zacks Rank #4 (Sell).

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

Wingstop Inc. Price and EPS Surprise

Factors at Play

The first and second quarters of 2017 witnessed 11% year-over-year increases in commodity rates for bone-in chicken wings. Wingstop expects year-over-year inflation on bone-in chicken wings to continue in the third quarter as well, which is likely to weigh on margins. However, the companyanticipates the rollout of its split menu to drive mix shift toward the lower-cost boneless wings, which, in turn, might aid in mitigating the impact of inflationary bone-in wings environment to some extent.

Wingstop has also been experiencing higher labor costs and expenses related to unit openings, which may dent quarterly profits further.

Meanwhile, a choppy sales environment in the overall restaurant space might continue to limit revenue growth.

Nevertheless, we expect the company’s relentless focus on menu innovation to drive comps in the to-be-reported quarter. Moreover, the company’s new POS system integrates online orders straight to the kitchen that is expected to further bolster online ordering growth and lead to higher average check.

The Zacks Consensus Estimate for the systemwide comps growth in the quarter is pegged at 2.4%, higher than the prior-quarter’s reported growth of 2%.

Further, solid unit development, increased investments in technology to boost online ordering along with migration to a national advertising platform are likely to drive the quarter’s results. In fact, Wingstop continues to grow its online ordering mix and expects to sustain TV and digital presence to continue building on the momentum established in the first two quarters.

Considering these factors, the Zacks Consensus Estimate for the quarter’s sales is pegged at $25 million, reflecting an increase of 14.7% year over year. This solid revenue growth is anticipated to boost earnings as the consensus estimate for the bottom line is pegged at 15 cents per share, implying a year-over-year improvement of 18.7%.

Stocks to Consider

Here are a couple of restaurant stocks to consider as our model shows that they have the right combination of elements to post earnings beat this quarter.

El Pollo Loco Holdings, Inc. LOCO has an Earnings ESP of +1.65% and a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Noodles & Company NDLS has an Earnings ESP of +66.67% and a Zacks Rank #3.

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

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