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Here's Why Wendy's (WEN) Rallied Despite Q1 Earnings Miss

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The Wendy's Company (WEN - Free Report) reported first-quarter fiscal 2020 results, wherein earnings and revenues not only missed the Zacks Consensus Estimate but also declined on a year-over-year basis. 

Despite the lower-than-expected results, the company’s shares rose 7.4% on May 6 as the company said that its U.S sales are picking up. After witnessing a sharp decline in March and the first two weeks of April, same-restaurant sales declined only 2.1% in the week ended May 3.

Delving Deeper

Adjusted earnings of 9 cents per share lagged the Zacks Consensus Estimate of 10 cents by 10%. The bottom line also plunged 35.7% year over year, primarily due to a decline in adjusted EBITDA.

The Wendys Company Price, Consensus and EPS Surprise

 

Quarterly revenues of $405 million missed the consensus mark of $412 million by 1.7%. The top line also declined 1% from the year-ago quarter. The decline was primarily due to lower advertising fund revenues and sales at company-operated restaurants owing to the COVID-19 pandemic.

Meanwhile, comps at International restaurants (excluding Venezuela and Argentina) declined 1.6% against 2.7% growth in the year-ago quarter. Comps at Global restaurants fell 0.2% against 1.4% growth in the prior-year quarter. However, comps in the United States recorded break-even sales compared to 1.2% growth in the prior-year quarter.

System-Wide Sales Discussion

Global system-wide sales — including company-operated and franchise restaurants — were $2.6 million in the reported quarter, up 0.9% from the prior-year quarter’s levels. U.S. system-wide sales were $2.3 million in the quarter, up 1% year over year. However, system-wide sales in the International segment amounted to $0.3 million in the quarter, reflecting no movement from the prior-year quarter level.

Operating Highlights

Company-operated restaurant margin was 10.1% in the reported quarter compared with 15% in the year-ago quarter. The deterioration was mainly due to labor rate inflation, higher maintenance costs, increased commodity costs and breakfast training expenses. 

General and administrative expenses in the quarter totaled $51.6 million, up 4.7% from $49.3 million recorded in the prior-year quarter. The increase was primarily due to higher salaries and benefits, increase in severance costs, and meeting cancellation expenses due to the COVID-19 outbreak. However, the costs were partially offset by a lower incentive compensation accrual.

Quarterly operating profit amounted to $48.7 million, down 26.5% from the year-ago quarter’s reported figure. Also, net income of $14.4 million plummeted 54.9% from $31.9 million in the year-ago quarter. The decline was primarily because of higher effective tax rate, unfavorable adjustment related to foreign tax credits and a reduction in the net excess tax benefits related to share-based compensation.

Adjusted EBITDA declined 12.2% from the prior-year quarter’s figure, given a decrease in company-operated restaurant margin and rise in general and administrative expenses. Notably, adjusted EBITDA margin declined 280 basis points to 22.1%.

Balance Sheet

Cash and cash equivalents as of Mar 29, 2020, were $294.9 million compared with $300.2 million as on Dec 29, 2019. 

However, to ensure financial stability during the global pandemic, the company suspended all share repurchase activity. The company will reduce capital expenditure and non-people related general & administrative expenses in 2020, which will result in savings of $30 million. As of May 3, 2020, the company’s cash balance stands at nearly $365 million.

Inventories at the end of the first quarter amounted to $4.6 million, up from $3.9 million at 2019-end. Long-term debt was $2,244.9 million as of Mar 29, 2020, compared with $2,257.6 million as on Dec 29, 2019.

Owing to the business disruption and impact of the COVID-19 pandemic, the company has lowered its dividend for second-quarter 2020 to 5 cents per share, payable on Jun 15, 2020, to shareholders of record as of Jun 1, 2020. The number of common shares outstanding as of Apr 29, 2020, was 222.7 million.

Other Developments

In the quarter under review, Wendy’s had 41 global restaurant openings with an increase of 17 net new units. Image Activation, which is an integral part of the company’s global growth strategy, includes reimaging of existing restaurants and building new ones. At the end of the fiscal first quarter, 60% of the global system was image-activated.

Zacks Rank & Key Picks

Wendy's currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1(Strong Buy) Rank stocks here.

Some better-ranked stocks in the Retail-Wholesale sector are Sprouts Farmers Market, Inc. (SFM - Free Report) , Domino's Pizza, Inc. (DPZ - Free Report) and Yum China Holdings, Inc. (YUMC - Free Report) . Sprouts Farmers sports a Zacks Rank #1, while Domino's and Yum China carry a Zacks Rank #2 (Buy).

Sprouts Farmers has a three-five year earnings per share growth rate of 3.7%.

Domino's has a trailing four-quarter positive earnings surprise of 12.7%, on average. The company’s earnings beat the Zacks Consensus Estimate in the last four quarters.

Earnings in 2021 for Yum China are expected to surge 79.2%.

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