Where’s the Beef? – Is Wendy’s On Track?
Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Wendy’s (NASDAQ:WEN) will forever be associated with “Where’s the Beef?” so when I saw their earnings this morning I couldn’t avoid the reference. The Wendy’s Company has experienced a lot of changes since Triarc acquired Wendy’s in 2008, changing names twice, changing exchanges, and ultimately divesting Arby’s. Arby’s produced lackluster results for the company since the Wendy’s acquisition and in July 2011 the company sold the majority of its stake to Roark Capital Group. The company still has an 18.5% share of the sandwich chain.
The company’s results are encouraging, even though earnings fell 30%. Reported profit was $4.3 million down from $6.1 million the previous year. The earnings miss was driven by charges related to the divesture of Arby’s, which as far as I’m concerned is well worth the short-term fiscal pain. Arby’s was a performance drag that I think the company correctly recognized it would be better without.
Revenue growth was stronger than expected, growing 5.6% to $615 million. Consensus estimates had revenue pegged at $613 million for the quarter. System-wide same-store sales at their North American locations rose 4.4% with the company-owned restaurants in the region up 5.1% and margins up 100 basis points to 15%. The increase in margin stands out given the increase in commodity prices throughout the year, but new products and pricing worked in the company’s favor. Their Dave’s Hot ‘N Juicy Cheeseburger product line exceeded expectations and the company expects it to continue driving same-store sales growth. The company forecasts same-store sales grow 2% to 3% for fiscal 2012.
The company announced the end of their share repurchase program, which spent $157 million over the year. The company purchased 31 million shares on the open market during the year. Thankfully, the program has expired and that capital will be redirected toward growth opportunities. Share buybacks are an accepted way to return excess capital to shareholders but in Wendy’s case I think they are much better off redirecting that capital as opposed to returning it to share holders.
Wendy’s also recently announced a joint venture with Higa Industries to form Wendy’s Japan with plans to open 100 Wendy’s in Japan. The company estimates a market potential of 700 stores in Japan, and considers the reintroduction of their restaurants an important cornerstone of their international expansion. Wendy’s Japan could have a significant long-term effect on revenue, but that remains to be seen.
The company also intends to improve its stores over the next year, and will be developing breakfast menus to spur long-term growth. The company is even offering its own Redhead Roasters coffee blend, a move reminiscent of McDonald’s McCafe strategy. Tapping into the coffee market could be another revenue driver for the company long-term.
Wendy’s stock hasn’t performed well during the past few years, and as it stands the stock has a negative PE. The company did post same store sales that were the best since the second quarter of 2004 but so far the company is looking light on the beef. Wendy’s has a strong brand and seems to be on the right path, but I’m currently neutral on the stock. I think Wendy’s is on track but I’d like to see the company’s initiatives pan out over the next few quarters before committing capital.
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