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The Wendy's Co. (WEN - Analyst Report) witnessed an 8.2% surge in share prices to $7.23 on Jul 23, 2013 on announcement of strong preliminary second-quarter 2013 results and a dividend hike. The company is scheduled to report its detailed financial results on Aug 7, 2013.

Second-Quarter Highlights

The company’s second-quarter 2013 adjusted earnings of 8 cents per share beat the Zacks Consensus Estimate of 6 cents by 33.3% and the year-ago earnings per share of 5 cents by 60%. Margin expansion led to solid earnings. Wendy’s has in fact delivered positive earnings surprises of 50% and 100% in the previous two quarters.

Total revenue in the second-quarter inched up 0.7% to $650.5 million but fell short of the Zacks Consensus Estimate of $655.0 million. The slight year-year-year growth in revenues can be attributed to improved company-owned sales while franchise sales were almost flat. Same-restaurant sales nudged up 0.4% in the second quarter while franchised units saw a 0.3% rise in comps.

Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) rose 15% to $102.1 million owing to high restaurant margin and reduced general and administrative costs. North America company-operated restaurant margins expanded 260 bps to 16.7% leveraging a number of initiatives that were put into effect last year. A favorable sales mix, improved labor management, decreased breakfast advertising expenses and lower paper costs contributed to margin expansion.

Dividend Hike

The company hiked its cash dividend by 25% to 5 cents per share from 4 cents per share paid previously. This equates to an annual pay out of 20 cents per share payable on Sep 17, 2013, to shareholders of record as of Sep 3, 2013. The company’s forward annualized dividend yield becomes 2.77% as of Jul 23, 2013.

Prior to this, during the fourth quarter of 2012, the company hiked its cash dividend by 100% to 4 cents per share from 2 cents per share paid previously. Such a shareholder friendly step pushed up the stock price.

Outlook

On the guidance front as well, Wendy’s soothed investors’ nerve. Wendy’s expects average comps in company-operated restaurants in North America to grow 2% - 3% for 2013. Comps will increase in the second half of the year.

It also expects increased year-over-year profitability in the second half of 2013. Margins at Wendy’s are projected within a range of 14.2% – 14.5% for 2013 and will be led by higher comps gain from the re-imaging initiative and cost-saving initiatives.

The company reaffirmed its adjusted earnings per share guidance in the range of 20–22 cents and EBITDA guidance in the range of $350–$360 million, representing a 5% – 8% year-over-year increase.

On the expansion front, management plans to open 25 company-owned and 40 franchised units in 2013. The company is also planning to unveil nearly 60 franchisee and joint-venture outlets overseas. Further, the company plans to shut down 90–100 franchise restaurants and 20–30 company-operated restaurants in North America and 15–20 restaurants overseas. Wendy’s also plans to re-image 100 company-operated restaurants. Capital expenditure will likely be about $245 million in 2013.  The company’s long-term guidance also includes the revamping of 600 restaurants by 2015.

Bottom Line

Wendy’s is progressing slowly but steadily. Despite a sluggish sales scenario, the continued decent performance on the earnings front signals that the restaurateur is successfully transitioning itself. Menu innovation, re-imaging of units, net domestic unit growth and international expansion as well as streamlining of the cost structure will likely set a more bullish tone for Wendy’s in the near future.

Wendy's currently carries a Zacks Rank #1 (Strong Buy). Some other companies from the restaurant sector that are worth a look include AFC Enterprises Inc. , The Cheesecake Factory Inc. (CAKE - Analyst Report) and Dunkin' Brands Group Inc. (DNKN - Snapshot Report) all carrying a Zacks Rank #2 (Buy).

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