Wendy's (WEN) Earnings Miss, Revenues Beat Estimates in Q2

The Wendy's CompanyWEN reported mixed results for the second quarter of 2018, wherein earnings missed analysts' expectations while revenues exceeded the same.

Adjusted earnings of 14 cents lagged the Zacks Consensus Estimate of 16 cents by 12.5%. However, the bottom line increased 7.7% year over year, primarily favored by the positive effect of lower tax rate from Tax Cuts and Jobs Act of 2017, partially offset by higher expenses from depreciation and amortization.

Quarterly revenues of $411 million topped the consensus mark of $408 million by 0.8%. The top line improved 3.9% from the year-ago quarter, driven by increased rental revenues related to Franchise Flips completed in 2017. Revenues also gained from positive comps recorded by both company-operated and franchise-operated restaurants.

Meanwhile, comps at the North America system restaurants were up 1.9% compared with an increase of 1.6% in the last-reported quarter and 3.2% in second-quarter 2017.

Shares of Wendy's have barely moved in after-hours trading on Aug 7. However, the company's shares have rallied 7.6% in the past year, outperforming the industry 's collective growth of 4.7%.

Let's delve deeper into the numbers.

System-Wide Sales Discussion

Global system-wide sales, including both company-operated and franchise restaurants, were $2.7 million in the reported quarter, up 3.6% from the prior-year quarter. The North America system-wide sales were $2.6 million in the second quarter, reflecting a 3.2% year-over-year increase. Systemwide sales at the International segment amounted to $0.13 million in the quarter under review, up 10.9% year over year.

Operating Highlights

Company-operated restaurant margin was 17.4% in the reported quarter compared with 18.8% in the year-ago quarter. The 140-basis points (bps) decline was primarily caused by higher commodity and labor costs, partially offset by pricing actions.

General and administrative expenses in the second quarter were $49.2 million, down 1.8% from $50.1 million recorded in the prior-year quarter. The decline reflected a decline in professional fees, and employee compensation and related expenses that stemmed from the company's G&A savings efforts.

Second-quarter operating profit amounted to $71.5 million, marking a 305.3% increase from the year-ago quarter's figure of $17.6 million. Net income of $29.9 million declined 5.9% year over year.

Adjusted EBITDA increased 1.5% 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 100 bps to 33.6%.

The Wendy's Company Price, Consensus and EPS Surprise

The Wendy's Company Price, Consensus and EPS Surprise | The Wendy's Company Quote

Balance Sheet

Cash and cash equivalents as of Jul 1, 2018, was $194.9 million compared with nearly $171.4 million as of Dec 3, 2017. Inventories at the end of the second quarter amounted to $3.3 million, up from $3.1 million at the end of 2017.

Long-term debt totaled $2.31 billion as of Jul 1, 2018, compared with $2.26 billion as of Dec 3, 2017. Cash flow from operating activities increased 40.3% year over year to $148.4 million in the second quarter of 2018.

In second-quarter 2018, the company repurchased 2.7 million shares for $45.7 million at an average price of $17.03 per share. As of Jul 1, 2018, Wendy's had roughly $112.5 million remaining under its existing share repurchase authorization of $175 million, which will expire on Mar 3, 2019.

Other Developments

In the second quarter, Wendy's had 36 global restaurant openings, with an increase of 23 net new units.

Image Activation remains an integral part of the company's global growth strategy, and includes reimaging existing restaurants and building new ones. At the end of the second quarter, 46% of the global system was image activated. In the quarter under review, Wendy's facilitated 64 Franchise Flips.

Reiterates 2018 Outlook

For 2018, the company expects North America comps growth to be 2-2.5%, with commodity and labor inflation of 1-2% and 3-4%, respectively. This remains the same as the company's previously guided range. Moreover, 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 to be 55-57 cents.

Reaffirms Long-Term Outlook

The company continues to anticipate record global restaurant sales (in constant currency and excluding Venezuela) of $12 billion by 2020. Furthermore, it expects to reach a 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 to be 37-39%.

Zacks Rank & Peer Releases

Wendy's carries a Zacks Rank #3 (Hold). You can see t he complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

McDonald's MCD reported impressive second-quarter 2018 results , wherein both earnings and revenues surpassed the Zacks Consensus Estimate. Adjusted earnings per share of $1.99 surpassed the consensus mark of $1.92 by 3.6% and increased 15% from the year-ago quarter (12% in constant currencies). The upside reflects stronger operating performance.

Darden DRI reported better-than-expected results in the fourth quarter of fiscal 2018 . Adjusted earnings of $1.39 per share outpaced the consensus estimate of $1.35 by 3%. The bottom line also increased 17.8% year over year on the back of higher revenues. Notably, the reported quarter marked the 15th consecutive earnings beat for the company. Darden's relentless efforts in improving the basic operating factors of the business - food, service and atmosphere - drove its bottom-line performance.

Noodles & Company NDLS reported mixed results in the second quarter of 2018 , wherein earnings missed the Zacks Consensus Estimate while revenues surpassed the same. Adjusted earnings of a penny missed the consensus mark of 3 cents but remained flat with the year-ago quarter's EPS.

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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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