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Wendy's Q3 Earnings Top, Sales Miss

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The Wendy’s Co. (WEN - Free Report) third-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 of 2 cents by as much as 300%. Margin expansion led to solid earnings.

Total revenue in the third quarter inched up 0.7% year over year to $640.8 million but fell short of the Zacks Consensus Estimate of $647.0 million. Lost revenues from the sale of company-owned restaurants resulted in soft sales in the quarter.

Company-owned same-restaurant sales in North America grew 3.2% in the quarter while franchised units saw a 3.1% rise in comps. Comps benefited from new menu offerings like Pretzel Bacon Cheeseburger as well as brand transformation initiatives.

Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) were up 17% to $98.1 million owing to high restaurant margin and reduced general and administrative costs. North American company-operated restaurant margins expanded 170 bps to 15.6% leveraging a favorable sales-mix, thanks to reduced paper and beverage costs.  However, commodity costs were up 100 basis points (bps) per year.

Share Repurchase

In the third quarter of 2013, the company bought back nearly 5.5 million shares of common stock leaving approximately $59 million available for further repurchase under the current authorization, which will cease at the end of 2013.

2013 Outlook

Wendy’s expects average comps at company-operated restaurants in North America to be 2.0% versus the prior guidance of 2%–3% for 2013. Comps will increase in the final quarter of the year.

Buoyed by the better-than-expected comps performance, management raised its margins, adjusted EBITDA and earnings per share guidance for full-year 2013. Company-owned margins at Wendy’s are expected to be 15% for 2013, up from the previously projected range of 14.2%–14.5%. Margins will be led by the re-imaging and cost-saving initiatives.

Adjusted EBITDA guidance was raised to $365 million from the previous range of $350 million–$360 million while its adjusted earnings per share are now guided to be 25 cents a share, up from the range of 20–22 cents a share guided earlier.

However, owing to the strong growth witnessed so far this year, management intends to make incremental investments in the fourth quarter to boost growth, which, in turn, will lead to a year-over-year decline in adjusted EBITDA in the coming quarter.

As a part of its brand revitalization and portfolio optimization initiatives, Wendy’s remains on track to franchise about 425 company-operated restaurants in 13 U.S. markets. The company expects to finish the process by the second quarter of 2014. This initiative will trigger royalties and rental income while reducing general and administrative expenses.

On the expansion front, management reiterated its store opening guidance of 25 company-owned and 40 franchised units in 2013. The company is also planning to unveil nearly 45 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 in 2013.

Our Take

The third quarter was a mixed bag for Wendy’s. While the earnings beat and a raised guidance were satisfactory, the sales miss was a dampener. Share price dropped 11.44% following the release. Although Wendy’s repositioning efforts seem to be on track, the turnaround process will take time to reap benefits.

Wendy’s currently carries a Zacks Rank #3 (Hold). Others players in the same industry, which look attractive at current levels include Buffalo Wild Wings Inc. , DineEquity, Inc. (DIN - Free Report) and Red Robin Gourmet Burgers Inc. (RRGB - Free Report) . While Buffalo Wild Wings and DineEquity carry a Zacks Rank #1 (Strong Buy), Red Robin carries a Zacks Rank #2 (Buy).

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