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Wendy's (WEN) Stock Gains as Q3 Earnings Beat Estimates

Zacks Equity Research

The Wendy's Company’s WEN shares gained more than 4% in the pre-market trading session on Nov 6, following better-than-expected third-quarter 2019 results. The company’s earnings topped analysts’ expectation, marking the fifth consecutive beat. Also, revenues outpaced the Zacks Consensus Estimate, after missing the same in the second quarter.

Delving Deeper

Adjusted earnings of 19 cents per share surpassed the Zacks Consensus Estimate of 15 cents by 26.7%. The bottom line also increased 11.8% year over year, primarily favored by an increase in adjusted EBITDA, fewer outstanding shares and lower depreciation expense.

Quarterly revenues of $437.9 million outpaced the consensus mark of $435.3 million by 0.6%. The top line also improved 9.3% from the year-ago quarter, driven by increased sales from company-operated restaurants and franchise royalties.

Meanwhile, comps at North America system restaurants were up 4.4% compared with 1.4% increase in the second quarter and 0.2% decline in the year-ago period.

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 5.6% from the prior-year period. North America system-wide sales were $2.7 million in the quarter, reflecting a 5.4% year-over-year increase. System-wide sales at the International segment amounted to $0.14 million in the quarter under review, up 8.7% year over year.

Operating Highlights

Company-operated restaurant margin was 16.2% in the reported quarter compared with 15.7% in the year-ago period. The 50-basis points (bps) improvement was primarily attributable to higher pricing and positive mix benefits. However, the positives were partly offset by labor rate inflation and higher commodity costs.

General and administrative expenses in the quarter were $46.2 million, down 0.6% from $46.5 million recorded in the prior-year period. This decline was due to a $2.8-million reduction in its legal reserve owing to an increase in anticipated insurance proceeds available for use related to the proposed settlement of the Financial Institutions case.

Third-quarter operating profit amounted to $79 million, marking a 2.2% improvement from the year-ago quarter. Net income of $46.1 million, however, decreased 88.2% from $391.2 million recorded in the year-ago quarter. This was due to the sale of its ownership interest in Inspire Brands in third-quarter 2018 for $450 million.

Adjusted EBITDA increased 2.5% from the prior-year quarter, given higher franchise royalty revenues and company-operated restaurant margin. Adjusted EBITDA margin, however, declined 170 bps to 25.1%.

Balance Sheet

Cash and cash equivalents as of Sep 30, 2019 were $439.4 million compared with $431.4 million on Dec 30, 2018. Inventories at the end of the third quarter amounted to $3.5 million, slightly lower than $3.7 million at 2018-end. Long-term debt was $2.27 billion as of Sep 30, 2019 compared with $2.31 billion on Dec 30, 2018.

The company repurchased 1.3 million shares for $26.4 million in the third quarter at an average price of $19.91 per share. It currently has $161.1 million remaining under the existing $225-million share repurchase authorization that will expire on Mar 1, 2020.

Other Developments

In the third quarter of 2019, Wendy’s had 40 global restaurant openings, with an increase of 24 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 third quarter, 56% of the global system was image activated.

Guidance Updated

For 2019, the company now expects global system-wide sales growth of 3.5-4% versus 3-4% expected earlier. Adjusted EPS is anticipated to grow between up 1.5% and down 1.5% (versus prior projection of 3.5-6.5% decline). It further expects adjusted EBITDA growth to be between flat and down 1% (versus flat to down 2% expected earlier). Wendy’s still expects global net new unit growth of 1.5% from the prior-year level.

For 2020, global system-wide sales are expected within $12-12.5 billion, with free cash flow of approximately $215-$225 million.

Zacks Rank & Peer Releases

Wendy’s currently carries a Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Red Robin Gourmet Burgers, Inc. RRGB reported mixed fiscal third-quarter 2019 results, wherein the bottom line missed the Zacks Consensus Estimate but the top line surpassed the same. It reported loss per share of 24 cents, wider than the Zacks Consensus Estimate of a loss of 22 cents. In the year-ago quarter, the company had reported adjusted earnings of 16 cents per share.

Brinker International, Inc. EAT reported mixed first-quarter fiscal 2020 results, wherein earnings were in line with the Zacks Consensus Estimate but revenues lagged the same. Adjusted earnings of $41 cents per share declined 12.8% from the year-ago quarter, mainly due to an increase in stock-based compensation expenses for newly retired executives.

Chipotle Mexican Grill, Inc. CMG reported third-quarter 2019 results, wherein earnings and revenues surpassed the respective Zacks Consensus Estimate. The company’s adjusted earnings of $3.82 per share surpassed the Zacks Consensus Estimate of $3.20. The bottom line also improved 76.9% from the year-ago quarter, driven by increased revenues and strong operating margins.

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