The Wendy's Company's
) first-quarter 2014 adjusted earnings of 7 cents per share beat
the Zacks Consensus Estimate by 2 cents and recorded a substantial
year-over-year growth. The improved earnings reflect
Total revenue in the quarter declined 13.3% year over year to
$523.2 million. The downside reflects a reduction in the number of
company-operated restaurants as a result of the system optimization
This was partly offset by same-restaurant sales growth as well
as increases in technical assistance fees, rental income and
franchise royalties. The top line, however, beat the Zacks
Consensus Estimate of $504.0 million by 3.8%, which we believe was
due to comps growth.
Behind the Headline Numbers
Comps increased 1.3%, marginally higher than the prior-year quarter
increase of 1.0%. The 2014 comps increase was primarily due to
successful product promotions and increased traffic at Image
Comps improved more than 500 basis points (bps) during the second
half of the quarter compared to the first, as weather conditions
improved. The shift in the Easter holiday period to the second
quarter had a marginal positive impact on first-quarter 2014 comps.
However, the discontinuation of breakfast operations in certain
restaurants had a negative impact of approximately 40 bps on
first-quarter 2014 same-restaurant sales.
Comps at North American franchise-operated restaurants were up
0.6%, same as the year-ago quarter. North American company-operated
restaurant margins increased 30 bps to 13.1% driven by comps
Adjusted earnings before interest, taxes, depreciation and
amortization (EBITDA) increased 12.9% to $87.3 million.
Wendy's has mostly reiterated the 2014 outlook. The company
projects adjusted earnings to be within 34-36 cents per share in
2014, up from the 2013 levels. Management expects adjusted EBITDA
in the range of $390.0 to $400.0 million, representing an increase
of 6.0% to 9.0% year over year.
Average same-restaurant sales growth is expected to be in the range
of 2.5% to 3.5% at company-operated restaurants. Further, the
company expects a reduction in interest expense of approximately
$15 million, resulting from the 2013 debt restructuring.
Capital expenditures are expected in the range of $280 to $290
million, including approximately $215 million for company-operated
Image Activation restaurants.
Wendy's expects company-operated restaurant margin in a range of
16.3% to 16.8%, versus 16.8% to 17.0%, due to the revised outlook
for expected raise in commodity costs, with higher-than-expected
beef costs, primarily in the second and third quarters.
Long-Term View Reaffirmed
Wendy's reaffirmed its long-term outlook. The restaurateur expects
adjusted EBITDA growth in high single to low double-digit range and
adjusted earnings per share growth in mid-teens over the long term.
This long-term expectation takes into account annual comps growth
of at least 3.0% beginning 2015.
The outlook also includes adjusted EBITDA growth in the high
single-digits from 2014 through 2016, when company-operated Image
Activation activity peaks, resulting in an increase in lost
operating weeks and a temporary increase in growth-oriented
capital. It also includes adjusted EBITDA growth in low
double-digits beginning 2017, when the number of company-operated
Image Activation restaurants exceeds the number under construction.
System Optimization Initiative
Wendy's completed or initiated more than 200 Image Activation
reimages of company-operated and franchise-operated restaurants in
2013 and expects to nearly double that in 2014, with the reimaging
of 200 company-operated and 150 to 200 franchise-operated
The company also expects to unveil 15 company-operated and 45
franchise-operated restaurants in 2014 incorporating the remodeled
features. The company continues to target the implementation of
Image Activation in 85% of its company-operated restaurants and 35%
of the North America system by the end of 2017.
Though Wendy's posted mixed results, it is progressing steadily
with its growth initiatives. Despite a sluggish sales, the decent
earnings performance 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
Wendy's presently has a Zacks Rank #3 (Hold). Better-ranked stocks
in the same industry include
Jack in the Box Inc.
Burger King Worldwide, Inc.
Fiesta Restaurant Group, Inc.
). All these stocks have a Zacks Rank #2 (Buy).
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