Wendy's Meets EPS; Lags Rev

Zacks

The Wendy’s Co. (WEN) recently posted second quarter 2012 adjusted earnings of 5 cents per share, in line with the Zacks Consensus Estimate as well as the year-ago earnings per share. On a GAAP basis, the company reported loss of a penny per share, as against the year-ago quarter’s earnings of 3 cents per share.

Operational Highlights

Total revenue in the quarter under review inched up 3.8% year over year to $645.9 million, which fell short of the Zacks Consensus Estimate of $648.0 million. An increase in average check facilitated sales growth.

Wendy’s North American company-operated same-store sales increased 3.2%, representing the fifth consecutive quarter of positive same-store sales at the company-operated outlets. Franchise same-store sales rose 3.2%.

The rollout of Dave's Hot 'n Juicy Cheeseburgers in many markets, along with the  introduction of Spicy Guacamole Chicken Club sandwich and premium Signature dishes as a part of its brand repositioning program helped drive the quarterly comps. Further, improvements in the existing core products, such as premium salads, French fries and sandwiches ensured value proposition and aided the company’s second-quarter comps.

Company-operated restaurant margins expanded 20 basis points (bps) to 14.1%, buoyed by an improved same-store as well as beneficial product mix, partially offset by increased spending towards labor and higher commodity costs mainly beef.

Financial Position

Wendy’s ended the quarter with cash and cash equivalents of $435.0 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, it rewarded the stock holders in the form of dividend payments amounting to $7.8 million.

Store Update

Wendy’s opened 13 franchised restaurants in the quarter and shut down 19 company-owned and 28 franchised restaurants. At the end of the quarter, Wendy’s had 6,547 restaurants worldwide.

The company also closed the acquisition of 30 franchise units in Austin, Texas during the second quarter. In July, Wendy’s again purchased 24 franchised units in the Albuquerque, New Mexico area.

Outlook

For 2012, management continues to believe that the Wendy's chain will generate adjusted EBITDA in the range of $320–$335 million. Beyond 2012, annual adjusted EBITDA growth is expected to be in the high-single digit to low-double digit range.

Wendy’s benefited from the reimaging program undertaken in 2011. For 2012, approximately 50 additional company-operated restaurants are expected to undergo a face-lift 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, among which at least 17 units will be opened in a reimaged suit.

Following the considerable success achieved from the reimaged restaurants, management plans to speed up overhaul activity in 2013, and intends to refurbish around 50% of company-operated restaurants by 2015.

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.

Our Take

Wendy’s repositioning efforts seem to be paying off. In addition to reimaging restaurants and upgrading menus, the company is taking resort to other initiatives. Notable among these are the expansion of the breakfast line-up to a new market, day part extension, rollout of high-quality coffee offering, promotion of limited-time offers, closure of underperforming units and franchisee acquisitions.

The year 2012 is considered to be Wendy’s transitional year. In an inflationary environment, we like the company’s focus on supply-chain improvement to combat the commodity cost pressure.

However, Wendy’s faces stiff competition from industry biggies like McDonald’s Corporation (MCD) and Yum! Brands Inc. (YUM) in both domestic and international market places. The company is expected to incur a high pre-opening cost associated with the reimaging activities in the latter half of 2012.

At the current level, we prefer to remain on the sidelines as we believe all its above-said initiatives need sometime before they fully pay off.

Currently, Wendy's retains a Zacks #3 Rank, which translates into a short-term Hold rating. We maintain our long-term Neutral recommendation on the stock.

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