The fourth-quarter earnings season has witnessed releases from about half of the retail companies in the S&P 500 cohort. The results so far reflect gains from increasing and shifting consumer demand among a range of formats and channels.

Q4 Retail Earnings Expectations

Half of the Zacks broad sectors (8 out of 16) are expected to report double-digit growth in the fourth quarter of 2018. Restaurants in the wider Retail-Wholesale sector seem to have a solid footing as well. Per the latest Earnings Preview (as of Feb 8), 21% rise is expected to be witnessed in the sector’s fourth-quarter earnings compared with 26.1% growth in the last reported quarter. Revenues in the quarter under review are expected to rise 5.6% (lower than the third quarter’s 6.4%). Margins in the quarter are anticipated to increase 0.6% compared with the prior quarter’s increase of 0.8%.

How is the Restaurant Industry Positioned?

The U.S. restaurant industry made an impressive comeback, with 0.7% comps growth in 2018. The top-line momentum is anticipated to continue in 2019. Per TDn2K’s The Restaurant Industry Snapshot, the overall fourth quarter was satisfactory, with comps growth of 1.4%, the highest since 2015. Guest check-in in the quarter grew 3.1% year over year, offsetting the negative impact of traffic erosion. Same-store traffic declined 1.6% in the fourth quarter.

Persistent erosion in traffic despite comps growth indicates that it is only guest checks and not guest counts that contributed to restaurant sales. This also means that consumers are not frequently visiting restaurants and are getting increasingly reliant on delivery services instead.

Moreover, restaurant giants are plagued by a high cost of operations. Further, sales-building efforts such as promotional activities and a convincing pricing strategy are detrimental to margins. Apart from this, competition, high wage and food cost inflation remain concerns.

However, the industry has been gaining from increased consumer spending and restaurateurs’ focus on digital innovation. The fourth quarter has borne fruits of increased consumer spending, a steady rise in wages and lower unemployment. Also, most of the restaurant operators have been continuously partnering with delivery channels and digital platforms to drive incremental sales.

How to Pick the Right Stocks?

Amid a wide number of restaurant stocks, it is by no means an easy task for investors to pick stocks that have the potential to deliver better-than-expected earnings.

While there is no foolproof method of picking outperformers, our proprietary methodology — the combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — helps in identifying stocks that have high chances of surprising in their upcoming earnings announcement. Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.

Earnings ESP shows the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Key Picks

Here are some restaurateurs set to report fourth-quarter 2018 earnings that might interest investors.

Jack in the Box Inc. (JACK - Free Report), which is the nation’s largest hamburger chain, currently carries a Zacks Rank #3 and has an Earnings ESP of +2.55%. The company is likely to beat estimates in the to-be-reported quarter. It beat the Zacks Consensus Estimate for earnings in two of the trailing four quarters, the average positive surprise being 3.9%. For the fourth quarter, the consensus estimate is pegged at $1.31, indicating a 6.5% year-over-year increase.

Jack In The Box Inc. Price and EPS Surprise

Jack In The Box Inc. Price and EPS Surprise | Jack In The Box Inc. Quote

Del Taco Restaurants, Inc. (TACO - Free Report) currently has a Zacks Rank #3 and an Earnings ESP of +4.11%, suggesting that the company is likely to beat estimates this time around. The restaurant missed earnings estimates in two of the trailing four quarters, the average miss being 6.2%. However, the Zacks Consensus Estimate for earnings in the quarter to be reported is pegged at 18 cents, indicating a 20% year-over-year increase.

Del Taco Restaurants, Inc. Price and EPS Surprise

Del Taco Restaurants, Inc. Price and EPS Surprise | Del Taco Restaurants, Inc. Quote

El Pollo Loco Holdings, Inc. (LOCO - Free Report) currently carries a Zacks Rank #2 and has an Earnings ESP of +7.14%. It suggests that a beat is likely in the to-be-reported quarter. El Pollo Loco surpassed estimates in each of the trailing four quarters, the average beat being 5.5%. For the quarter to be reported, earnings estimates are pegged at 14 cents, projecting 27.3% growth from the year-ago quarter.

El Pollo Loco Holdings, Inc. Price and EPS Surprise

El Pollo Loco Holdings, Inc. Price and EPS Surprise | El Pollo Loco Holdings, Inc. Quote