It has been about a month since the last earnings report for The Wendy's Company WEN . Shares have lost about 3.5% in that time frame.
Will the recent negative trend continue leading up to its next earnings release, or is WEN due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
Wendy's Q1 Earnings & Revenues Beat, '18 EPS View Up
Wendy's reported better-than-expected results in the first quarter of 2018. Adjusted earnings of 11 cents surpassed the Zacks Consensus Estimate of 10 cents by 10%. The bottom line also increased 37.5% year over year, primarily favored by the positive effect of lower tax rate related to share-based payments along with Tax Cuts and Jobs Act of 2017. Increased revenues also drove earnings.
Quarterly revenues of $380.6 million topped the consensus mark of $380 million by 0.2%. The top line improved 5.4% from the year-ago quarter driven by increased rental revenues related to Franchise Flips completed in 2017. Revenues also gained from positive comps recorded from both company-operated and franchise-operated restaurants. However, comps for North American system were affected by adverse weather conditions, which partially dented the overall top line of the company.
Meanwhile, comps at the North America system restaurants were up 1.6% compared with an increase of 1.3% in the last reported quarter and 1.6% in first-quarter 2017.
System-Wide Sales Discussion
Global system-wide sales, including both company-operated and franchise restaurants, were $2.5 million in the quarter, up 3.3% from the prior-year quarter. The North America system-wide sales were $2.4 million in the first quarter, reflecting a 2.8% year-over-year increase. Systemwide sales at the International segment amounted to $0.13 million in the quarter, up 13.7% year over year.
Company-operated restaurant margin came in at 13.9% in the quarter compared with 16% in the year-ago quarter. The 210-basis points (bps) decline was primarily caused by higher commodity and labor costs, partially offset by pricing actions.
General and administrative expenses in the first quarter were $50.4 million, down 1.9% from $51.3 million recorded in the prior-year quarter. The decline reflected lower professional fees. First-quarter operating profit amounted to $55.3 million, a 4.3% decline from the year-ago quarter's figure of $57.7 million. Net income of $20.2 million declined 1.6% year over year.
Adjusted EBITDA increased 5.4% from the prior-year quarter primarily from revenue growth, including net rental income, partially offset by a decrease in company-operated restaurant margin. However, adjusted EBITDA margin declined 40 bps to 30.1%.
Cash and cash equivalents as of Apr 1, 2018 was $197.7 million compared with nearly $171.4 million as of Dec 3, 2017. Inventories at the end of the first quarter amounted to $3.1 million, down from $3.2 million at the end of 2017.
Long-term debt totaled $2.31 billion as of Apr 1, 2018 compared with $2.26 billion as of Dec 3, 2017. Cash flow from operating activities increased 63.1% year over year to $68.7 million in the first quarter of 2018.
In first-quarter 2018, the company repurchased 2.4 million shares for $39.4 million at an average price of $16.58 per share. As part of these repurchases, Wendy's completed its 2017 share repurchase authorization of $150 million, which expired on Mar 4, 2018 by buying 1.4 million shares for $22.6 million in the quarter under review. Management also purchased 1 million shares for $16.7 million on its existing $175 million share repurchase authorization.
Wendy's also declared a cash dividend of 8.5 cents per share that is payable on Jun 15, 2018 to its shareholders of record as of Jun 1, 2018. The number of common shares outstanding as of May 2, 2018 was 239.2 million.
In the first quarter, Wendy's had 33 global restaurant openings, with a slight decrease in net unit growth.
Image Activation remains an integral part of the company's global growth strategy and includes reimaging existing restaurants and building new restaurants. At the end of the first quarter, 44% of the global system was image activated. In the quarter under review, Wendy's did not facilitate any Franchise Flips.
For 2018, the company expects North America comps growth in the range of 2-2.5%, with commodity and labor inflation within 1-2% and 3-4%, respectively. This remains same as the company's previously guided range. Also, the company-operated restaurant margin is still expected to increase 17-18%. Adjusted EBITDA margin of approximately 33-34% is maintained.
Adjusted EPS is anticipated in the range of 55-57 cents, up from the previously guided range of 54-56 cents.
Long-Term Outlook Reaffirmed
The company continues to anticipate record global restaurant sales (in constant currency and excluding Venezuela) of $12 billion by 2020. Also, it expects to reach global restaurant count of 7,250 and intends to complete Image Activation of at least 70% of the global system. Notably, Wendy's aims to realize free cash flow of approximately $300 million by 2020. Adjusted EBITDA margin is expected within the range of 37-39%.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates flatlined during the past month. There have been two revisions higher for the current quarter compared to two lower.
The Wendy's Company Price and Consensus
The Wendy's Company Price and Consensus | The Wendy's Company Quote
At this time, WEN has a nice Growth Score of B, however its Momentum is doing a bit better with an A. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
Our style scores indicate that the stock is more suitable for momentum investors than growth investors.
WEN has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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