WEN is set to report EPS before the market opens tomorrow. I expect management to strike a careful but confident tone on the earnings call when discussing its outlook for 2011. 2011 is still a “transitional year” for Wendy’s and the entire enterprise. We don’t expect much news on the previously announced sale of Arby’s but ultimately expect the sale to be a positive catalyst for the stock.
I continue to think WEN is solid long-term play in the QSR space. The company’s renewed focus on revitalizing, not complicating, the menu in 2011 will benefit the company for years. The company’s focus on selling burgers and cokes will, in my view, yield significant results in terms of sales, labor efficiency, and – ultimately – earnings.
As with every company that has reported so far, food inflation is center-stage. For WEN, beef costs inflation (in a sluggish sales environment) is one thing that could hinder the turnaround in the short term.
Here is what the company had to say on the topic during the most recent earnings call on March 3rd.
WEN has all of its ingredients with the exception of fresh beef, which cannot be hedged. As a result, it is likely that WEN will raise its FY11 inflation target, which is currently 2-3% at Wendy’s. Since March 3rd, beef costs are actually down approximately 5%. However, given the persistent inflation in grain prices it seems likely that beef costs may remain elevated – and perhaps even increase further – for the next couple of quarters at least. Chicken is obviously one foodstuff that is trending down year-over-year, and therefore could provide some relief, but WEN is “pretty much locked in” on that item.
Below are some quotes from WEN management on beef prices and commodity inflation in general, provided during the March 3rd earnings call:
“For 2011, we expect Wendy's same-store sales to grow between 1% and 3%. We expect improvement of 30 to 60 basis points in Wendy's company-operated restaurant margin. This margin assumption factors in a 2% to 3% increase in total commodities for the year.”
“With beef costs going up significantly this year, you'll see Wendy's food costs, I think, reach a higher level in Q2 and Q3 because of the timing of when we'll recognize those market increases. Arby's will also be facing very high beef prices, we think, through this year, 15% or more increase year-over-year.”
“The offset that we have to it right now is favorable prices on chicken for the most part for the year that we're pretty much locked in on. So that will help mitigate, I think, some of the overall commodity costs. But I think we're like everyone else, I think we're nervous overall about the pressures we're seeing on commodity costs and we're working very hard from a menu and a pricing strategy to help offset that, so we can achieve the kinds of margin increases that we talked about.”