The Wendy’s Co. (WEN) recently posted first quarter 2012 adjusted earnings of a penny per share, missing the Zacks Consensus Estimate of 3 cents as well as the year-ago earnings of 2 cents. On a GAAP basis, the company’s earnings were 3 cents per share, better than the year-ago quarter’s break-even results.
Operational Highlights
Total revenue in the quarter under review inched up 1.8% year over year to $593.2 million. An increase in average check facilitated sales growth, which was partially offset by a slight reduction in transactions.
Wendy’s North America company-operated same-store sales increased 0.8% while franchise same-store sales rose 0.7%. Promotion of “my $0.99 value menu” in January, return of Dave's Hot 'n Juicy cheeseburgers in February, and promotion of the North Pacific Cod Sandwich and the "W" Cheeseburger in March contributed to the same-store sales.
Company-operated restaurant margin plunged 160 basis points (bps) to 11.8% due to a 220 basis-point adverse impact from commodity cost inflation as well as lower pricing.
Financial Position
Wendy’s ended the quarter with cash and cash equivalents of $418.4 million, long-term debt of around $1.4 billion and shareholders’ equity of around $2.0 billion.
The company did not buy back any share in the quarter. However, the company rewarded the stock holders in the form of dividend payment of $7.8 million.
Store Update
The Wendy’s opened 12 new restaurants in the quarter and shut down 25. At the end of the quarter, Wendy’s had 6,581 restaurants worldwide, of which 354 were outside North America.
Outlook
Wendy’s lowered its 2012 outlook for adjusted EBITDA from continuing operations to a range of $320 to $335 million from earlier guidance of $335 million to $345 million. The cut echoes lower-than-expected sales and underperformance in company-operated restaurant margin in the first quarter.
Wendy’s benefited from the re-image program undertaken in 2011. For 2012, approximately 50 additional company-operated restaurants are expected to undergo a facelift and a substantially higher number of company-owned and franchise units are slated for a revamp in 2013 and beyond. Wendy’s also plans to unveil 20 new company-operated restaurants.
The company also plans to merge its Atlanta restaurant support center with the Dublin, Ohio restaurant support center in late 2012 that will likely involve $23 million cost of consolidation.
Estimate Revisions
Following the earnings release, 6 out of 17 analysts’ estimates were cut while none walked the opposite direction for the upcoming quarter. Also, for full-fiscal 2012, 10 out of 18 analysts trimmed their estimates over the last 7 days without raising a single estimate.
Over the last 7 days, magnitude of estimates dipped a penny to 4 cents for the second quarter of 2012 while full-year estimates fell 2 cents to 16 cents.
Our Take
Although 2012 is planned to be Wendy’s transitional year, the recent performance was not encouraging. Steeply rising commodity costs also remain a cause of concern. A high pre-opening cost regarding the image activation initiatives mostly in the back half of 2012 will also be incurred. Wendy’s faces stiff competition from industry biggies like McDonald’s Corporation (MCD) and Yum! Brands Inc. (YUM) in both domestic and international marketplaces.
However, Wendy’s is trying hard to reposition itself through the enhancement of guest satisfaction, menu innovation, day part expansion, remodels, expansion, closure of underperforming units. At the current level, we prefer to remain on the sidelines as we believe all its initiatives need sometime before they fully pay off.
Wendy's currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We maintain our long-term Neutral recommendation on the stock.
To read this article on Zacks.com click here.
Get all Zacks Research Reports and be alerted to fast-breaking buy and sell opportunities every trading day.
Be the first to comment