Is Wendy's Turnaround Real?

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Includes: MCD, WEN, YUM
by: John Gordon

On Monday, CNBC’s Jim Cramer featured Wendy’s (NYSE:WEN) as a real turnaround - lots of upside potential, less worse at Arby’s (NYSE:YUM), margins better, cheap for the current stock price. Cramer said the Wendy’s turnaround was real.

At the same time, yesterday, McDonald’s (NYSE:MCD), one of the few companies still announcing monthly sales trends, announced a world-wide same store sales increase of 4.3%, 2.6% in the US.

Is the Wendy’s sales turnaround real? We all know how complicated these restaurants are. Wendy’s and Arby’s are both 50 year old brands, both hailing from Ohio. Wendy’s was acquired by Triarc and financial engineer/investor Nelson Peltz in 2008, who already operated Arby’s.

As reported, for the quarter, Wendy’s same store sales were down 1.2% at company stores and flat at franchisees, while Arby’s stores were down 5.8%. But, since Wendy’s has removed their abandoned breakfast daypart, excluding breakfast, Wendy’s lunch/dinner same store sales would have been up .6% and system sales “positive”. The credit was given to Wendy’s new boneless chicken wings ($3.99 entrée /$5.99 combo).

CEO Rollie Smith noted the Wendy’s July same store results would have been plus 3.4% (lunch/dinner only). So that must be the turn.

Wendy’s sales components (traffic, average check, and subcomponents mix, price) were not disclosed, so we have to guess. Restaurants need incremental traffic to drive positive leverage, and price increases to cover inflation.

Before this quarter, Wendy’s same store sales (not taking out breakfast) were plus .3% in Q1, plus 3.6% in Q4 2008, and plus .5% in full year 2008, plus .9% in 2007.

I’d note the Wings are tasty and of good portion, with quality packaging. The Wings can be purchased either as an entrée or menu add-on. Thus, Wendy’s could be getting average check growth (customers buying the Wings as an add on) and losing customers, which is not sustainable in the long run.

To be sure, Wendy’s looks much better inside, with the new products. It is improving margins, as it promised, and has new products in the R&D pipeline.

Arby’s hasn’t turned materially yet, despite their Roastburger launch about 2 quarters ago. CEO Rollie Smith noted sequential improvement in the Arby’s negative trend.

Wendy’s/Arby’s is looking at expanding international (smart) and multi-brand, co-located Wendy’s/Arby’s units. On my July 1st Seeking Alpha article, I noted that really only Yum has made that work, thus far. Unless Wendy’s/Arby’s plans company operated development, it will be some time until they find the right mix of world-wide franchisees that can make co-branding work, since dual-branded restaurant operations is complicated.

So, Wendy’s is looking better. Let's watch for the turn.

Disclosure: no stock positions.