Wendy's Beats on Earnings, Misses Rev

Zacks

The Wendy’s Company’s (WEN) fourth-quarter 2013 adjusted earnings of 11 cents per share beat the Zacks Consensus Estimate by a penny and increased 22.2% year over year. The improved year-over-year earnings reflect a decline in total costs and expenses. Also, earnings were in line with the higher end of the preliminary earnings expectation of 10 cents to 11 cents provided on Jan 13, 2014.

As indicated during the preliminary results, total revenue in the fourth quarter declined 5.9% year over year to $592.4 million. The top line also fell short of the Zacks Consensus Estimate of $605.0 million by 2.1%. The downside reflects a reduction in the number of company-operated restaurants as a result of the company's system optimization initiative.

Behind the Headline Numbers

The company experienced year-over-year growth in comps during the quarter driven by the successful promotions of the Pretzel Pub Chicken sandwich and Bacon Portabella Melt on Brioche. Comps at North America company-operated restaurants were up 3.1%, much better than a decline of 0.2% in the year-ago quarter but marginally down from the prior quarter comps growth of 3.2%. Franchised units saw a 2.8% rise in comps, much better than a decline of 0.6% in the prior-year quarter but down from prior quarter comps growth of 3.1%.

Adjusted earnings before interest, taxes, depreciation and amortization (:EBITDA) declined 7.2% to $89.0 million due to higher incentive compensation, professional services and franchise incentives. However, these were partly offset by higher franchise revenues.

North America company-operated restaurant margins increased 40 basis points (bps) to 16.3% driven by comps growth and lower paper and beverage costs. These were, however, partly offset by higher commodity costs and higher repair and maintenance expense.

Full Year 2013 Update

In 2013, the company posted earnings of 30 cents, in line with the Zacks Consensus Estimate and up 76.4% year over year. Also, earnings remained in line with the higher end of the preliminary earnings expectation of 29 cents to 30 cents.

Total revenue declined 0.7% year over year to $2.49 billion and also fell short of the Zacks Consensus Estimate by $5.0 million. Comps at North America company-operated restaurants were up 1.9% better than 1.6% increase in 2012 but marginally lower than management’s expectation of a 2.0% increase. Meanwhile, franchised units saw an increase of 1.7% in comps compared with 1.6% in the prior year quarter.

Improved 2014 Outlook

The company projects adjusted earnings to be within 34 cents - 36 cents per share in 2014, up from 2013 levels. The Zacks Consensus Estimate of 35 cents per share lies within the guidance. Management expects adjusted EBITDA in the range of $390.0 million to $400.0 million, representing an increase of 6.0% to 9.0% year over year.

The company expects North America company-operated restaurants same-store sales to increase 2.5% - 3.5%, better than a 1.9% increase in 2013.

Margins at Wendy’s are expected to be within 16.8%–17.0%, helped by strong comps and aggressive cost-savings initiatives taken by the company. It also reflects the impact of flat commodity costs, as higher beef costs will be offset by lower chicken costs.

Capital expenditure is expected to be in the range of $280.0 million to $290.0 million.

Long-Term View Reaffirmed

The company reaffirmed its outlook for the long term. It expects adjusted EBITDA growth in high single-digit to low double-digit range and adjusted earnings per share growth in mid-teens over the long-term. This long term expectation takes into account annual comps growth of at least 3.0% beginning 2015.

System Optimization Initiative

The company’s system optimization initiative that was launched in Jul 2013 is progressing well. As a result of this initiative, the company sold 244 restaurants in 2013 and has sold or signed purchase agreements or letters of intent to sell 174 additional restaurants.

By first quarter of 2014, the company expects to sell approximately 415 restaurants and earn approximately $235.0 million. However, the company had earlier targeted these numbers for second-quarter 2014.

As per the system optimization program, the company is also working on image activation and intends to double the pace in 2014. It plans to reimage 200 company-operated restaurants and 150 to 200 franchised restaurants.

By 2017, the company targets to re-image 85.0% of its company-operated restaurants.

Our Take

Wendy’s posted mixed fourth-quarter results and is progressing steadily with its growth initiatives. Despite a sluggish sales scenario, the decent performance on the earnings front signals that the restaurateur is successfully transitioning itself and working on its cost structure. Menu innovation, re-imaging of units, net domestic unit growth and international expansion set a more bullish tone for Wendy’s for the near future.

The company presently has a short-term Zacks Rank #2 (Buy). Some other stocks worth considering in the sector include Famous Dave's of America Inc. (DAVE), Jack in the Box Inc. (JACK) and Brinker International, Inc. (EAT). While Famous Dave's of America carries a Zacks Rank #1 (Strong Buy), Brinker International and Jack in the Box Inc. carry a Zacks Rank #2.

Read the Full Research Report on EAT
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Read the Full Research Report on JACK
Read the Full Research Report on DAVE


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