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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."

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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, although in recent days that trend has slowed.

A woman holding an umbrella walks past a KFC restaurant in Shenzhen, China.
Brent Lewin | Bloomberg | Getty Images
A woman holding an umbrella walks past a KFC restaurant in Shenzhen, China.

Cowen & Co.'s Andrew Charles said in a note Monday that he's "most confident in SBUX and BWLD's sales prospects this quarter," referring to Starbucks and Buffalo Wild Wings. "Despite the deteriorating macro environment that could cast dark clouds on 3Q earnings, we find it difficult to identify a single company's results where we are most cautious."

Starbucks' earnings per share for the period ended in September are seen rising by 17 percent, according to analysts polled by Thomson Reuters. Foreign exchange factors and higher investment spending are projected to affect results, which are expected Oct. 29.

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The coffee chain's combined same-store sales will "slow slightly from high single digits" to just 4.9 percent growth, below the Street consensus of 6.6 percent, Jefferies analyst Andy Barish said in a note Monday. Barish believes "there is room for upside to our estimates as SBUX continues to make solid progress with technology/digital investments as well as with its food program."

At Buffalo Wild Wings, third-quarter earnings per share, seen coming Oct. 28, are forecast to rise by 14 percent although some analysts see risk of a miss. "With chicken wing costs proving to be stubbornly high through September and labor cost pressures continuing, we think there is a modest risk to EPS," Barish stated in a note.

Cowen analyst Charles is more upbeat about Buffalo Wild Wings' prospects, however, based on the possibility that third-quarter comps could come in 6.5 percent higher — slightly ahead of consensus estimates for 5.5 percent growth. "We believe sales held up better than consensus expects against easier August/September 2014 comparisons relative to July," Charles said.

McDonald's is forecast by analysts to report third-quarter earnings were up 17 percent, and global same-store sales are expected to turn positive in the September quarter despite no upside seen from the U.S. business. The world's largest hamburger chain is scheduled to report results Oct. 22, and analysts will be looking to hear more information from management about the all-day breakfast plans and any cannibalization of its burger business.

At Chipotle, third-quarter earnings per share are seen increasing by 11 percent, but decelerating same-store sales trends are expected in the September quarter as they lap last year's tough 19.8 percent growth. Chipotle, which is expected to release results Oct. 20, faced same-store sales headwinds in the first half of the year due to a pork supplier disruption at its U.S. restaurants. The company announced last week that pork, which accounts for about 7 percent of its total sales, is now available in 90 percent of its domestic restaurants.

Finally, Panera Bread's third-quarter earnings per share are seen falling 5 percent with higher labor costs from a new national marketing campaign (which includes catering initiatives) pressuring results. Management earlier indicated that comps in July were up by 4.7 percent, helped in part by media spending around the campaign. The company is expected to give its quarterly earnings report on Oct. 27.