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Wendy's (WEN) Up 1.3% Since Last Earnings Report: Can It Continue?

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It has been about a month since the last earnings report for Wendy's (WEN - Free Report) . Shares have added about 1.3% 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 catalysts.

Wendy's Earnings Miss, Revenues Beat Estimates in Q2

The Wendy's reported mixed results for the second quarter of 2018, wherein earnings missed analysts’ expectations while revenues exceeded the same.

Adjusted earnings of 14 cents lagged the Zacks Consensus Estimate of 16 cents by 12.5%. However, the bottom line increased 7.7% year over year, primarily favored by the positive effect of lower tax rate from Tax Cuts and Jobs Act of 2017, partially offset by higher expenses from depreciation and amortization.

Quarterly revenues of $411 million topped the consensus mark of $408 million by 0.8%. The top line improved 3.9% from the year-ago quarter, driven by increased rental revenues related to Franchise Flips completed in 2017. Revenues also gained from positive comps recorded by both company-operated and franchise-operated restaurants.

Meanwhile, comps at the North America system restaurants were up 1.9% compared with an increase of 1.6% in the last-reported quarter and 3.2% in second-quarter 2017.

System-Wide Sales Discussion

Global system-wide sales, including both company-operated and franchise restaurants, were $2.7 million in the reported quarter, up 3.6% from the prior-year quarter. The North America system-wide sales were $2.6 million in the second quarter, reflecting a 3.2% year-over-year increase. Systemwide sales at the International segment amounted to $0.13 million in the quarter under review, up 10.9% year over year.

Operating Highlights

Company-operated restaurant margin was 17.4% in the reported quarter compared with 18.8% in the year-ago quarter. The 140-basis points (bps) decline was primarily caused by higher commodity and labor costs, partially offset by pricing actions.

General and administrative expenses in the second quarter were $49.2 million, down 1.8% from $50.1 million recorded in the prior-year quarter. The decline reflected a decline in professional fees, and employee compensation and related expenses that stemmed from the company’s G&A savings efforts.

Second-quarter operating profit amounted to $71.5 million, marking a 305.3% increase from the year-ago quarter’s figure of $17.6 million. Net income of $29.9 million declined 5.9% year over year.

Adjusted EBITDA increased 1.5% from the prior-year quarter, primarily from revenue growth, including net rental income, partially offset by a decrease in company-operated restaurant margin. However, adjusted EBITDA margin declined 100 bps to 33.6%.

Balance Sheet

Cash and cash equivalents as of Jul 1, 2018, was $194.9 million compared with nearly $171.4 million as of Dec 3, 2017. Inventories at the end of the second quarter amounted to $3.3 million, up from $3.1 million at the end of 2017.

Long-term debt totaled $2.31 billion as of Jul 1, 2018, compared with $2.26 billion as of Dec 3, 2017. Cash flow from operating activities increased 40.3% year over year to $148.4 million in the second quarter of 2018.

In second-quarter 2018, the company repurchased 2.7 million shares for $45.7 million at an average price of $17.03 per share. As of Jul 1, 2018, Wendy’s had roughly $112.5 million remaining under its existing share repurchase authorization of $175 million, which will expire on Mar 3, 2019.

Other Developments

In the second quarter, Wendy’s had 36 global restaurant openings, with an increase of 23 net new units.

Image Activation remains an integral part of the company’s global growth strategy, and includes reimaging existing restaurants and building new ones. At the end of the second quarter, 46% of the global system was image activated. In the quarter under review, Wendy’s facilitated 64 Franchise Flips.

Reiterates 2018 Outlook

For 2018, the company expects North America comps growth to be 2-2.5%, with commodity and labor inflation of 1-2% and 3-4%, respectively. This remains the same as the company’s previously guided range. Moreover, the company-operated restaurant margin is still expected to increase 17-18%. Adjusted EBITDA margin of approximately 33-34% is maintained.
Adjusted EPS is anticipated to be 55-57 cents.

Reaffirms Long-Term Outlook

The company continues to anticipate record global restaurant sales (in constant currency and excluding Venezuela) of $12 billion by 2020. Furthermore, it expects to reach a global restaurant count of 7,250 and intends to complete Image Activation of at least 70% of the global system. Notably, Wendy’s aims to realize free cash flow of approximately $300 million by 2020. Adjusted EBITDA margin is expected to be 37-39%.

 

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates.

VGM Scores

Currently, Wendy's has a subpar Growth Score of D, however its Momentum Score is doing a lot better with a B. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% 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 trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Wendy's has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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