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Wendy's (WEN) Q4 Earnings Miss Estimates, Revenues Beat

Zacks Equity Research

The Wendy's Company’s WEN reported mixed fourth-quarter 2019 results, with earnings missing the Zacks Consensus Estimate and revenues beating the same. Following the results, shares of the company declined more than 4% on Feb 26.

Delving Deeper

Adjusted earnings of 8 cents per share lagged the Zacks Consensus Estimate of 9 cents by 11.1%. The bottom line also plunged 50% year over year, primarily due to a decline in adjusted EBITDA.

However, quarterly revenues of $427.2 million beat the consensus mark of $423.6 million by 0.8%. The top line also increased 7.4% from the year-ago quarter’s figure on increased sales from company-operated restaurants and franchise royalties.

Meanwhile, comps at North America system restaurants moved up 4.3% compared with 0.2% increase in the year-ago quarter.

The Wendy's Company Price, Consensus and EPS Surprise

 

The Wendy's Company Price, Consensus and EPS Surprise

The Wendy's Company price-consensus-eps-surprise-chart | The Wendy's Company Quote

 

System-Wide Sales Discussion

Global system-wide sales — including company-operated and franchise restaurants — were $2.8 million in the reported quarter, up 5.9% from the prior-year quarter’s levels. North America system-wide sales were $2.6 million in the quarter, up 5.7% year over year. System-wide sales in the International segment amounted to $0.15 million in the quarter under review, up 9.8% year over year.

Operating Highlights

Company-operated restaurant margin was 14.3% in the reported quarter compared with 16% in the year-ago quarter. The decline was mainly due to labor rate inflation, higher insurance costs, increased commodity costs and declining customer count partially. This was partially offset by pricing actions and positive mix benefits.

General and administrative expenses in the quarter were $53.9 million, down 24.5% from $71.4 million recorded in the prior-year quarter. The decline was primarily caused by the $27.5-million legal reserve that was recorded in fourth-quarter 2018, relating to the settlement of the Financial Institutions case.

Quarterly operating profit amounted to $36.7 million, down almost 20% from the year-ago quarter’s reported figure. However, net income of $26.5 million rallied 41% from $18.8 million in the year-ago quarter. The increase was primarily driven by a cash settlement related to a previously-held investment, partially offset by a fall in operating profit and a higher provision for income taxes.

Adjusted EBITDA declined 22.6% from the prior-year quarter’s figure, given an increase in franchise support and other costs, general and administrative expenses and decline in net rental income. The downside was partially offset by an increase in franchise royalty revenues and fees. Notably, adjusted EBITDA margin declined 760 basis points to 19.5%.

Balance Sheet

Cash and cash equivalents as of Dec 29, 2019 were $300.2 million compared with $431.4 million on Dec 30, 2018. Inventories at the end of the fourth quarter amounted to $3.9 million, up from $3.7 million at 2018-end. Long-term debt was 2,257.6 million as of Dec 29, 2019 compared with $2305.6 million on Dec 30, 2018.

On the share repurchase front, the company repurchased 1.9 million shares for $28.8 million in the first quarter of 2020. This led to the completion of its $225-million share repurchase authorization that was set to expire on March 1, 2020.  The board of directors also approved a new $100-million share repurchase authorization, expiring on Feb 28, 2021.

Other Developments

In the quarter under review, Wendy’s had 71 global restaurant openings with an increase of 45 net new units. Image Activation, which is an integral part of the company’s global growth strategy, includes reimaging of existing restaurants and building new ones. At the end of the fourth quarter, 58% of the global system was image activated.

2019 Highlights

In 2019, total revenues amounted to $1,709 million compared with $1,589.9 million in 2018.

Adjusted earnings per share (EPS) for the year were at 59 cents, flat on a year-over-year basis.

Adjusted EBITDA was $412.8 million compared with $415.4 million in 2018.

2020 Guidance

For 2020, the company expects global system-wide sales in the range of $12.0-$12.5 billion. Adjusted EPS is anticipated in the range of 60-62 cents per share. It further expects adjusted EBITDA in the range of $425-$435 million.

For 2020 free cash flow is expected between $230 million and $240 million, excluding approximately $20-million tax-effected impact from the settlement of the Financial Institutions case that was finalized in January 2020.

Zacks Rank & Key Picks

Wendy's currently carries a Zacks Rank #4 (Sell). You can see the complete list of today’s Zacks #1(Strong Buy) Rank stocks here.

Few better-ranked stocks in the same space are Texas Roadhouse, Inc. TXRH, Brinker International, Inc. EAT and Chipotle Mexican Grill, Inc. CMG. Texas Roadhouse sports a Zacks Rank #1, while Brinker International and Chipotle Mexican Grill carry a Zacks Rank #2 (Buy).

Texas Roadhouse has trailing four-quarter positive earnings surprise of 4.3%, on average. The company’s earnings beat estimates in three of the last four quarters.

2020 earnings for Brinker International are expected to rise 10.2%.

Chipotle Mexican Grill has an expected three-five year earnings per share growth rate of 19.3%.

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