The Wendy’s Co. (WEN) has recently posted second quarter 2011 adjusted earnings of 5 cents per share, which were in line with the Zacks Consensus Estimate. On a GAAP basis, the company’s earnings were 3 cents per share compared with 2 cents in the prior-year quarter.
Arby’s indirect corporate overhead, retention program and other transaction-related costs and impairment of long-lived assets were the special items in the quarter.
Wendy’s Operational Highlights
Wendy’s total revenue grew 2.5% year over year to $622.5 million in the quarter, mainly on an upside in company-operated restaurants (up 3.9%) and franchise revenues (up 4.3%), partially offset by lower bakery and kids’ meal promotion items sold to franchisees (down 29.0%). Wendy’s noticed positive transactions during the quarter aided by menu improvements as well as brand repositioning.
During the quarter, Wendy's North American same-restaurant sales (comps) increased 2.3% driven by 2.3% gains at both franchised restaurants and company-operated outlets. This was the best sales performance of Wendy’s since the fourth quarter of 2008. Comps were negative in the comparable last-year quarter in both franchised and owned restaurants.
Company-operated adjusted restaurant margin contracted 250 basis points (bps) to 13.9% in the reported quarter due to a 170-bp rise in food and paper costs, 50-bp spike in occupancy, advertising and other operating costs and a 30-bp upside in labor costs.
Financial Position
Wendy’s ended the year with cash and cash equivalents of $492.4 million, long-term debt of $1.4 billion and shareholders’ equity of $2.1 billion.
In the first six months, Wendy’s repurchased approximately 24 million of common stock for $122 million at an average price of $5.18 per share.
Store Update
At the end of the quarter, Wendy’s had 6,571 restaurants, of which 1,400 were company owned and 5,171 were franchise operated. In the second quarter, the company opened 24 units and closed 18s, most of which were franchised.
Wendy’s plans to open 20 company-operated and 45 franchised stores in the domestic market and 40 franchised restaurants in the international market in 2011.
Outlook
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.
Wendy’s reiterated its adjusted EBITDA guidance range at $330–$340 million for the full year.
Company-operated restaurant margin is expected to be 50 to 100 basis points lower than the prior year, primarily due to higher commodity costs.
Our Take
We believe Wendy’s remains on track to turn around and is poised for long-term growth. After the completion of the sale of the struggling Arby’s brand, Wendy’s is concentrating solely on brand repositioning through restaurant modernization, closure of underperforming units and expansion plans in both domestic and international markets. Wendy's has growth plans in Russia, China, Brazil and other key overseas markets.
The company is all set to drive its revenue and post strong same-store sales in the third and fourth quarters driven by innovative products and the launch of new cheeseburger line in coming October. Its new breakfast menu has also been well received among consumers. The company intends to deliver 10% to 15% average annual EBITDA growth in 2012 and beyond.
However, an uncertain economy with a high unemployment rate, commodity cost inflation and faltering consumer confidence will likely restrain the company’s growth in the near term. Additionally, the countries that Wendy’s is eyeing for expansion are already well covered by restaurant biggies like Yum! Brands Inc. (YUM) and McDonald's Corp. (MCD).
Wendy’s currently retains a Zacks #2 Rank, which translates into a short-term Buy rating. We are maintaining our long-term Neutral recommendation on the stock.
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