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Why Is Wendy's (WEN) Up 8.5% Since Last Earnings Report?

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A month has gone by since the last earnings report for Wendy's (WEN - Free Report) . Shares have added about 8.5% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Wendy's due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Wendy's Earnings & Revenues Surpass Estimates in Q1

The Wendy's reported strong first-quarter fiscal 2021 results, wherein both earnings and revenues beat the Zacks Consensus Estimate after missing the in the preceding quarter. Moreover, the bottom and the top lines improved year over year.

During the fiscal first quarter, the company reported adjusted earnings of 20 cents per share, up 122.2% year over year. The figure also beat the Zacks Consensus Estimate of 14 cents by 42.9%.

Quarterly revenues of $460.2 million outpaced the consensus mark of $444 million. Further, the top line increased 13.6% on a year-over-year basis. The upside can primarily be attributed to higher sales at company-operated restaurants, rise in franchisee royalty revenues and fees, and advertising funds.

Meanwhile, same-restaurant sales at International restaurants (excluding Venezuela and Argentina) rose 7.9% against 1.6% decline in the year-ago quarter. Comps at Global restaurants grew 13% against a decline of 0.2% in the prior-year quarter. Moreover, comps in the United States witnessed growth of 13.5%.

System-Wide Sales Discussion

Global system-wide sales — including company-operated and franchise restaurants — were nearly $3 million in the reported quarter, up 12.9% from the prior-year quarter. U.S. system-wide sales were $2.6 million in the quarter, up 13% year over year. System-wide sales in the International segment amounted to $0.3 million in the quarter, up 11.4% from the prior-year quarter level.

Operating Highlights

Company-operated restaurant margin was 17% in the reported quarter compared with 10.1% in the year-ago quarter. The increase was primarily owing to higher average check and lower insurance costs. However, this was partially offset by customer count declines due to the pandemic and higher labor rate.

General and administrative expenses in the quarter were $52.6 million, down 1.9% from $51.6 million in the prior-year quarter. The increase was primarily on account of higher incentive compensation accrual, which was partly offset by lower travel related expenses as a result of reduced travel.

Quarterly operating profit amounted to $83.1 million, up 70.6% from the year-ago quarter’s reported figure. The increase can primarily be attributed to higher franchise royalty revenues and fees, and rise in company-operated restaurant margin. However, this was partially negated by $3.5 million investment in breakfast advertising.

Net income during the fiscal first quarter soared 186.4% to $41.4 million, compared with $14.4 million in the year-ago quarter. The increase was primarily owing to a rise in operating profit.

Adjusted EBITDA during the quarter totaled $121 million, up 35.4% from $89.3 million in the prior-year quarter. The increase was backed by higher franchise royalty revenue and fees and an increase in company-operated restaurant margin, partially offset by investment in breakfast advertising.

Balance Sheet

Cash and cash equivalents as of Apr 4, 2021, were $316.5 million compared with $307 million on Jan 3, 2021. Inventories at the end of the first quarter amounted to $4.7 million, flat sequentially. Long-term debt was $2205.6 million as of Apr 4, 2021, compared with $2,218.2 million on Jan 3, 2021. The company has increased its quarterly dividend by 11% to 10 cents, payable on Jun 15, 2021, to shareholder of record as of Jun 1, 2021.

Other Developments

In the quarter under review, Wendy’s had 38 global restaurant openings with an increase of 10 net new unit. The company is likely to open restaurants in the U.K. in the first half of 2021.

2021 Outlook

For 2021, the company expects global system-wide sales growth in the range of 8% to 10%, compared with the prior estimate of 6% to 8%. Adjusted EBITDA is projected in the band of $445 million to $465 million, up from the earlier estimate of $445-$455 million. Adjusted earnings per share for 2021 in the range of 72 cents to 74 cents, compared with the prior projection of 67 cents to 69 cents. The company expects cash flow from operations in the band of $330 million to $350 million, while capital expenditure is expected between $80 million and $90 million. Free cash flow is anticipated between $250 million and $260 million.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision.

VGM Scores

Currently, Wendy's has a nice Growth Score of B, however its Momentum Score is doing a bit better with an A. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions has been net zero. Notably, Wendy's has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.


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