Wendy's: Where's the Beef?

| About: The Wendy's (WEN)

By Jonathan Chen

Wendy's Arby's Group Inc. (NYSE:WEN) shares were down this morning, after the fast food restaurant company reported earnings Tuesday and warned on rising commodity costs.

The company reported earnings of 0 cents per share on $847.8 million in revenues, just slightly outpacing Wall Street estimates of $845.6 million.

See the full earnings call transcript

The Dublin, Ohio-based company is trying to sell its struggling Arby's restaurants.

Roland Smith, chief executive, said “Arby's continued to build sales momentum and posted strong systemwide same-store sales growth in North America.”

The company is trying to introduce breakfast items to its Wendy's restaurants, which it believes will help same-store-sales, and generate additional revenue, as breakfast foods have higher margins.

Smith went on to say:

"First quarter adjusted EBITDA1 was in-line with our expectations. Wendy's generated positive systemwide same-store sales in the U.S., offset by softness in Canada. Arby's continued to build sales momentum and posted strong systemwide same-store sales growth in North America.

“In the first quarter, we continued to invest in our business as we position the Wendy's brand for 10% to 15% average annual EBITDA growth in 2012 and beyond. To that point, we are focused on Wendy's ‘Real' brand positioning and our superior food quality. Later this year we will introduce completely new, core menu items including Dave's Hot ‘n Juicy cheeseburgers and a line of premium chicken sandwiches. Our ‘Real' brand positioning also includes an ongoing commitment to the salad category with innovative products like our Berry Almond Chicken Salad we will introduce this summer. Breakfast is also a major initiative for Wendy's and we expect to be serving our new breakfast in approximately 1,000 restaurants by the end of the year. Customer acceptance of our new breakfast menu is very encouraging and we're pleased that sales volumes are meeting expectations and growing. Investing in breakfast and other new Wendy's menu items is a great use of our capital. We expect these investments to generate long-term organic growth and leverage our existing store base.

“At Arby's, we continued to make progress with regards to our strategic alternatives process,” said Smith. “In the first quarter, top-line performance was very strong with North America systemwide same-store sales of 5.5%. Sales were driven by our everyday dollar value menu, the introduction of our ‘Good Mood Food' brand positioning and the successful launch of our new Angus Three Cheese and Bacon Sandwich.”

Wendy's has been a laggard for years now, as it just can not compete with McDonald's (NYSE:MCD), and to a lesser extent, Burger King. At 22 times 2012 earnings, Wendy's is not cheap. There is no reason to believe that Wendy's will be able to get it right this time, as the majority of consumers just do not know what Wendy's is. McDonald's and Burger King have their loyal consumers, and continue to expand to their menus. Wendy's has been trying to cater to the "foodie" group, but does anyone really know that? I think not, judging by the results.

Shareholders have been asking "Where's the beef?" for some time now, and it just does not look like there is meat to this story. I say hold the pickles, and move on.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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