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Must-know: Why Wendy’s top line declined

Amit Jhaveri

Must-know: Wendy's quarterly overview for 2Q14 (Part 3 of 9)

(Continued from Part 2)

Top line taking a beating

With Wendy’s (WEN) selling its company-operated locations to franchisees, its top line has been declining. However, Wendy’s management remains confident that its “system optimization” strategy will help improve profit margins.

In the above chart, we can see that at the beginning of the second quarter of 2013 (or 2Q13), revenues—or top line—for Wendy’s restaurants has been declining. Total combined revenues of company-operated restaurants and franchises for the North American segment and the global segment were $523 million, down 19.5%, compared to $650 million in 2Q13. The sale of company-operated restaurants attributed to this decline in revenues.

Other performance measures

Adjusted earnings before interest, tax, depreciation, and amortization (or EBITDA) was $104.2 million, up 2.1%, compared to $102.1 million in 2Q13. In total, the company stated that it lost $24 million in EBITDA due to the sale of 418 restaurants. Operating profits for the quarter were $63.9 million, up 12%, compared to $57 million during the same quarter a year ago. In contrast, McDonald’s (MCD) reported operating profits of $2.071 million, which grew by 0.01%, and Yum! Brands (YUM) reported an operating profit of $479 million, up 22%, compared to the second quarter a year ago.

It’s important to identify how the restaurants are performing in terms of same-store sales, a key valuation metric for the restaurant industry. An investor can get exposure to the restaurant industry through ETFs such as the Consumer Discretionary Select Sector SPDR Fund (XLY) and the PowerShares Dynamic Food and Beverage ETF (PBJ).

Continue reading this series to see how Wendy’s same-store sales performed in the second quarter.

Continue to Part 4

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