The Wendy's Company (WEN) recently reported its first-quarter 2013 adjusted earnings of 3 cents per share, beating the Zacks Consensus Estimate of 2 cents. Quarterly earnings also surpassed the comparable year-ago quarter’s earnings of one cent per share. Earnings in the quarter were helped by Wendy’s top-line growth and margin expansion in company-operated restaurants. The company’s ‘Right Price, Right Size Menu’ initiative also pushed up quarterly earnings.
Quarterly revenues increased 1.8% year over year to $603.7 million, but fell short of the current Zacks Consensus Estimate of $611.0 million by 1.2%. Amid a sluggish industry sales environment, the company’s positive comparable restaurant sales (comps), higher sales gain from the new unit openings and traffic growth drove the top-line in the quarter.
Comps at North America company-operated restaurants grew 1%, driven by product mix, better pricing and Wendy’s Image Activation programs. However, comps in the quarter were adversely affected by the early Easter, adverse weather conditions, lower transactions, and termination of breakfast operation.
Wendy’s Franchise sales declined 0.3% to $73 million. Franchise comps in North America were up only 0.6% during first-quarter.
North American company-operated restaurant margins expanded 100 basis points (bps) to 12.8%, driven by improved comps, better pricing as well as product mix, lower beverage cost and decreased breakfast advertising expenses, offset by a 90 bps rise in commodity costs.
Adjusted EBITDA rose 21% to $77.3 million owing to higher restaurant margin and reduced general and administrative costs.
Since the starting of Wendy’s Image Activation program, it has launched 86 new as well as restored restaurants. At the end of the quarter, the company was operating 6,500 restaurants worldwide.
Wendy’s has recently raised its earnings guidance for 2013. Wendy’s projects that its adjusted earnings per share will be within 20 cents - 22 cents, up from the previous estimate of 18 cents - 20 cents. Earnings, which are expected to be up 18%-29% year over year, will benefit from the company’s debt refinancing activity.
However, management has reiterated its adjusted EBITDA guidance of $350 - $360 million.
Wendy’s continues to expect that the average comps in North America company-operated restaurants will grow by 2% - 3%.
Margins at Wendy’s are projected to be within 14.2% - 14.5%, led by higher comps, sales gain from Image Activation initiative, and favorable cost-effective initiatives. However, margins in the quarter are expected to be adversely affected by 90 - 120 bps increase in commodity costs.
On the expansion front, management plans to open 25 company-owned and 40 franchise units in North America. The company is also planning to unveil nearly 60 franchisee and joint-venture outlets overseas. Further, the company plans to shut down 90 - 100 franchised as well as 20-300 company-operated restaurants in North America and 15 -20 restaurants overseas. The company’s guidance also includes the revamping of 600 restaurants by 2015.
Wendy's’ year-over-year increase in revenues, earnings as well as margin improvement is impressive. Wendy's has initiated a multi-year turnaround plan to improve its restaurant operating margins, reinvigorate brands, revitalize comps and expand internationally. The company is also focused on enhancing shareholder value through dividends and share repurchases.
However, although Wendy’s’ repositioning efforts seem to be on track, the turnaround process is yet to pay off. Along with this, food cost inflation is expected to remain a headwind for the company.
Currently, Wendy's retains a Zacks Rank#1 (Strong Buy). Some other restaurateurs like McDonald’s Corp. (MCD - Free Report) missed our estimates on both lines this season while Yum! Brands Inc. (YUM - Free Report) beat earnings but missed out on revenues. Another company, The Cheesecake Factory Inc. (CAKE - Free Report) was ahead of estimates on both counts.
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