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Wendy's Tops Q3 Earnings & Revenues, Guides Well for '15

The Wendy's CompanyWEN posted better-than-expected third quarter 2015 results with earnings and revenues beating the Zacks Consensus Estimate. Comps were impressive. The company provided a bullish outlook for 2015. Share price of this restaurant operator increased 4.5% in yesterday's trading session.

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 came in at 9 cents beating the Zacks Consensus Estimate of 8 cents by 12.5%. Also, earnings increased 28.6% year over year as a decline in expenses and improved margins made up for a decline in revenues. Meanwhile, transition to a predominantly franchised model and higher royalties and rental income contributed to the numbers.

The Wendy's Company (WEN) - Earnings Surprise | FindTheCompany

Total revenue of $464.6 million beat the consensus mark of $442.0 million by 5%. However, it declined 6.5% 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 royalty revenue, franchise fees and rent income.

Behind the Headline Numbers

Comps were strong on the back of promotional offers and marketing activities. Comps at North America system restaurants were up 3.1%, better than the prior quarter comps growth of 2.2%. While comps at North American company-operated restaurants increased 3.3% in the third quarter, comparing favorably with comps growth of 2.4% in the prior quarter, comps at North American franchise-operated restaurants were up 1.7%, comparing unfavorably with second-quarter comps growth of 2.2%.

North America company-operated restaurant margin increased 330 basis points to 18.8% driven by higher same-restaurant sales, positive impact from the company's image activation reimaging program and lower commodity costs.

General and administrative expenses fell 2.3% year over year owing to lower share-based compensation expense and the positive impact of the company's system optimization initiative and resource realignment plan announced in 2014. However, it was partially offset by higher incentive compensation.

While adjusted EBITDA improved 11.4% year over year, EBITDA margin improved 350 bps to 21.5% due to the positive impact of the second phase of the company's system optimization initiative.

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. The planned sale of 540 domestic restaurants is on schedule. Of these, the company intends to sell 225 in 2015 and the balance in 2016. This follows the sale of approximately 600 restaurants in 2013, 2014 and 2015 as part of the company's system optimization initiative.

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 Bullish

Wendy's marginally revised its earnings, EBITDA and comps guidance for 2015 driven by strong year-to-date operating results and encouraging results from the 4 for $4 promotion that began in October. The company expects 2015 earnings per share at the higher end of the previously announced range of 31 cents to 33 cents per share compared to the year-ago figure of 34 cents. The Zacks Consensus Estimate is currently pegged at 32 cents per share.

The company expects comps at company-operated restaurants to increase at the higher end of the previously issued range of 2% to 2.5% for 2015. It increased its EBITDA guidance for 2015 for the second consecutive quarter and expects EBITDA to be at the higher end of the previously expected range of $385.0 million to $390.0 million.

The company re-affirmed its operating margin guidance and expects it in the range of 17% to 17.5%. 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.

Long-Term Outlook Re-affirmed

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 #2 (Buy).

Stocks to Consider

Other well ranked stocks in the restaurant industry include BJ's Restaurants, Inc. BJRI , Dave & Buster's Entertainment, Inc. PLAY and Carrols Restaurant Group, Inc. TAST . All these stocks sport a Zacks Rank #1 (Strong Buy).

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

WENDYS CO/THE (WEN): Free Stock Analysis Report

CARROLS RESTRNT (TAST): Free Stock Analysis Report

DAVE&BUSTRS ENT (PLAY): 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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