Wendy's Beats, Reaffirms Outlook

| About: The Wendy's (WEN)

Wendy’s/Arby’s Group Inc. (NYSE:WEN) recently posted fourth-quarter 2010 adjusted earnings of approximately one cent per share, which was above the Zacks Consensus estimate of break-even. The lower overhead costs and interest expenses and modest same-store sales gains at both of its restaurant chain led to the upside in the earnings.

On a GAAP basis, the Atlanta-based company’s loss narrowed to $10.8 million or 3 cents per share during the quarter, compared with a loss of $14.7 million or 3 cents per share in the same quarter last year. The current quarter included a charge of 4 cents per share.

Total revenue in the quarter tumbled 6.7% year over year to $840.7 million. Sales from company-operated restaurants dropped 6.8% to $748.4 million and franchise revenue dipped 5.9% to $92.2 million. Adjusted EBITDA also plunged 6.4% to $84.0 million.

The company’s full-year net loss, including total net special charges after tax of $64.7 million or 15 cents per share, was $4.3 million or one cent per share. In fiscal 2009, net earnings were $3.5 million or one cent per share. Revenues were $3.4 billion in fiscal 2010 versus $3.6 billion in 2009.

Wendy’s Operating Highlights

Wendy’s total revenue in the quarter dropped 7.5% year over year to $582.7 million mainly due to the decline in the company-operated restaurants (down 7.4%) and franchise revenues (down 8.0%).

During the fourth quarter, Wendy's North American same-restaurant sales rose 0.2% as gains of 0.6% at franchised restaurants offset the 0.9% fall at company-operated outlets. Continued value promotions by quick-service restaurants led to the upside.

Company-operated adjusted restaurant margin contracted 120 basis points (bps) to 14.4% in the reported quarter due to the 130 bps rise in food and paper costs and 120 bps spike in occupancy, advertising and other operating costs, partially offset by 60 bps dip in labor costs.

Arby’s Operating Highlights

Arby’s total revenue in the quarter fell 4.7% year over year to $258.0 million as company-operated restaurants sales dipped 4.8% year over year to $239.5 million and franchise revenues slipped 4.1% to $18.5 million.

Arby’s overall North America same-restaurant sales were up 2.0% due to higher company-operated same-store sales (up 2.9%) and franchised same-store sales ( up 1.6%).

Company-operated adjusted restaurant margin inched down 10 basis points to 11.8% primarily due to higher food and labor costs.

Wendy’s/Arby’s Group Financial Position

Wendy’s/Arby’s Group ended the year with cash and cash equivalents of $512.5 million, long-term debt of $1.6 billion and shareholders’ equity of $2.2 billion.

In 2010, Wendy’s/Arby’s Group repurchased 173.5 million shares and incurred capital expenditure of $148.0 million.

Store Update

At year end, Wendy’s had 6,576 restaurants, of which 1,394 were company-owned and 5,182 were franchise-operated.

Arby’s ended the year with 3,649 restaurants, of which 1,144 were company-owned and 2,505 franchises.

Wendy’s plans to open 20 company stores and 45 franchised store in the domestic market and 50 franchised restaurants in the international market.


For 2011, Wendy’s expects same-store sales at North American company-operated restaurants to be up 1% to 3% on a year-over-year basis.

For 2011, Wendy’s/Arby’s Group expects adjusted EBITDA to be in the range of $345 million to $355 million.

The company anticipates improvement of 30 to 60 basis points in Wendy's company-operated restaurant margin in 2011, including commodity cost inflation of 2% to 3%. However, to mitigate the impact of input cost, the fast-food chain is considering price rise.

Our Take

Wendy’s/Arby’s Group views the coming year as a transition period as the company reiterated its intention to spin off its Arby's chain, so that it can focus its resources on building the Wendy’s brand.

To improve the same-store sales at Wendy's, the company plans to expand its breakfast menu in more markets, launch the new cheeseburger line nationally and reinforce the My 99 Value Menu strategy combined with restaurant modernization and expansion plans in both the domestic and international market.

Wendy's recently announced its growth plans and partnerships in Argentina, the Philippines and Japan. Further, Wendy’s has a long-term development agreement with franchisees in the Middle East and North Africa, Singapore, Turkey, Russia and the Eastern Caribbean. Additionally, the company is exploring growth opportunities in China, Brazil and other key international markets.

However, an uncertain economy with a high unemployment rate and faltering consumer confidence coupled with stiff competition will likely restrain the company’s growth in the near term.

One of the primary competitors of Wendy’s/Arby’s, Brinker International Inc. (NYSE:EAT), recently reported second quarter 2011 earnings of 38 cents per share, surpassing the Zacks Consensus Estimate of 32 cents per share. The upside in earnings was driven by continued margin expansion at Chili's and top-line growth at Maggiano's.