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

The Wendy's Company’s WEN reported second-quarter fiscal 2020 results, wherein the bottom line surpassed the Zacks Consensus Estimate but the top line lagged the same. However, both the metrics declined on a year over year basis. Following the results, the company’s shares declined nearly 6% on Aug 5.

Although the company’s same-restaurant sales declined in the quarter due to the pandemic, it witnessed robust growth in July courtesy of robust breakfast and digital businesses. In July, same-restaurant sales witnessed growth of high-single digit.

Delving Deeper

Adjusted earnings of 12 cents per share beat the Zacks Consensus Estimate of 10 cents by 20%. However, the bottom line plunged 33.3% year over year, primarily due to decline in adjusted EBITDA.

Quarterly revenues of $402.3 million missed the consensus mark of $405 million. The top line also declined by 7.6% from the year-ago quarter’s figure. The downside can primarily be attributed to fall sales at company-operated restaurants and decrease in franchisee royalty revenues, owing to the COVID-19 pandemic.

Meanwhile, same-restaurant sales at International restaurants (excluding Venezuela and Argentina) declined 18.4% against 3.9% growth in the year-ago quarter. Comps at Global restaurants declined 5.8%, against 1.6% growth in the prior-year quarter. Moreover, comps in U.S. witnessed decline of 4.4% against 1.3% growth in the year-ago quarter.

The Wendys Company Price, Consensus and EPS Surprise The Wendys Company Price, Consensus and EPS Surprise

The Wendys Company price-consensus-eps-surprise-chart | The Wendys Company Quote

System-Wide Sales Discussion

Global system-wide sales — including company-operated and franchise restaurants — were $2.6 million in the reported quarter, down 6.4% from the prior-year quarter. U.S. system-wide sales were $2.4 million in the quarter, down 4% year over year. However, system-wide sales in the International segment amounted to $0.2 million in the quarter, down 26.9% from the prior-year quarter level.

Operating Highlights

Company-operated restaurant margin was 14.4% in the reported quarter compared with 16.5% in the year-ago quarter. The decline was mainly due to labor rate inflation and dismal traffic on account of the coronavirus pandemic. This was partially mitigated by positive impact of the company’s new breakfast daypart in the United States.

General and administrative expenses in the quarter were $48.6 million, down 4.3% from $50.8 million recorded in the prior-year quarter. The decrease was primarily due to lower travel related expenses due to the pandemic.

Quarterly operating profit amounted to $60.7 million, down 24.7% from the year-ago quarter’s reported figure. Also, net income of $24.9 million slumped 23.1% from $32.4 million in the year-ago quarter. The decrease was primarily due to dismal operating profit.

Adjusted EBITDA declined 17.3% to $97.4 million from the prior-year quarter, given a decrease in company-operated restaurant margin and franchise royalty revenues and fees, decline in net rental income, and investment in breakfast advertising of nearly $2.2 million.

Balance Sheet

Cash and cash equivalents as of Jun 28, 2020 were $338 million compared with $300.2 million on Dec 29, 2019.

Inventories at the end of the second quarter amounted to $4.4 million, up from $3.9 million at 2019-end. Long-term debt was 2,238.7 million as of Jun 28, 2020 compared with $2,257.6 million on Dec 29, 2019.

The company declared dividend of 5 cents per share, payable on Sep 15, 2020, to shareholders of record as of Sep 1, 2020. The number of common shares outstanding as of Jul 9, 2020 was 223.8 million. The company also announced it intends to resume share repurchases in 2020.

Other Developments

In the quarter under review, Wendy’s had 22 global restaurant openings with an increase of one net new unit. The company is likely to open restaurants in the U.K. in the first half of 2021.

Zacks Rank & Key Picks

Wendy's currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1(Strong Buy) Rank stocks here.

Other better-ranked stocks in the same space include Domino's Pizza, Inc. DPZ, Papa John's International, Inc. PZZA and El Pollo Loco Holdings, Inc. LOCO. Domino's sports a Zacks Rank #1, while Papa John's and El Pollo Loco carry a Zacks Rank #2 (Buy).

Domino's has a trailing four-quarter earnings surprise of 18.6%, on average.

Papa John's has a three-five year earnings per share growth rate of 8%.

Earnings in 2021 for El Pollo Loco are expected to surge 33.2%.

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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.

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