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Wendy's (WEN) Tops Q3 Earnings & Sales; Raises Guidance

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The Wendy’s Company (WEN - Free Report) posted better-than-expected third-quarter 2016 results with earnings as well as revenues beating the Zacks Consensus Estimate.

Backed by the encouraging third-quarter results, the company raised its guidance for profit and EPS.

Earnings and Revenue Discussion

Adjusted earnings came in at 11 cents, beating the Zacks Consensus Estimate of 10 cents by 10%. Also, earnings increased 22.2% year over year backed by higher margins and lower share count due to share buybacks in the quarter.

Total revenue of $364 million beat the consensus mark of $347 million by 4.9%. However, it declined 21.7% year over year. The decline reflects a reduction in the number of company-operated restaurants as a result of its system optimization initiative. It owned 433 fewer company-operated restaurants in the third-quarter compared with the year-ago quarter.

Comps at North America system restaurants were up 1.4%, higher than the increase of 0.4% in the previous quarter.

Franchise revenues were $135.4 million in the third quarter, up 28.2% year over year. The rise was due to higher rental income, franchisee fees and royalty revenues primarily as a result of the company's system optimization initiative, in addition to an increase in same-store sales.

Profit Discussion

North America company-operated restaurant margin decreased 40 basis points (bps) to 18.4% driven by higher other operating and labor costs, partly offset by lower commodity costs and the favorable impact from the Company's Image Activation program.

General and administrative expenses decreased 7.5% year over year owing to cost savings related to the company's system optimization initiative, as well as lower share-based compensation and incentive compensation, partly offset by higher professional fees and legal fees.

Meanwhile, adjusted EBITDA (earnings before interest, tax, depreciation and amortization) increased 0.5% year over year despite fewer company operated restaurants. EBITDA margin improved 600 bps to 27.5% due to the positive impact of the company's system optimization initiative.

System Optimization Initiative

Per the system optimization program, the company intends to decrease its ownership to approximately 5% of the total restaurants by the end of 2016. The planned sale of 315 domestic restaurants to the franchisees is on schedule. The company continues to expect the third phase of system optimization to generate pretax proceeds of approximately $435 million.

As part the program, Wendy’s is also working on reimaging. The company and its franchisees plan to reimage 500 North America system restaurants and open approximately 100 new North America restaurants in 2016. The company plans to remodel at least 60% of Wendy's North America restaurants by the end of 2020.

WENDYS CO/THE Price, Consensus and EPS Surprise

2016 Guidance

Wendy’s raised its 2016 earnings per share guidance to 40 cents to 41 cents, from its prior projection of 39 cents to 40 cents.

The company expects comps increase at North America company-operated restaurants of about 1.5%, which falls between its previously guided range of 1–2%. It now expects adjusted EBITDA in the higher range of its previously issued range of flat to up 1%.

Meanwhile, the company reiterated its outlook for commodity costs to decline approximately 5–6%.

The company also continues to expect to achieve adjusted EBITDA margin of 38–40% by the end of year 2020.

Zacks Rank & Stocks to Consider

Currently, Wendy’s carries a Zacks Rank #2 (Buy).

Better-ranked restaurant stocks include Domino’s Pizza, Inc. (DPZ - Free Report) , Potbelly Corporation (PBPB - Free Report) and Wingstop, Inc. (WING - Free Report) .

Domino’s current year growth estimate is pegged at 22.8% compared with the industry average of 6.7%. It sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Potbelly currently carries a Zacks Rank #2 (Buy). Its current year growth estimate is pegged at 29.3% compared with the industry average of 6.7%.

Wingstop current year growth estimate is pegged at 20.5% compared with the industry average of 6.7%. It currently carries a Zacks Rank #2.

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