The Wendy's Company
) recently posted second quarter 2014 results and announced further
plans under its ongoing system optimization initiative. It also
reaffirmed its outlook for 2014. Share price of the company
increased 2.3% post announcement of results.
Wendy's second-quarter 2014 adjusted earnings of 9 cents per share
were in-line with the Zacks Consensus Estimate and were up 12.5%
year over year. The year-over-year rise reflects improved margins,
a decline in interest expense and lower share count. Also, earnings
were in-line with management's expectation.
The Wendy's Company - Earnings Surprise | FindTheBest
Total revenue in the quarter declined 19.5% year over year to
$523.4 million. The downside reflects a reduction in the number of
company-operated restaurants as a result of the system optimization
initiative. This was partly offset by same-restaurant sales (comps)
growth as well as increases in rental income and franchise
royalties. Also, an image activation program and spring product
promotions helped drive sales in the second quarter. The company
had also expected a 20% decline in revenue as a result of
franchising 418 company-operated restaurants.
The top line, however, beat the Zacks Consensus Estimate of $517.0
million by 1.2%, which we believe was due to comps growth and sales
boost initiatives taken by the company.
Behind the Headline Numbers
Comps at company-operated restaurants increased 3.9%, better than
the year-ago comps increase of 0.4% and the prior quarter comps
growth of 1.3%. Comps at North American franchise-operated
restaurants were up 3.1%, far better than the year-ago comps growth
of 0.3% and first quarter comps growth of 0.6%. Improved comps
reflect success of image activation program being executed by the
Company-operated restaurant margin increased 110 basis points (bps)
to 17.8% driven by comps growth and the positive impact of the
company's system optimization initiative. However, these positives
were partially offset by an increase in commodity costs, mainly
Adjusted earnings before interest, taxes, depreciation and
amortization (EBITDA) increased 2.1% to $104.2 million, which was
in-line with the company's expectations.
Third Quarter and Fourth Quarter Guidance
For the third quarter, the company expects significant
year-over-year increase in temporary restaurant closures due to
speeding up of reimaging activity. Therefore, it expects same
restaurant sales growth to be slightly less than the low end of the
full-year outlook of 2.5% to 3.5%. Also, it expects adjusted EBITDA
to be flat. However, in the fourth quarter, adjusted EBITDA is
expected to increase year over year.
2014 Outlook Reiterated
Wendy's has reiterated its outlook for 2014. The company projects
adjusted earnings to be within 34-36 cents per share in 2014, up
from 2013 levels. Management expects adjusted EBITDA in the range
of $390.0 to $400.0 million, representing an increase of 6% to 9%
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 of restaurants.
Wendy's expects company-operated restaurant margin in a range of
16.3% to 16.8%. The guidance reflects higher beef costs in the
second half of the year.
System Optimization Initiative
After completing the sale of 418 company-owned restaurants in Mar
2014, Wendy's now plans to sell 135 i.e. 100% of the
company-operated restaurants in Canada to new and existing
franchisees. It intends to complete the transaction by the end of
first quarter 2015.
In 2014, the company expects ongoing annualized reduction in
general and administrative expenses of approximately $8 million
after completing these transactions, in addition to $30 million
savings owing to the completion of the sale of 418 U.S.
restaurants. It also expects higher cash flow due to the expected
increase in rent and royalty revenue, as well as lower ongoing
The company expects the sale of its Canadian restaurants to reduce
adjusted EBITDA by approximately $5 million in 2015, resulting in
adjusted EBITDA growth in the mid-to-high single-digit range in
However, it expects the transactions to be neutral to EBITDA in
2016 and accretive to adjusted EBITDA in 2017 and thereafter. It
expects adjusted EBITDA growth in high single-digits in 2016 and
low-double-digits adjusted EBITDA growth beginning in 2017.
Moreover, it expects the transactions to be neutral to net income
in 2015 and slightly accretive to net income beyond 2015. Adjusted
earnings per share are expected to grow in mid-teens beginning
2015, which reflects annual same-restaurant sales growth of at
Despite 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 bode
well for the near future. Comps also posted a decent show. However,
an increase in commodity costs remains a headwind for the company.
Moreover, reduction of company-owned restaurants would pressurize
sales in the near-term.
Wendy's presently has a Zacks Rank #4 (Sell). Better-ranked stocks
in the same industry include BJ's Restaurants, Inc. (
), Chipotle Mexican Grill, Inc. (
) and Jamba, Inc. (
). All these stocks sport a Zacks Rank #1 (Strong Buy).
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