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Brighter Days Ahead of Wendy’s

January 15, 2014 | About:
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To strive and prosper well in this competitive market, one must satisfy the needs of customers as well as its valued investors. This is because both are the life blood of a company. At the end of the day, investors expect a pocketful of return for their hard-earned money.

On Monday, Jan. 13, 2014, The Wendy's Company (WEN) reported fiscal fourth-quarter earnings. The preliminary results proved that this Dublin, Ohio-based company had a very rewarding year (2013). Since January, the company’s stock has performed well with a 50% rise. This rise in share price has outperformed the share appreciation of its peers McDonald's (MCD) and Burger King Worldwide (BKW) by a great margin.

About the Company

With a market cap of 3.517 billion, Wendy’s is primarily engaged in the business of operating, developing and franchising a system of distinctive quick-service restaurants serving food. It is a quick-service restaurant company in the hamburger sandwich segment. To reduce its operating costs, the company franchises its restaurants. As of Dec. 29, the company had 6,558 restaurants, including franchisees. Wendy's is also a 50% partner in a Canadian restaurant real estate joint venture with Tim Hortons Inc., a quick-service restaurant chain. The joint venture owns Wendy's/Tim Hortons combo units in Canada. In August 2013, The Wendy's Company announced the sale of 30 restaurants in the St. Louis market to BB St. Louis LLC.

Positive Numbers

Along with its preliminary 2013 results, Wendy’s issues 2014 outlook and reaffirms long-term outlook. The company plans to release its audited financial results on Thursday, Feb. 27, 2014. A table is provided below to show preliminary fourth quarter 2013 compared with last year’s earnings.

The decrease in consolidated revenues resulted primarily from a reduction in the number of company-operated restaurants due to the company’s System Optimization initiative, partially offset by the same-restaurant sales growth, as well as increases in franchise royalties, technical assistance fees and rental income.

Significant items impacting 2013 adjusted EBITDA include higher incentive compensation, professional services and franchise incentives, partially offset by higher franchise revenues as a result of the company’s System Optimization initiative.

The company has not yet completed its tax closing procedures for 2013 therefore; it is reporting 2013 net income, adjusted earnings per share and earnings per share as ranges.

Wendy’s 2014 outlook as well as the long-term outlook is provided below.

Chart from Wendys.com

Competitive Advantage

Wendy’s is going well compared to its peers. McDonald’s same-store sales only grew by 0.7%, which is quite low compared to Wendy’s. Burger King’s same-store sales were even worse by reporting a 0.3% decline in the third quarter for its U.S. and Canada region.

McDonald’s November comparable store sales were down 0.8% in the U.S. and down 2.3% for the Asia/Pacific, Middle East and Africa (APMEA) segment. This is mainly due to the problems in Japan. Recently, McDonald’s announced that it would be closing 74 outlets in Japan. Furthermore, McDonald's is trading at just 16 times forward earnings, whereas Wendy's and Burger King are trading at 29 and 24 times forward earnings, respectively. Additionally, McDonald's yields 3.4%, versus 2.3% of Wendy's and 1.2% for Burger King.

McDonald’s another threat is poor product positioning.  Its Mighty Wings were a great flop with 10 million pounds of unsold stock. Wendy’s on the other hand, added compelling new products to its line-up, including the Pretzel Bacon Cheeseburger and the Pretzel Bacon Pub Sandwich, as well as the Bacon Portabella Melt on Brioche. These new sandwiches are being credited with lifting same-store sales by 1.9%.

McDonald’s will release its fourth quarter 2013 earnings on Thursday, Jan. 23, 2014. From the above problems it can be predicted that the earnings report will not be so impressive, and shareholders will also not get enough return.

Wendy’s Secret

According to Wendy’s, some of its recent success is due to the System Optimization Initiative, and image renewal program. The company has announced that it plans to further optimize its restaurant ownership by selling certain company-operated restaurants to franchisees. Wendy’s is targeting the second quarter of 2014 for the completion of the sale of about 415 restaurants and anticipates total proceeds of approximately $235 million, including $138 million in 2013.

Wendy’s began redesigning company owned locations and plans to extend the new look to 200 more corporate stores as well as franchise locations in coming months. In a separate plan Wendy’s is looking to sell certain corporate-operated locals to franchisees. By the second quarter of 2014 Wendy’s is looking to sell about 415 restaurants resulting in total proceeds of $235 million. Including franchises Wendy’s currently has 6,558 restaurants.

Last, Wendy's new Spicy Chipotle Crispy Chicken Sandwich and Spicy Chipotle Jr. Cheeseburger, each priced at $0.99, bring the company's "Right Price, Right Size" menu to 21 items. This is equal to the 21 items offered on McDonald's Dollar Menu, and they are now enjoying significant attention from consumers.

To Put the Pieces Together

Wendy’s strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures, compelling growth in net income, good cash flow from operations and solid stock price performance. The company is showing healthy North American growth at a time when both larger competitor McDonald's and smaller competitor Burger King are struggling to show any growth.

So far, McDonald's and Burger King have been trending weaker going into the fourth quarter. Wendy’s on the other hand has outperformed the others. In this competitive fast-food industry, Wendy’s is moving very strategically. It can be seen as the company is focussing on menu innovation combined with cost reductions through the divestment of company-owned locations. This strategy will stabilize its cash flow in the medium run and improve its top line and margins in the long run. Therefore, brighter days are ahead for Wendy’s as well as for its valued investors.


Rating: 4.0/5 (8 votes)

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