The Wendy's CompanyWEN posted lower-than-expected preliminary fourth-quarter 2016 results, with earnings as well as revenues missing the Zacks Consensus Estimate.
Earnings and Revenue Discussion
Adjusted earnings came in at 8 cents, missing the Zacks Consensus Estimate of 9 cents by 11.1%. Also, earnings declined 33.3% year over year, mainly due to lower sales and higher other operating costs and labor rates.
Total revenue of $309.9 million lagged the consensus mark of $312.8 million by nearly 1%. Further, it declined 33.3% year over year. The decline reflects a reduction in the number of company-operated restaurants as a result of its system optimization initiative. It owned 522 fewer company-operated restaurants in the fourth quarter compared with the year-ago quarter.
Comps at North America system restaurants were up 0.8%, lower than the increase of 1.4% in the previous quarter.
Franchise revenues were $95.7 million in the fourth quarter, down 5.1% year over year. The decrease was due to a decline in franchise fees resulting from a year-over-year reduction in the number of restaurants sold through the company's system optimization initiative.
North America company-operated restaurant margin decreased 40 basis points (bps) to 18.8% due to higher other operating and labor costs, partly offset by lower commodity costs and the favorable impact from the company's Image Activation program.
General and administrative expenses decreased 15.5% year over year owing to cost savings related to the company's system optimization initiative, as well as lower incentive compensation.
Meanwhile, adjusted EBITDA (earnings before interest, tax, depreciation and amortization) decreased 15.3% year over year due to fewer company operated restaurants. However, EBITDA margin improved 620 bps to 29.4% due to the positive impact of the company's system optimization initiative.
System Optimization Initiative
The company completed its plan of reducing its company-operated restaurant ownership to approximately 5% of the total system, in accordance with the system optimization program. The company sold a total of 310 restaurants to franchisees during 2016, which was in addition to the 227 restaurants that were sold in the second half of 2015. In total, the third phase of system optimization generated pretax proceeds and fees of $435 million.
Going forward, the company plans to continue to facilitate franchisee-to-franchisee restaurant transfers through its buy-and-flip strategy, as a part of the system optimization strategy. During 2016, Wendy's facilitated 144 Buy and Flips and expects to complete around 400 in 2017.
As part of the program, Wendy's is also working on reimaging. The company and its franchisees reimaged 521 North America system restaurants and built 99 new North America restaurants and 50 new International restaurants in 2016. Global net new restaurant openings totaled 58 in 2016. At the end of 2016, approximately 32% of the global system featured the brand's new image. The company plans to remodel at least 60% of Wendy's North America restaurants by the end of 2020.
The company's Board of Directors has authorized a 7.7% increase in its quarterly dividend. The new quarterly dividend rate of 7 cents per share will be effective with its next dividend payment on Mar 15 to shareholders of record as of Mar 1.
Wendy's full-year adjusted earnings of 40 cents per share lagged the Zacks Consensus Estimate of 41 cents by 2.4%. However, earnings increased 21.1% from the year-ago figure of 33 cents.
Full-year revenues of $1.44 billion were in line with the consensus but decreased 23.3% year over year.
Wendy's Company (The) Price, Consensus and EPS Surprise
Adjusted earnings per share are expected to be in the range of 45 cents to 47 cents, up approximately 13-18% from 2016 levels. The Zacks Consensus Estimate of 45 cents falls toward the lower end of the guidance.
Adjusted EBITDA is projected to be approximately $396 million to $404 million, reflecting an increase of 1-3% compared to 2016.
Further, the company expects comps growth of approximately 2-3% for the North America system. Restaurant margin and commodity costs are expected to be flat compared to 2016 levels.
Long-Term Outlook Updated
The company expects to record global restaurant sales (in constant currency and excluding Venezuela) of $12 billion by the year 2020. It expects its global restaurant count to reach 7,500 and system-wide Image Activation of at least 70%. Additionally, free cash flow of approximately $275 million is targeted to be realized.
The company also continues to expect to achieve adjusted EBITDA margin of 38-40% by the end of year 2020.
Zacks Rank & Stocks to Consider
Currently, Wendy's carries a Zacks Rank #3 (Hold).
Potbelly currently carries a Zacks Rank #1 (Strong Buy). Its long-term growth estimate is pegged at 20% compared with the industry average of 15.6%. You can see the complete list of today's Zacks #1 Rank stocks here .
Dave & Buster's has a positive record of earnings surprises, recording an average beat of 37.81% in the last four quarters. It sports a Zacks Rank #2 (Buy).
Wingstop's 2016 earnings growth estimate is pegged at 21.3% compared with the industry average of 7.7%. It currently carries a Zacks Rank #2.
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