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Wendy's (WEN) Stock Gains More Than 8% on Q2 Earnings Beat

Zacks Equity Research

The Wendy's Company’s WEN shares gained 8.2% on Aug 7, following better-than-expected second-quarter 2019 results. The company’s earnings topped analysts’ expectation, marking the fourth consecutive earnings beat. However, revenues missed the Zacks Consensus Estimate after surpassing the same in the first quarter.

Notably, the company’s shares have gained 25.4% so far this year, underperforming the industry’s rally of 29.2%.


Delving Deeper

Adjusted earnings of 18 cents per share surpassed the Zacks Consensus Estimate of 17 cents by 5.9%. The bottom line also increased 28.6% year over year, primarily favored by an increase in adjusted EBITDA, fewer outstanding shares and lower depreciation expense.

Quarterly revenues of $435.3 million missed the consensus mark of $441 million by 1.3%. That said, the top line improved 5.9% from the year-ago quarter, driven by increased sales from company-operated restaurants and franchise royalties.

Meanwhile, comps at the North America system restaurants were up 1.4% compared with 1.3% increase in the first quarter and 1.9% improvement in the year-ago period.

System-Wide Sales Discussion

Global system-wide sales — including company-operated and franchise restaurants — were $2.8 million in the reported quarter, up 3.3% from the prior-year period. North America system-wide sales were $2.7 million in the quarter, reflecting a 3% year-over-year increase. System-wide sales at the International segment amounted to $0.14 million in the quarter under review, up 10.4% year over year.

Operating Highlights

Company-operated restaurant margin was 16.5% in the reported quarter compared with 17.4% in the year-ago period. The 90-basis points (bps) decline was primarily due to labor rate inflation, a decline in the customer count and higher commodity costs. These were partly offset by higher pricing.

General and administrative expenses in the quarter were $50.8 million, up 3.3% from $49.2 million recorded in the prior-year period. This increase reflects the timing of employee compensation expenses and investments to boost digital experience, partially offset by lower employee compensation and related costs.

Second-quarter operating profit amounted to $80.6 million, marking a 12.7% improvement from the year-ago quarter. Net income of $32.4 million also increased 8.4% from $29.9 million recorded in the year-ago quarter.

Adjusted EBITDA increased 7.6% from the prior-year quarter, given higher franchise royalty revenues and net franchise rental income. Adjusted EBITDA margin also expanded 20 bps to 33.8%.

The Wendy's Company Price, Consensus and EPS Surprise

Balance Sheet

Cash and cash equivalents as of Jun 30, 2019 was $426.2 million compared with $431.4 million on Dec 30, 2018. Inventories at the end of the second quarter amounted to $3.5 million, slightly lower than $3.7 million at 2018-end. Long-term debt remained at $2.3 billion as of Jun 30, 2019.

The company repurchased 1.1 million shares for $20.4 million in the second quarter at an average price of $18.86 per share. It also repurchased 0.5 million shares for $10 million so far in the third quarter. The company currently has $186.8 million remaining under the existing $225-million share repurchase authorization that will expire on Mar 1, 2020.

Other Developments

In the second quarter of 2019, Wendy’s had 28 global restaurant openings, with an increase of 9 net new units. Image Activation, which remains an integral part of the company’s global growth strategy, includes reimaging of existing restaurants and building new ones. At the end of the second quarter, 53% of the global system was image activated.

Outlook Maintained

For 2019, the company continues to expect global system-wide sales growth of 3-4%. Adjusted EPS is still anticipated to grow 3.5-7% from a year ago. It further expects adjusted EBITDA growth of roughly 2.5-4.5% year over year. Wendy’s still expects global net new unit growth of 1.5% from the prior-year level in 2019.

For 2020, global system-wide sales are expected to be $11.5 billion, with free cash flow of approximately $275 million.

Zacks Rank & Peer Releases

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.

Darden DRI reported fourth-quarter fiscal 2019 results, wherein earnings surpassed the Zacks Consensus Estimate, whereas revenues lagged the same. Adjusted earnings of $1.76 per share beat the Zacks Consensus Estimate of $1.73. Moreover, the bottom line grew 26.6% year over year on higher revenues.

Chipotle CMG reported better-than-expected results in the second quarter of 2019. Its adjusted earnings of $3.99 per share surpassed the Zacks Consensus Estimate of $3.69 by 8.1%. The bottom line also grew 39% from the year-ago quarter, backed by a rise in revenues and strong operating margins.

Domino’s DPZ reported mixed second-quarter 2019 financial numbers, wherein earnings surpassed the Zacks Consensus Estimate but revenues missed the same. Its adjusted earnings were $2.19 per share, which outpaced the Zacks Consensus Estimate of $2.00. The metric also grew 19% on a year-over-year basis. The bottom-line improvement was driven by higher net income and lower outstanding share count as a result of share repurchases.

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