As the earnings season begins, investors are eagerly awaiting the quarterly results of their favorite stocks in the restaurant industry. The efforts of the restaurant companies to boost comps and some other external factors are likely to aid results, yet higher food costs and other headwinds remain overhangs.

State of Affairs in Q2
 
As in the first quarter, a gradual improvement in the economy and higher employment rate provided support in the second quarter. The industry managed to post four consecutive quarters of positive growth, according to TDn2K’s Black Box Intelligence, though same-store sales growth of 1.8% in the second quarter was lower than the first.
 
However, deteriorating traffic continued to dampen performance. This was the third consecutive quarter of traffic decline. So what drove same-store sales? Though people chose to limit their visits to restaurants, they spent more per visit. Per TDn2K, consumer confidence remains high with customers choosing to order one extra appetizer or dessert or shifting their spending to pricier items within the menu.
 
Driving Factors
 
Restaurants are benefiting from stabilizing energy prices and higher consumer confidence.  After improving in May, consumer confidence increased further in June on strong job gains. The latest gain reflects increased consumer confidence, given the current state of business and employment conditions.
 
The market analysts’ reports were also quite positive on the industry. Though the restaurant performance index (RPI) fell for the month of May compared to April, the optimism stemmed from the RPI, which was above 102 for the 8thconsecutive month. Meanwhile, most of the restaurant operators remained optimistic about sales improvement in the coming months.
 
However, operators continue to face pressure from rising employee wages and a strong U.S. dollar, which would dampen their profits. Meanwhile, restaurant operators, though optimistic about their sales, remain skeptical about the overall economy.
 
With Darden Restaurants, Inc. (DRI - Analyst Report) posting better-than-expected quarterly results and Yum! Brands, Inc. (YUM) coming up with mixed results in the second quarter, the focus now shifts to some other stocks in the restaurant industry that are favorably positioned despite the current ups and downs.
 
How to Pick the Right Stocks?

Choosing the right stocks could be quite difficult unless one knows the right method. One way of doing so is by selecting stocks that have the combination of a favorable Zacks Rank – Zacks Rank #1 (Strong Buy) or 2 (Buy) or 3 (Hold) – and a positive Earnings ESP.
 
Earnings ESP is our proprietary methodology for identifying stocks that have the best chance to surprise in their upcoming earnings announcements. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate.
 
Our research shows that for stocks with this combination, chances of a positive surprise are as high as 70%. Here we have highlighted five restaurant stocks that may impress investors in their second quarter results.
 
Jack in the Box Inc. (JACK - Snapshot Report) is a chain of quick-service restaurants based in California. The company has beaten the Zacks Consensus Estimate over the trailing four quarters and has an average positive earnings surprise of 6.85%. This Zacks Rank #1 company has an earnings ESP of +2.74%. The company is scheduled to report its fiscal third quarter results in August.
 
Based in Colorado, Red Robin Gourmet Burgers, Inc., (RRGB - Analyst Report) is a full-service casual dining restaurant chain that has been posting positive comps for more than three years. Menu innovation, effective marketing strategy and remodeling programs have strengthened its brands. The company’s earnings beat the Zacks Consensus Estimate in two of the trailing four quarters and it has an average positive earnings surprise of 11.93%. This Zacks Rank #2 company has an Earnings ESP of +4.00%. The company is scheduled to report its second quarter results in August.
 
The Habit Restaurants, Inc. (HABT - Snapshot Report) that began trading in Nov 2014 has reported results for two quarters, wherein it handsomely beat the Zacks Consensus Estimate. This California based company, which offers specialty sandwiches, fresh salads, shakes and malts, has generated positive comparable restaurant sales growth for many years due to an increase in customer traffic. This Zacks Rank #2 company has an Earnings ESP of +14.29% and is scheduled to report its second quarter results on Aug 5, 2015.
 
Based in California, The Cheesecake Factory Incorporated (CAKE - Analyst Report) is one of the most recognized upscale casual restaurants operating in the U.S. The company is committed to boost its sales and improve margins to survive in the competitive environment. The company posted a positive earnings surprise of 14.29% in the last quarter. This Zacks Rank #2 company has an Earnings ESP of +1.61% and is scheduled to report its second quarter results on Jul 22, 2015.
 
Brinker International, Inc.’s (EAT - Analyst Report) aggressive expansion and sales-building initiatives like menu innovation and kitchen system optimization poise it well to sustain comps growth. This casual dining restaurant has a Zacks Rank #2 and has posted an average positive earnings surprise of 1.08% over the trailing four quarters. The company has an Earnings ESP of +2.13% and is scheduled to report its fiscal fourth quarter results in August.
To Sum Up
 
It seems that restaurant companies continued to operate in a slow but improving economic environment. With plenty of positive factors in sight, we believe that investing in these companies, which have an earnings beat potential on strong fundamentals, would yield strong returns for your portfolio in the short term.