For fast food, burger chains, the downslide has been very steep. It is time to get leaner and fitter, and if you have invested in Wendy’s Co. (WEN, Financial), you will be impressed by their efforts. After facing year after year of losses and declined profits, the company has embarked on a steady journey to cut costs and expenses. To do this, the management is trying to plug the outflow of cash which is primarily in the form of owning the restaurants and all the premises. The fast food chain company has announced its plans to sell off 640 outlets across the United States and Canada to franchisees. The news was met with a lot of market cheers, and a positive first quarter earnings results pushed the company’s share value upwards.
Whereas McDonald’s (MCD, Financial) has opted for a advertising blitzkrieg to improve its brand and beat health concerns, Wendy’s has decided to do away with assets which at present seem to be liabilities. However, the question now is whether just selling off its stores will help the financial condition of Wendy’s, a company already dealing with debts and falling profits. Is it time for investors and shareholders to finally heave a sigh of relief, or is this bit of improvement short-term and temporary?
Will selling off its restaurants improved finances?
Beating most analysts’ evaluation, Wendy’s reported profit of $27.5 million or $0.07 per share in the first quarter of 2015. However, the profit margin fell far short by 40.6% from last year’s same quarter profit of $46.3 million equating to 12 cents per share. Similar is the case of its revenue earnings. The current quarter reported revenue earnings of $466.2 million which is a decrease of almost 10.9% from the $523.2 million reported in the first quarter of the company's previous fiscal year.
The company came forward to explain its fall in revenue compared to last year’s same quarter and said that compared to the previous year, the company now owned lesser number of restaurants, and hence the decrease in revenues. This raise a question of whether selling off its restaurants will actually improve the finances of the company. So far it is not making much of a difference. However, since the company was feared to fare much worse this time, the fact that Wendy’s did better than hoped was a reason for the market to cheer.
What is in store for Wendy’s
On Wednesday, Wendy's announced plans to sell 640 of its company-owned restaurants in the United States and Canada, hoping to sell them to franchisee network. The sale will be spread over 2 years - 380 restaurants to be sold this year, including its 100 Canadian outlets, and another 260 in 2016 – and will be handled by a private equity group. At the end of 2014, Wendy's held almost 6,515 restaurants around the world in its kitty. The sale is estimated to generate almost $475 million for the cash-strapped company in pre-tax proceeds and "significantly reduce future capital expenditure requirements." According to Wendy’s CEO Emil Brolick, the main aim is to "drive further growth opportunities for expanded restaurant ownership to strong operators."
He further added that "Going forward, we intend to buy and sell restaurants opportunistically to act as a catalyst for growth by further strengthening our franchisee base, driving new restaurant development and accelerating Image Activation adoption."
The Dublin, OH-based company is also trying to close on the sale of its bakery in Zanesville, Ohio, by the end of this month. The bakery supplies Wendy’s with sandwich buns and raked in $62 million in revenue last year. However, according to Brolick, the sale will cut down costs and also let the company focus completely on its core business.
Our take
The restructuring move by the food giant is a welcome move but whether the new strategy is enough to up the investor’s value is a matter of time and if the move is unable to revive the share value then the company will have to further re-strategies in order to hold on to their investors. There has already been a considerable dent in investors’ confidence till now but the next couple of years will be the activity time for the management team to prove their worth. For now we would recommend a HOLD on the stocks of the company.
