Key Predictions For Q3 Earnings Reports Of MCD & CMG

The Q3 reporting cycle has started on an encouraging note with multiple companies reporting significant earnings and revenue growth compared with the prior quarters. Particularly, the momentum on the revenue side is quite palpable.

Per the latest Earnings Preview, total earnings for the 87 S&P 500 members that have reported results (as of Oct 20) are up 9.4% from the year-ago period, courtesy a 7.3% rise in revenues. Notably, 71.3% of the companies that have posted their quarterly numbers have surpassed earnings estimates, while 70.1% have exceeded top-line expectations.

Restaurant Stocks in Focus

The restaurant industry belongs to the broader Retail-Wholesale sector and the space is expected to deliver mixed performance this earnings season. Overall Q3 earnings for the sector are expected to be down 2.2% year over year, though revenues are anticipated to rise 5.8%.

In the recent quarters, the restaurant industry’s sales trends have been very challenging, given soft consumer spending on dining out, which has resulted in low consumption. Declining comps due to sluggish traffic trends along with rising costs are thus taking the sheen out of restaurant companies. Nevertheless, restaurant operators are undertaking various sales building and digital initiatives to enhance guest experience and, in turn, drive traffic and comps.

Also, the third quarter of 2017 marked the seventh consecutive quarter of negative comparable sales (comps) for the restaurant industry as a whole, per TDn2K’s Black Box Intelligence. Markedly, the quarter posted the second worst sales and traffic growth rates in over five years. In fact, the recent hurricanes appear to have particularly impacted results for restaurant companies in the quarter.

Thus, though the overall scenario is still bordering on the negative and the earnings picture seems to be less enticing, innovative operators with strong fundamentals are likely to continue exhibiting strength even in a not-so-favorable environment.

Let’s take a look at what might be in store for the two restaurant companies that are set to report their third-quarter 2017 results on Oct 24. Will these companies manage to put up a decent performance?

Chipotle Mexican Grill, Inc. (NYSE:CMG) came up with a positive earnings surprise of 7.41% in the last quarter. However, the trailing four-quarter average earnings surprise is a negative 3.94%.

Chipotle Mexican Grill, Inc. Price and EPS Surprise

Chipotle Mexican Grill, Inc. Price and EPS Surprise | Chipotle Mexican Grill, Inc. Quote

Our proven model does not conclusively show earnings beat for Chipotle this quarter. This is because, according to our quantitative model, a company needs the right combination of the two key ingredients – a positive Earnings ESP and a Zacks Rank #3 (Hold) or better – to increase its odds of an earnings surprise.

For the quarter, the company has an Earnings ESP of -6.08% and a Zacks Rank #5 (Strong Sell). You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

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

Notably, the company’s earnings and revenues are likely to improve year over year. In fact, the Zacks Consensus Estimate for the quarter’s earnings stands at $1.60, representing a year-over-year increase of over 100%. Also, revenues are estimated to improve 10.2% to $1.14 billion.

However, it is to be noted that the to-be-reported quarter is expected to witness easy year-over-year comparisons as Chipotle was in the midst of its massive food-safety scandal this time last year.

Though Chipotle’s new brand-management efforts, continual restaurant openings along with various sales-building initiatives bodes well, renewed food safety concerns may pressurize the company’s top line. Also, costs associated with marketing programs, higher labor expenses along with elevated food costs, given rise in avocado prices, are likely to dent the quarter’s profitability (read more: Will Food Safety Issues Hurt Chipotle's Q3 Earnings?).

McDonald's Corp. (NYSE:MCD) pulled off a positive earnings surprise of 6.79%. In fact, the company’s earnings surpassed the Zacks Consensus Estimate in each of the last 12 quarters, with the trailing four-quarter average earnings surprise coming in at 7.44%.

McDonald's Corporation Price and EPS Surprise

McDonald's Corporation Price and EPS Surprise | McDonald's Corporation Quote

We expect the company to surpass expectations in the quarter due to the combination of its Zacks Rank #2 (Buy) and Earnings ESP of +0.18%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for revenues in the U.S. segment is currently pegged at nearly $2 billion, reflecting a decline of nearly 4% year over year, given the prevailing challenging restaurant environment in the domestic space. Nevertheless, various sales and digital initiatives undertaken are likely to drive the segment’s comps.

The Zacks Consensus Estimate for revenues stands at $1.82 billion and $1.48 billion for International Lead Markets and High-Growth Markets, reflecting a year-over-year decline of over 3% and 10%, respectively. Political and economic unrest in key operating regions are likely to hurt sales, despite consistent efforts to improve performance and drive comps in these markets.

Meanwhile, though increased focus on refranchising is likely to boost earnings, it may hamper the quarter’s revenue growth. The Zacks Consensus Estimate for the quarter’s earnings is pegged at $1.75, representing a year-over-year increase of 8.1%. The same for revenues is projected to be $5.8 billion, down 10.2% from the prior-year quarter (read more: Will Comps Growth Drive McDonald's Q3 Earnings?).

Stay tuned! Check back on our full write-up on earnings releases of these stocks.

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