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Why Is Wendy's (WEN) Down 2.9% Since Last Earnings Report?

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It has been about a month since the last earnings report for Wendy's (WEN - Free Report) . Shares have lost about 2.9% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Wendy's due for a breakout? 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 Q2

Wendy's reported robust second-quarter fiscal 2021 results, with earnings and revenues surpassing the Zacks Consensus Estimate. The metrics increased on a year-over-year basis.

During fiscal second quarter, the company reported adjusted earnings of 27 cents per share that surpassed the Zacks Consensus Estimate of 18 cents by 50%. The bottom line surged 125% from 12 cents reported in the prior-year quarter.

Quarterly revenues of $493.3 million outpaced the consensus mark of $460 million by 7.2%. Further, the top line increased 22.6% 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 advertising funds.

During the quarter, same-restaurant sales at International restaurants (excluding Venezuela and Argentina) rose 31.4% year over year against 18.4% decline reported in the year-ago quarter. Comps at Global restaurants increased 17.4% year over year against 5.8% decline reported in the prior-year quarter. Moreover, comps in the United States witnessed growth of 16.1% year over year against 4.4% decline reported in the prior-year quarter.

System-Wide Sales Discussion

During fiscal second quarter, global system-wide sales — including company-operated and franchise restaurants — came in at nearly $3.3 million in the reported quarter compared with $2.6 million in the prior-year quarter. During the quarter, U.S. system-wide sales came in at $2.9 million compared with $2.4 million in the prior-year quarter. Meanwhile, system-wide sales in the International segment amounted to $0.4 million in the quarter compared $0.2 million in the prior-year quarter.

Operating Highlights

During fiscal second quarter, company-operated restaurant margin came in at 20.3% compared with 14.4% in the year-ago quarter. The upside was primarily driven by increased customer counts and higher average check. However, this was partially offset by rise in labor rate and commodity costs.

General and administrative expenses in the quarter came in at $63.1 million, compared with $48.6 million in the prior-year quarter. The upside was primarily driven by higher incentive compensation accrual and technology costs (related to the company's ERP implementation).
 
Quarterly operating profit amounted to $126.7 million, up 108.9% from the year-ago quarter’s reported figure. The increase can primarily be attributed to higher franchise royalty revenues and fees, system optimization gains (related to the sale of the New York market) and rise in company-operated restaurant margin. However, this was partially offset by rise in general and administrative expenses.

Net income during fiscal second quarter soared 163.9% to $65.7 million, from $24.9 million reported in the year-ago quarter. The uptick came on the back of rise in operating profit. However, this was partially offset by a loss on early extinguishment of debt (part of its debt refinancing) that the company incurred during second-quarter 2021.

Adjusted EBITDA during the quarter totaled $131.1 million, up 34.5% from $97.4 million reported in the prior-year quarter. The upside was backed by higher franchise royalty revenues and fees as well as an increase in company-operated restaurant margin, partially offset by a rise in general and administrative expenses.

Balance Sheet

Cash and cash equivalents as of Jul 4, 2021, came in at $568.1 million compared with $316.5 million on Apr 4, 2021. Inventories at the end of fiscal second quarter amounted to $4.3 million, compared with $4.7 million in the previous quarter. As of Jul 4, 2021, long-term debt came in at $2,373.6 million compared with $2,205.7 million in the prior quarter.

Meanwhile, the company announced a hike in its quarterly dividend payout. The company raised its quarterly dividend by 20%, which indicates its intention to utilize free cash for boosting shareholders’ returns. The company raised quarterly dividend to 12 cents per share from the previous payout of 10 cents. The hiked dividend will be paid out on Sep 15, 2021 to shareholders on record as of Sep 1, 2021.  

During fiscal second quarter, the company repurchased 1.2 million shares worth $27.3 million. Further, management approved an additional $70 million to repurchase shares. So far in fiscal third quarter, the company repurchased 0.2 million shares for approximately $4.4 million.  As of Aug 11, 2021, the company had approximately $100 million available under its newly increased $220-million share repurchase authorization. The program is stated to expire in February 2022.

Restaurant Development

In the quarter under review, Wendy’s had 43 global restaurant openings with an increase of 28 net new unit.

During the quarter, the company announced a development commitment by REEF to open and operate 700 delivery kitchens (over the next five years) across the United States, Canada and the U.K. The commitment builds upon the successful test of eight delivery kitchens in Canada (beginning in late 2020). With this commitment, REEF will become the first Wendy's franchisee in the United Kingdom. Wendy's together with REEF expects to open approximately 50 delivery kitchens in 2021, with the rest expected to be launched by 2025. Meanwhile, the company expects to open 8,500-9,000 global restaurants by 2025.

2021 Outlook

For 2021, the company expects global system-wide sales growth in the range of 11-13%, compared with the prior estimate of 8-10%. Adjusted EBITDA is projected in the band of $465-$475 million, up from the earlier estimate of $455-$465 million. Adjusted earnings per share for 2021 in the range of 79-81 cents compared with the prior projection of 72-74 cents. The company expects cash flow from operations in the band of $350 million to $370 million, while capital expenditure is expected between $80 million and $90 million. Free cash flow is anticipated between $270 million and $280 million.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month.

VGM Scores

At this time, Wendy's has a subpar Growth Score of D, a grade with the same score on the momentum front. Following the exact same course, 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 D. 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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