Potbelly (PBPB) Q1 Earnings: Will Solid Comps Drive Stock?

Potbelly Corporation (NASDAQ:PBPB) is set to report first-quarter 2016 results on May 3, after the market closes.

Last quarter, the company posted a positive earnings surprise of 33.33%. Moreover, the Chicago-based casual-dining restaurant chain has surpassed estimates in two of the trailing four quarters, with an average positive surprise of 15.78%.

Let’s see how things are shaping up for the upcoming announcement.

Factors to Consider

Potbelly has been reporting positive comps over the past few quarters and we expect the trend to continue in the to-be-reported quarter as well. Positive traffic trends — mainly on the back of extensive menu innovation and aggressive marketing initiatives — are expected to drive comps.

Further, the company is focused on unit growth in the U.S. to cash in on increasing consumer demand for fast-casual restaurants, which should continue to add to the top line in the first quarter. Additionally, the company’s catering, delivery and pickup services should aid sales. The company is also boosting its digital, social and mobile presence to resonate better with guests, and these efforts are expected to support traffic growth.

Nevertheless, we are concerned about rising costs. Increased labor expenses, due to minimum wage increases across some of the markets in which Potbelly operates, would pose as headwinds. As a result, the company’s rising cost structure is likely to hurt margins in the first quarter.

Earnings Whispers

Our proven model does not conclusively show that Potbelly is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here, as you will see below.

Zacks ESP: The Earnings ESP for Potbelly is 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate are pegged at 4 cents.

Zacks Rank: Potbelly has a Zacks Rank #3, which when combined with a 0.00% ESP, makes surprise prediction difficult.

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

Stocks to Consider

Here are some restaurant stocks that investors may consider, as our model shows that they have the right combination of elements to post an earnings beat this quarter:

The Wendy's Company (NASDAQ:WEN) , with an Earnings ESP of +16.67% and a Zacks Rank #1.

Bojangles', Inc. (NASDAQ:BOJA) , with an Earnings ESP of +5.88% and a Zacks Rank #3.

Red Robin Gourmet Burgers Inc. (NASDAQ:RRGB) , with an Earnings ESP of +0.91% and a Zacks Rank #3.