Wendy's Misses on Higher Costs

| About: The Wendy's (WEN)

Wendy’s/Arby’s Group Inc. (NYSE:WEN) recently posted first quarter 2011 adjusted earnings of approximately one cent per share, which missed the Zacks Consensus Estimate by a penny. The results were slightly below expectations due to higher commodity costs.

On a GAAP basis, the Atlanta-based company’s loss narrowed to $1.4 million or zero cents per share during the quarter compared with a loss of $3.4 million or 1 cent per share in the prior-year quarter. However, the current quarter includes a charge of 1 cent per share.

Total revenue in the quarter climbed 1.2% year over year to $847.8 million. Sales from company-operated restaurants inched up 1.1% to $756.5 million and franchise revenue jumped 2.3% to $91.3 million. Adjusted EBITDA plunged 9.3% to $83.5 million.

Wendy’s Operating Highlights

Wendy’s total revenue in the quarter dropped 0.4% year over year to $582.5 million mainly due to lower bakery and kids’ meal promotion items sold to franchisees (down 20.3%), partially offset by an upside in company-operated restaurants (up 0.3%) and franchise revenues (up 1.7%).

During the quarter, Wendy's North American same-restaurant sales were flat year over year as gains of 0.3% at franchised restaurants were offset by a 0.9% fall at company-operated outlets.

Company-operated adjusted restaurant margin contracted 200 basis points (bps) to 13.4% in the reported quarter due to a 90-bp rise in food and paper costs, 60-bp spike in occupancy, advertising and other operating costs and a 50-bp upside in labor costs.

Arby’s Operating Highlights

Arby’s total revenue in the quarter jumped 5.0% year over year to $265.3 million driven by higher company-operated restaurant sales (up 5.0% to $247.2 million) and franchise revenues (up 5.2% to $18.1 million).

Arby’s overall North America same-restaurant sales were up 5.5% due to higher company-operated same-store sales (up 6.8%) and franchised same-store sales (up 4.8%).

Company-operated adjusted restaurant margin inched down 20 basis points to 10.6% primarily due to higher food and paper costs.

Wendy’s/Arby’s Group Financial Position

Wendy’s/Arby’s Group ended the year with cash and cash equivalents of $500.1 million, long-term debt of $1.5 billion and shareholders’ equity of $2.2 billion.

Store Update

At the end of the quarter, Wendy’s had 6,565 restaurants, of which 1,395 were company-owned and 5,170 were franchise-operated.

Arby’s ended the quarter with 3,631 restaurants, of which 1,139 were company-owned and 2,492 were franchises.

Wendy’s plans to open 20 company stores and 45 franchised stores in the domestic market and 50 franchised restaurants in the international market in 2011.


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 lowered its adjusted EBITDA range to $330–$340 million from $345-355 million on the back of significant cost pressure.

The company anticipates Wendy's company-operated restaurant margin to be flat to slightly negative in 2011 compared with its previous outlook of improvement of 30 to 60 basis points, arising from the expectation of a 5% to 6% upside in commodity cost versus 2% to 3%. However, to mitigate the impact of input cost, the fast-food chain is considering raising its prices.

Our Take

Wendy’s/Arby’s Group views the coming year as a transition period as the company has 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 to various other 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, 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. Further, the company is exploring growth opportunities in China, Brazil and other key international markets.

However, an uncertain economy with a high unemployment rate, commodity cost inflation 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, Yum! Brands Inc. (NYSE:YUM) reported first quarter 2011 adjusted earnings of 63 cents per share, which fell short of the Zacks Consensus Estimate by a penny. Earnings increased 7% year over year mainly on the back of strong performance at its China division.