WEN

Wendy's Company (The) (WEN)

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The Wendy's Company (WEN)

UBS Global Consumer Conference

March 14, 2013 9:40 am ET

Executives

Stephen E. Hare - Chief Financial Officer and Senior Vice President

Analysts

David Palmer - UBS Investment Bank, Research Division

Presentation

David Palmer - UBS Investment Bank, Research Division

Good morning, everybody. I'm David Palmer, UBS Restaurant and Packaged Food analyst. We're on our tab Wendy's management here with us today. Joining us with me up here on stage is Steve Hare, Chief Financial Officer for Wendy's. And with us also are David Poplar and Lindsay Radkoski of Investor Relations.

Steve Hare has been Senior VP and Chief Financial Officer at Wendy's since September 2008. He was Senior VP and Chief Financial Officer of Triarc from September 2007 to September '08. He's helped preside over a serious change at Wendy's, including the Arby's acquisition and integration of Wendy's and Arby's and its subsequent productivity programs and the spinoff of Arby's.

Over the last 1.5 years, he's been working with a new CEO, Emil Brolick. And since then, they've been making a push together behind reimaging and innovation.

Thank you again, Steve, David and Lindsay for joining us today.

Stephen E. Hare

Great to be here.

Question-and-Answer Session

David Palmer - UBS Investment Bank, Research Division

Steve, perhaps you can start out with a bit of State of the Union for Wendy's. You certainly have been in a great position to give us perspective on Wendy's, even leading up to the Emil Brolick time on with brand. What have you been working on? And what opportunities and challenges do you see today?

Stephen E. Hare

Well, David, I think it's a very interesting time to be at Wendy's and I think a very interesting time to look at the company from an investment standpoint. I think with Emil Brolick coming back in the last 1.5 years, it really brings an interesting perspective back to the company. If you know Emil, Emil was a key figure at Wendy's really during the very high-performance period in the '90s, working closely with the founder, Dave Thomas. So he brings a lot of continuity and history and connection with the Wendy's brand. And I think the franchisees have really rallied around him and the leadership that he's providing. But interestingly, I think, Emil is focused on our future. It's not -- his mission is clearly not to sort of get back to the good old days, but it's to really drive Wendy's in a much more aggressive fashion that I think the company has seen in a long period of time. So you will see us and we'll talk today, obviously, about a number of activities that we're doing to try to really transform the entire brand. And the brand positioning that we're really focused on is A Cut Above, and we'll talk some more about what that really means in a lot of different areas. But it's a slow and a long process to transform the brand, but we're pleased with the early progress that we've made.

David Palmer - UBS Investment Bank, Research Division

Yes, and one of the things that's appealing about Emil is that he's a consumer insights guy, he's marketing guy. He talks about the position of the brand being in that Cut Above. Reimaging is a big part of that. I'll leave it open to you to kick off, talking about what you're working on in reimaging, how -- and I know you've been testing different types of it. What have you been learning? And how have your --- what is your new -- how is that focus evolving with regard to reimaging?

Stephen E. Hare

David, as you mentioned, Emil's upbringing and his passion is really around marketing of the brand and our products. So I think one of the first issues that he really dealt with when he came back to the company was getting back to Wendy's as a product innovator in the fast food category, looking at our process and our testing processes and really trying to reestablish us as the clear quality leader in food in the fast food business. But beyond that, as we started to get into that and we were seeing progress being made in terms of new products, we were also not satisfied with the sales performance that we were getting and the recognition of the quality differential that we think we have in our category. And one of the elements that we think was lacking and inconsistent with A Cut Above was the facilities that we have for the most part. It's a 40-old brand. So the average age of our buildings across the system is about 20 years old. And as we've look at it from, in terms of a contemporary experience for our customers, we felt that we had the quality menu and the innovation that Wendy's is known for. But at the same time, we were not providing the customer experience, especially when you start comparing us to a lot of the new fast casuals: the Chipotles and the Paneras and the Five Guys, who are also pulling at our premium customers. So we really came to a major decision that we had to really push and push aggressively to say, we need to deliver our food in A Cut Above facility as well, and that really was the origins of the Image Activation. So beginning nearly 2 years ago, we started testing 4 different designs and really trying to see what would resonate with our customers and what would tell people that Wendy's is different now and really get more trial and really see some of the product innovation that we're doing out there. Since that time, we have now focused on one of those designs, and we're seeing tremendous sales response. We've said publicly that the Image Activation stores, once we activate those stores, it's beyond just a construction project. It's also taking a hard look at the crew and the quality of the service we're providing, how we market the brand with digital menu boards and the entire experience. But as a result of that whole process, we're starting to see lifts on the sales side of 25%, which is remarkable in the environment that we're facing. And so it tells us we're on the right path. Now it's a long process. We've got a long way to go. The success at 25% sales lift has come at what we call Tier 1, which is a major reconstruction of the building, costing about $750,000. So a significant investment. So as we look at across the system and we look at our franchisees to come behind us and follow our lead because we really want this to be a brand-wide initiative. It will not be successful if it's just at the company-store level. Remember, we're about 22% company owned and 78% franchised. And I think to really be successful, systemwide, we've got to find a way to hopefully get the same kind of sales and customer responses, but at lower cost points, and that's why we're now heading towards a Tier 2 and Tier 3 alternative design that will be at lower cost points. Tier 2 would be at a $552,000 average cost and the Tier 3 would be closer to $375,000 as a range. Now, we're just in the process of opening our first Tier 2s and 3s this quarter. So in terms of the sales lift that we'll get as we reduce the investment, that's to be seen. But we're excited. We think we have good designs and just given the success we've seen in the Tier 1, we go into these lower-cost investments, thinking that really may be the sweet spot as our franchisees look at where do they want to sort of settle in on an Image Activation design.

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