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Wendy's Misses Q2 Earnings, System Optimization On Track - Analyst Blog

The Wendy's CompanyWEN posted mixed second quarter 2015 results with earnings missing the Zacks Consensus Estimate but revenues marginally beating the same. While the company lowered its same-restaurants sales guidance, it increased its EBITDA and restaurant operating margin for 2015. Share price of this restaurateur fell 1.7% on Aug 5.

Meanwhile, the company is on track to reduce its restaurant ownership to 5% through the sale of its restaurants under the system optimization initiative.

Earnings and Revenue Discussion

Adjusted earnings were 8 cents, which missed the Zacks Consensus Estimate of 9 cents by 11%. Also, earnings declined 11% year over year due to a decline in revenues.

The Wendy's Company - Earnings Surprise | FindTheBest

Total revenue of $489.5 million marginally beat the consensus mark. However, it declined 3.3% year over year. The decline reflects a reduction in the number of company-operated restaurants as a result of its system optimization initiative. However, it was partially offset by an increase in Franchise revenues owing to higher rent revenue and higher technical assistance fees.

Behind the Headline Numbers

Comps at North American company-operated restaurants increased 2.4% in the second quarter that compared unfavorably with comps growth 2.6% in the prior quarter. Comps at North American franchise-operated restaurants were up 2.2%, comparing unfavorably with first-quarter comps growth of 3.4%.

North America company-operated restaurant margin increased 40 basis points to 18.2% driven by higher same-restaurant sales, favorable product mix and the company's Image Activation reimaging program.

General and administrative expenses fell 8.4% year over year owing to cost savings related to the company's system optimization initiative and resource realignment announced in 2014.

While adjusted EBITDA improved 5.2% year over year due to a decline in expenses, EBITDA margin improved 170 bps to 21.3% due to increased rental income as well as a reduction in general and administrative expense.

System Optimization Initiative

Per the system optimization program, the company intends to decrease its ownership to approximately 5% of the total restaurants by mid-2016. While the company completed the sale of 100 Canada-based outlets in the second quarter, the sale of 540 domestic restaurants are on schedule. Of these 540 outlets, the company intends to sell 280 in the second half and the balance in 2016.

Besides bringing in pre-tax cash proceeds of approximately $400 to $475 million, the sale will considerably lessen future capital expenditure requirements.

As per the system optimization program, the company is also working on reimaging. The company and its franchisees plan to reimage a total of 450 system-wide restaurants and build 80 new restaurants in 2015. The company plans to remodel at least 60% of Wendy's North America restaurants by 2020-end.

2015 Outlook

Wendy's reiterated its EPS outlook and expects 2015 earnings per share in the range of 31 cents to 33 cents per share, up 10% to 17% year over year. The Zacks Consensus Estimate is currently pegged at 32 cents per share.

The company expects comparable sales to be negatively impacted in the second half of 2015 due to the timing of reimaging and sale of restaurants. Therefore, the company revised its comps growth guidance and expects it in the range of 2% to 2.5% compared with the previous expectation of 2.5% to 3%.

However, the company increased its EBITDA guidance for 2015 and expects it in the range of $385.0 million to $390.0 million compared with the prior expectation of $375 million to $385 million. Also, the company increased its operating margin guidance and expects it in the range of 17% to 17.5% compared with the previous expectation of 16.5% to 17%. The guidance reflects a decline in expenses and improved outlook for commodity costs. Commodity costs are now expected to be flat year over year in 2015 compared with the previous expectation of an increase of 1.5%.

Long-Term Outlook

Over the long term, the company expects high single-digit earnings per share growth in 2016 and high teens growth in 2017. Owing to the expected benefit of the company's share repurchase plan, beginning in 2018, earnings per share growth is likely to exceed 20%.

Average annual same-restaurant sales growth is expected in the range of 2.25% to 3% from 2016 onward.

The company continues to expect flattish adjusted EBITDA in 2016, followed by low single-digit adjusted EBITDA growth in 2017 and high single-digit growth in 2018.

Wendy's also expects significantly lower annual capital expenditure requirements, beginning 2016, primarily as a result of its system optimization initiative.

Wendy's currently carries a Zacks Rank #3 (Hold).

Stocks to Consider

Some better ranked stocks in the restaurant industry include BJ's Restaurants, Inc. BJRI , Dave & Buster's Entertainment, Inc. PLAY and Jack in the Box Inc. JACK . All these stocks sport a Zacks Rank #1 (Strong Buy).

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BJ'S RESTAURANT (BJRI): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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