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Mixed 4Q for Wendy's

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The Wendy's Company (WEN - Free Report) recently reported its fourth-quarter 2012 adjusted earnings of 9 cents per share, ahead of the Zacks Consensus Estimate as well as the year-ago earnings per share of 4 cents.

In 2012, the company’s adjusted earnings per share were 17 cents, which was in line with the Zacks Consensus Estimate but ahead of the year-ago quarter’s earnings of 15 cents per share.

Total revenues in the fourth quarter climbed 2.4% annually to $629.9 million, but fell short of the current Zacks Consensus Estimate of $638.0 million. The revenues in the quarter have gained from the company’s new acquisitions and unit openings. In 2012, total revenues increased 3% year over year to nearly $2.51 billion.

Operational Highlights

Wendy’s Franchise sales declined 0.8% to nearly $76 million. Same-store sales at North America Company-operated restaurants declined 0.2% versus a rise of 5.1% in the year-earlier quarter. Wendy’s North America Franchise same-store sales also declined 0.6%.

Company-operated restaurant margins in the quarter rose 90 basis points (bps) to 15.9%, driven by increased Image Activation sales and decreased breakfast advertising expenses, which negated the adverse impact from commodity cost inflation.

Adjusted EBITDA rose 19% to $95.9 million owing to high restaurant margin and reduced general and administrative costs.

Share Buyback

In the fourth quarter, Wendy’s declared to repurchase up to $100 million worth of its common stock through December 29, 2013.

Dividend Hike

During the quarter, the company hiked its cash dividend by 100% to 4 cents per share from 2 cents per share paid previously. This equates to an annual pay out of 16 cents per share.

Moreover, the company has recently declared its quarterly dividend of 4 cents per share, which will be paid to shareholders on March 15, 2013, of record as of March 1, 2013.

Store Update

Wendy’s opened 39 franchised and 12 owned restaurants in the quarter, and shut down 5 company-owned and 29 franchised restaurants. At the end of the quarter, the company was operating 6,560 restaurants worldwide including 6,186 restaurants in North America.

Moreover, in 2012 the company purchased 56 franchised restaurants and sold 30 units to franchisees.

Outlook Maintained

The company maintained its guidance for the full year of 2013. Wendy’s projects that its adjusted earnings will be within 18 cents - 20 cents per share, up 13%-25% year over year. Management reiterated its adjusted EBITDA guidance of $350 - $360 million.

The company expects North America company-operated restaurants same-store sales to increase by 2% - 3%.

Margins at Wendy’s are expected to be within 14.2% - 14.5%. The guidance for margins includes same-store sales as well as Image Activation growth and favorable cost-effective initiatives, which are partially offset by increased commodity costs of 90 - 120 basis points owing to rising beef costs.

Capital expenditure will likely be about $245 million in 2013. Wendy’s plans to revamp 100 franchised as well as 100 company-operated units. Additionally, the company is planning to spend $10 million to re-image its restaurants.

On the expansion front, management plans to open 25 company-owned and 40 franchise units. The company is also planning to unveil nearly 60 franchisee and joint-venture outlets overseas. Further, the company plans to shut down 90 - 100 franchise restaurants in North America and 15 -20 restaurants overseas. The company’s guidance also includes the revamping of 600 restaurants by 2015.

Our Take

Wendy's has outlined a multi-year turnaround plan to improve its restaurant operating margins, reinvigorate brands, revitalize same-store sales and expand internationally. The company also concentrates on enhancing shareholders’ value through dividend distribution. Although Wendy’s is striving to stand out by re-imaging restaurants, upgrading menus, resorting to other marketing initiatives, and closing underperforming stores, we believe all its attempts need sometime before they fully pay off.

Currently, Wendy's retains a Zacks Rank#3 (Hold). Another restaurateur Red Robin Gourmet Burgers Inc.’s (RRGB - Free Report) adjusted earnings in the fourth quarter of 2012 was way ahead of the Zacks Consensus Estimate as well as the year-ago quarter’s earnings. Red Robin Gourmet currently carries a Zacks Rank#1 (Strong Buy).

Other restaurant companies like Krispy Kreme Doughnuts, Inc. and Burger King Worldwide, Inc both with a Zacks Rank #2 (Buy) are expected to perform well, going ahead.

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