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Wendy's (WEN) Up 5.1% Since Last Earnings Report: Can It Continue?

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A month has gone by since the last earnings report for Wendy's (WEN - Free Report) . Shares have added about 5.1% 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 the most recent earnings report in order to get a better handle on the important catalysts.

Wendy's Earnings and Revenues Surpass Estimates in Q1

Wendy’s reported better-than-expected results for the first quarter of 2019. This marked the third consecutive earnings beat for the company, whereas revenues surpassed the consensus mark after missing it in the last two quarters.

Adjusted earnings of 14 cents surpassed the Zacks Consensus Estimate of 12 cents by 16.7%. The bottom line also increased 27.3% year over year, primarily favored by an increase in adjusted EBITDA and fewer outstanding shares. Earnings growth was partially offset by an increase in income taxes due to a higher tax rate.

Quarterly revenues of $408.6 million surpassed the consensus mark of $399 million by 2.4%. Moreover, the top line improved 7.4% from the year-ago quarter, driven by increased sales at company-operated restaurants.

Meanwhile, comps at the North America system restaurants were up 1.3% compared with an increase of 0.2% in the fourth quarter and 1.6% improvement in the year-ago quarter.

System-Wide Sales Discussion

Global system-wide sales, including company-operated and franchise restaurants, were $2.6 million in the reported quarter, up 2.3% from the prior-year quarter. North America system-wide sales were $2.5 million in the first quarter, reflecting a 2.2% year-over-year increase. Systemwide sales at the International segment amounted to $0.13 million in the quarter under review, up 4.7% year over year.

Operating Highlights

Company-operated restaurant margin was 15% in the reported quarter compared with 13.9% in the year-ago quarter. The 110-basis points (bps) improvement was primarily driven by strong mix management and pricing actions, partially offset by labor rate inflation and declines in the customer count.

General and administrative expenses in the first quarter were $49.3 million, down 2.2% from $50.4 million recorded in the prior-year quarter. This decrease reflected lower salaries and benefits as a result of G&A savings initiatives, partially offset by investments in boosting digital experience.

First-quarter operating profit amounted to $66.3 million, marking a 19.9% improvement from the year-ago quarter’s figure of $55.3 million. Net income of $31.9 million increased from $20.2 million recorded in the year-ago quarter.

Adjusted EBITDA increased 12% from the prior-year quarter, primarily on revenue growth, and lower general and administrative expenses. Adjusted EBITDA margin also expanded 90 bps to 31%.

Balance Sheet

Cash and cash equivalents as of Mar 31, 2019, was $414.2 million compared with $431.4 million as of Dec 30, 2018. Inventories at the end of the first quarter amounted to $3.6 million, slightly lower than $3.7 million at the end of 2018. Long-term debt remained at $2.30 billion as of Mar 31, 2019.

Wendy’s declared a regular quarterly cash dividend of 10 cents per share, which is payable on Jun 17, 2019, to shareholders of record as of Jun 3, 2019. The number of common shares outstanding as of May 1, 2019, was 230.7 million.

The company repurchased 1.7 million shares for $29.3 million in the first quarter at an average price of $16.83 per share. It also has repurchased 0.3 million shares for $5.7 million so far in the second quarter. The company currently has $211.5 million remaining under the existing $225-million share repurchase authorization that will expire on Mar 1, 2020.

Other Developments

In the first quarter of 2019, Wendy’s had 43 global restaurant openings, with a marginal decrease in net new units. Image Activation remains an integral part of the company’s global growth strategy, and includes reimaging of existing restaurants and building new ones. At the end of the first quarter, 51% of the global system was image activated.

Outlook Maintained

For 2019, the company continues to expect global system-wide sales growth of 3-4%. Adjusted EPS is still anticipated to grow 3.5-7%. It further expects adjusted EBITDA growth of roughly 2.5-4.5%. Wendy’s still expects global net new unit growth of 1.5% in 2019. For 2020, global systemwide sales are expected to be $11.5 billion, with free cash flow of approximately $275 million.

How Have Estimates Been Moving Since Then?

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

VGM Scores

At this time, Wendy's has an average Growth Score of C, a grade with the same score on the momentum front. Following the exact same course, 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 C. 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 this revision looks promising. It comes with little surprise 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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