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Wendy's Beats Q1 Earnings on Comps Growth

Zacks Equity Research

The Wendy’s Company’s (WEN) first-quarter 2014 adjusted earnings of 7 cents per share beat the Zacks Consensus Estimate by 2 cents and recorded a substantial year-over-year growth. The improved earnings reflect better-than-expected revenues.

Total revenue in the quarter declined 13.3% year over year to $523.2 million. The downside reflects a reduction in the number of company-operated restaurants as a result of the system optimization initiative.

This was partly offset by same-restaurant sales growth as well as increases in technical assistance fees, rental income and franchise royalties. The top line, however, beat the Zacks Consensus Estimate of $504.0 million by 3.8%, which we believe was due to comps growth.

Behind the Headline Numbers

Comps increased 1.3%, marginally higher than the prior-year quarter increase of 1.0%. The 2014 comps increase was primarily due to successful product promotions and increased traffic at Image Activation restaurants.

Comps improved more than 500 basis points (bps) during the second half of the quarter compared to the first, as weather conditions improved. The shift in the Easter holiday period to the second quarter had a marginal positive impact on first-quarter 2014 comps. However, the discontinuation of breakfast operations in certain restaurants had a negative impact of approximately 40 bps on first-quarter 2014 same-restaurant sales.

Comps at North American franchise-operated restaurants were up 0.6%, same as the year-ago quarter. North American company-operated restaurant margins increased 30 bps to 13.1% driven by comps growth.

Adjusted earnings before interest, taxes, depreciation and amortization (:EBITDA) increased 12.9% to $87.3 million.

2014 Outlook

Wendy’s has mostly reiterated the 2014 outlook. The company projects adjusted earnings to be within 34–36 cents per share in 2014, up from the 2013 levels. Management expects adjusted EBITDA in the range of $390.0 to $400.0 million, representing an increase of 6.0% to 9.0% year over year.

Average same-restaurant sales growth is expected to be in the range of 2.5% to 3.5% at company-operated restaurants. Further, the company expects a reduction in interest expense of approximately $15 million, resulting from the 2013 debt restructuring.

Capital expenditures are expected in the range of $280 to $290 million, including approximately $215 million for company-operated Image Activation restaurants.

Wendy’s expects company-operated restaurant margin in a range of 16.3% to 16.8%, versus 16.8% to 17.0%, due to the revised outlook for expected raise in commodity costs, with higher-than-expected beef costs, primarily in the second and third quarters.

Long-Term View Reaffirmed

Wendy’s reaffirmed its long-term outlook. The restaurateur expects adjusted EBITDA growth in high single 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.

The outlook also includes adjusted EBITDA growth in the high single-digits from 2014 through 2016, when company-operated Image Activation activity peaks, resulting in an increase in lost operating weeks and a temporary increase in growth-oriented capital. It also includes adjusted EBITDA growth in low double-digits beginning 2017, when the number of company-operated Image Activation restaurants exceeds the number under construction.

System Optimization Initiative

Wendy’s completed or initiated more than 200 Image Activation reimages of company-operated and franchise-operated restaurants in 2013 and expects to nearly double that in 2014, with the reimaging of 200 company-operated and 150 to 200 franchise-operated restaurants.

The company also expects to unveil 15 company-operated and 45 franchise-operated restaurants in 2014 incorporating the remodeled features. The company continues to target the implementation of Image Activation in 85% of its company-operated restaurants and 35% of the North America system by the end of 2017.

Our Take

Though Wendy’s posted mixed results, it is progressing steadily with its growth initiatives. Despite a sluggish sales, the decent earnings performance 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.

Wendy’s presently has a Zacks Rank #3 (Hold). Better-ranked stocks in the same industry include Jack in the Box Inc. (JACK), Burger King Worldwide, Inc. (BKW) and Fiesta Restaurant Group, Inc. (FRGI). All these stocks have a Zacks Rank #2 (Buy).

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