The Wendy’s Co (WEN) Surges Post Prelim Results

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Restaurateur The Wendy’s Co. (WEN) recently reported its preliminary fourth quarter and full year 2013 results that were above expectations. The company also provided an improved outlook for 2014 that resulted in a 6.4% increase in share price on Jan 13, 2014.  The company retained its long-term view. Wendy’s is scheduled to report its detailed financial results on Feb 27, 2014.

The Wendy’s Co (WEN)

The Wendy’s Co (WEN): Fourth-Quarter Prelim Numbers

The company’s fourth-quarter 2013 adjusted earnings is likely to be in the range of 10 cents to 11 cents per share, above the year ago figure of 9 cents per share and also the Zacks Consensus Estimate of 6 cents, attributable to strong margins.

Total revenue in the fourth-quarter declined 6.0% year over year to $592.4 million. The top line also fell short of the Zacks Consensus Estimate of $615.0 million. The downside reflects reduction in the number of company-operated restaurants as a result of the company’s system optimization initiative.

The company experienced growth in comps during the quarter driven by successful promotions of Pretzel Pub Chicken sandwich and Bacon Portabella Melt on Brioche. Comps at North America company-operated restaurants were up 3.1%, much better than a decline of 0.2% in the prior year quarter. Meanwhile, franchised units saw a 2.8% rise in comps compared to a decline of 0.6% in the prior-year quarter.

Also, the company experienced increase in franchise royalties and rental income that also contributed to the top line.

Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) declined 7.2% to $89.0 million due to higher incentive compensation, professional services and franchise incentives. However, these were partly offset by higher franchise revenues.

North America company-operated restaurant margins increased 40 basis points (bps) to 16.3% driven by comps growth and lower paper and beverage costs. These were, however, partly offset by higher commodity costs and higher repair and maintenance expense.

Full Year 2013 Numbers

The company’s full year 2013 adjusted earnings are expected to be in the range of 29 cents to 30 cents per share, higher than the Zacks Consensus Estimate of 25 cents per share and the year-ago figure of 17 cents.

Total revenue declined 0.7% year over year to $2.49 billion and also fell short of the Zacks Consensus Estimate by $4.6 million. Comps at North America company-operated restaurants were up 1.9% compared to 1.6% in 2012. Meanwhile, franchised units saw an increase of 1.7% in comps compared to 1.6% in the prior year quarter.

Adjusted EBITDA edged up 10.1% year over year to $367.1 million. North America company-operated restaurant margins surged 140 bps to 15.4%.

Improved 2014 Outlook

The company projects that its adjusted earnings will be within 34 cents – 36 cents per share in 2014, up 17%-20% year over year. Also, the guidance was above the Zacks Consensus Estimate of 28 cents per share. Management expects adjusted EBITDA guidance in the range of $390.0 million to $400.0 million, representing an increase of 6.0% to 9.0% year over year.

The company expects North America company-operated restaurants same-store sales to increase 2.5% – 3.5%, better than 1.9% in 2013.

Margins at The Wendy’s Co (NASDAQ:WEN) are expected to be within 16.8% – 17.0%, helped by strong comps and aggressive cost-savings initiatives taken by the company. It also reflects the impact of flat commodity costs, as higher beef costs will be offset by lower chicken costs.

Capital expenditure is expected to be in the range of $280.0 million to $290.0 million.

Reaffirmed Long-Term View

The company reaffirmed its outlook for the long term. It expects adjusted EBITDA growth in high single-digit to low double-digit range and adjusted earnings per share growth in mid-teens over the long-term.

Share Repurchase Update

During the fourth quarter and full year, the company repurchased shares worth $28.0 million and $69.0 million, respectively. Also, the board of directors authorized a new share repurchase program of up to $275 million.

System Optimization Initiative

As of Dec 29, 2013, the company’s total number of restaurants was 6,558, including 6,158 in North America and 400 internationally.

The company’s system optimization initiative that was launched in Jul 2013 is progressing well. As a result of this initiative, the company sold, or has signed letters of intent to sell 384 restaurants as of the end of 2013. By second quarter of 2014, the company expects to sell approximately 415 restaurants and earn proceeds of approximately $235.0 million.

As per the system optimization program, the company is also working on image activation and intends to double the pace in 2014. It plans to reimage 200 company-operated restaurants and 150 to 200 franchised restaurants.
By 2017, the company targets to re-image 85.0% of its company-operated restaurants.

Our Take

Wendy’s is progressing steadily. Despite a sluggish sales scenario, the decent performance on the earnings front 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.

The company presently has a short-term Zacks Rank #2 (Buy). Some other stocks worth considering include Fiesta Restaurant Group, Inc. (FRGI), The Cheesecake Factory Incorporated (CAKE) and Cracker Barrel Old Country Store, Inc. (CBRL). While Fiesta Restaurant Group carries a Zacks Rank #1 (Strong Buy), The Cheesecake Factory and Cracker Barrel carry a Zacks Rank #2 (Buy).

CHEESECAKE FACT (CAKE): Free Stock Analysis Report

CRACKER BARREL (CBRL): Free Stock Analysis Report

FIESTA RESTRNT (FRGI): Free Stock Analysis Report

WENDYS CO/THE (WEN): Free Stock Analysis Report

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