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Wendy's (WEN) Beats on Q3 Earnings, Lags Revenues, Stock Down

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The Wendy's Company WEN reported third-quarter fiscal 2020 results, wherein earnings beat the Zacks Consensus Estimate, while revenues missed the same. Nonetheless, the bottom line matched the year-ago mark, while the top line grew year over year.

Following the earnings release, shares of the company dropped 5.8% during trading hours on Nov 4 as lower-than-expected revenues hurt investor sentiments. Moreover, the company didn’t provide revenue and EBITDA guidance for 2020 due to uncertainty related to the COVID-19 pandemic.

Delving Deeper

During the fiscal third quarter, the company reported adjusted earnings of 19 cents per share, flat year over year. Nonetheless, it surpassed the Zacks Consensus Estimate of 17 cents by 11.8%.

Quarterly revenues of $452.2 million missed the consensus mark of $456 million. However, the top line increased 3.3% on a year-over-year basis. The increase can be primarily attributed to higher sales at company-operated restaurants along with a rise in franchisee royalty revenue and fees.

Meanwhile, same-restaurant sales at International restaurants (excluding Venezuela and Argentina) declined 2.1% against 3.3% growth in the year-ago quarter. Comps at Global restaurants grew 6.1%, compared with 4.4% growth in the prior-year quarter. Moreover, comps in the United States witnessed 7% growth compared with 4.5% growth in the year-ago quarter.

The Wendys Company Price, Consensus and EPS Surprise

 

The Wendys Company Price, Consensus and EPS Surprise
The Wendys Company Price, Consensus and EPS Surprise

The Wendys Company price-consensus-eps-surprise-chart | The Wendys Company Quote

System-Wide Sales Discussion

Global system-wide sales — including company-operated and franchise restaurants — were $3 million in the reported quarter, up 6.6% from the prior-year quarter. U.S. system-wide sales were $2.7 million in the quarter, up 7.9% year over year. However, system-wide sales in the International segment amounted to $0.3 million in the quarter, down 4% from the prior-year quarter level.

Operating Highlights

Company-operated restaurant margin was 16.9% in the reported quarter compared with 16.2% in the year-ago quarter. The increase was primarily attributed to higher average check and lower-than-expected local advertising spend. However, this was partially offset by customer count declines due to the pandemic, higher commodity costs and increase in labor rate.

General and administrative expenses in the quarter were $47.3 million, up 2.4% from $46.2 million recorded in the prior-year quarter. Notably, the increase reflects reserve adjustment of $2.8 million, related to a financial institution case. However, excluding the adjustment, general and administrative expenses would have contracted by approximately $1.7 million (or 3%) owing to lower incentive compensation accrual and drop in travel-related expenses as a result of reduced travel due to the pandemic, partially offset by a rise in professional fees.

Quarterly operating profit amounted to $81.3 million, up 2.9% from the year-ago quarter’s reported figure. The increase was primarily attributed to higher franchise royalty revenue and fees, lower franchise support and other costs along with an increase in company-operated restaurant margin. However, this was partially offset by a rise in breakfast advertising ($6.2 million), higher reorganization and realignment costs along with a fall in net rental income.

Net income during the fiscal third quarter slumped 13.7% to $39.8 million, compared with $46.1 million in the year-ago quarter. The decrease was mainly due to a rise in income tax provisions.

Adjusted EBITDA during the quarter came in at $118.8 million, increasing 8.1% from $109.9 million reported in the prior-year quarter. The increase was backed by higher franchise royalty revenue and fees, lower franchise support and other costs, and an increase in company-operated restaurant margin, partially offset by investment in breakfast advertising.

Balance Sheet

Cash and cash equivalents as of Sep 27, 2020, were $313.2 million compared with $300.2 million on Dec 29, 2019.

Inventories at the end of the third quarter amounted to $4.6 million, up from $3.9 million at 2019-end. Long-term debt was $2,226.2 million as of Jun 28, 2020, compared with $2,257.6 million on Dec 29, 2019.

The company declared a 40% dividend hike to 7 cents per share, payable on Dec 15, 2020, to shareholders of record as of Dec 1, 2020.

As of Sep 27, 2020, the company has approximately $81.7 million under its existing share repurchase authorization ($100 million) that expires in February 2022.

Other Developments

In the quarter under review, Wendy’s had 33 global restaurant openings with an increase of eight net new unit. The company is likely to open restaurants in the U.K. in the first half of 2021.

Zacks Rank & Key Picks

Wendy's currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Some better-ranked stocks in the same space include Brinker International, Inc. EAT Fiesta Restaurant Group, Inc. FRGI and Chuy's Holdings, Inc. CHUY. Brinker sports a Zacks Rank #1, while Fiesta Restaurant and Chuy's Holdings carry a Zacks Rank #2 (Buy).

Brinker has a three-five-year earnings per share growth rate of 33.6%.

Fiesta Restaurant’s 2021 earnings are expected to surge 260.7%.

Chuy's Holdings has a trailing four-quarter earnings surprise of 87.3%, on average.

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