The Wendy’s Co. (WEN) has recently posted third quarter 2011 adjusted earnings of 5 cents per share, beating the Zacks Consensus Estimate by a penny. On a GAAP basis, the company’s earnings were a penny per share compared with a break-even result in the prior-year quarter.
Operational Highlights
Wendy’s total revenue grew 1.8% year over year to $611.4 million in the quarter, mainly on an upside in company-operated restaurants (up 3.0%) and franchise revenues (up 1.7%), partially offset by lower bakery and kids’ meal promotion items sold to franchisees (down 23.0%). Wendy’s noticed positive transactions during the quarter aided by menu improvements as well as brand repositioning.
Wendy's North American same-restaurant sales (comps) inched up 0.9% versus a decline of 1.7% in year-ago period. Company-operated same-restaurant sales grew 1.8% driven by increases of 1.1% in transactions and 0.7% in average check growth, while franchised comps spiked 0.7%. This was one of the best sales performance by Wendy’s since the fourth quarter of 2008. Comps were negative in the year-ago quarter for both franchised and owned restaurants.
Company-operated adjusted restaurant margin expanded 30 basis points (bps) to 13.7% in the reported quarter on pricing and positive sales leverage stemming from a 50-bp plunge in occupancy, advertising and other operating costs and a 40-bp downside in labor costs that offset a 60 bp rise in food and paper costs.
Financial Position
Wendy’s ended the year with cash and cash equivalents of $488.8 million, long-term debt of $1.4 billion and shareholders’ equity of $2.0 billion.
In third quarter 2011, Wendy’s repurchased approximately 21 million of common stock at an average price of $5.12 per share. As of October 2, 2011, approximately $97 million remains under the repurchase authorization.
Store Update
At the end of the quarter, Wendy’s had 6,578 restaurants, of which 1,404 were company owned and 5,174 were franchise operated. During the quarter, the company opened 18 units of which most were franchised. Wendy’s also closed 11 franchised units.
Wendy’s plans to open 20 company-operated and 45 franchised stores in the domestic market and 35 franchised restaurants in the international market in 2011, one of which will be a joint venture store in Japan.
Outlook
For 2011, Wendy’s expects same-store sales at North American company-operated restaurants to be up in the mid 1–3% range 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 down 100 bps (previously down 50–100 bps) 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 revenues and post strong same-store sales in the fourth quarter driven by innovative products and the launch of new ‘W’ cheeseburger line. Its new breakfast menu has also been well received among consumers.
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 which 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 #3 Rank, which translates into a short-term Hold rating. We are maintaining our long-term Neutral recommendation on the stock.
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