WEN – EMIL’S EARLY DAYS

Over the past month, Wendy’s has traded up 16% on the back of the uptick in comparable restaurant sales coming from the launch of the new burgers.  While the company is headed in the right directions there are still some issues that are an overhang for a sustained improvement in same-store sales. 

It is the early days of the Emil Brolick’s reign at Wendy’s and there is significant work to do.  The new CEO is still working through the legacy issues of his predecessor and we expect him to further refine his approach to the company’s problems as we go forward. 

The following are some of the key takeaways from the quarter. 

BREAKFAST IS NOT WORKING – Wendy’s will continue to struggle at breakfast for the near future.  “While work remains to commercialize breakfast, we are very optimistic.”  The competition that Wendy’s is facing in this category is formidable and will continue make life difficult.  In addition, I don’t understand the company’s coffee strategy as it was described on the call.  Why are they evaluating a “proprietary branding approach” to the coffee program called Redhead Roasters?  It seems like “RedHeaded Roasters” is a branding approach that is somewhat confining.  This is especially clear when one considers that McCafé is a platform that allows MCD to market a number of different beverages and not just coffee.  Why would Wendy’s not follow a similar suit and use a broader branding approach like “Wendy’s Café?   There are going to continue to manage the test markets that they have, but to be successful it will come at the expense of margins.  With beef prices looking to be up significantly in 2012, they can’t afford the margin erosion at breakfast.

DAVE’S HOT AND JUICY BURGER – EARLY TRENDS ARE STRONG BUT FOR HOW LONG? – “We would have to go back to early April-May of 2004 to find a five-week period of sales growth higher than the most recent five-weeks in sales.  We are confident that with the strong results of Dave's Hot 'n Juicy and the continued sales strength with Asiago Ranch Chicken Club we will be able to move the third quarter year-to-date same-store sales growth of 1.1% to the middle of our annual target of 1% to 3% same-store sales growth by yearend.”  In our view, it seems like the company might be adding extra marketing to the calendar to keep sales trends propped up. 

PRODUCT/PRICE MOMENTUM TO CONTINUE IN DECEMBER – Wendy’s is introducing a mid-tier priced burger called “the W.”  The W is positioned between the line of Dave's Hot 'N Juicy Cheeseburgers and the $0.99 price point.  I’m sure the franchisee pushed hard for this to help keep the momentum and to be driver of a higher average check.

MARKETING STILL NEEDS TO BE UPGRADED – The new CEO is looking for a new CMO to fill the existing vacancy and hopes to complete that search in the first quarter of 2012.

ASSET BASE STILL A WORK IN PROGRESS – The Company is currently looking at nine new prototype restaurants.  “We are working to reduce the investment cost of these prototypes, working to determine which prototypes to focus on and, of course, we are anxious to learn how well sales sustain themselves over month’s period of time.”

MARGIN BENEFIT – As I said above, the breakfast business is a drag on margins and the company can’t afford that right now.  “We were able to offset higher commodity cost with strategic pricing and mix shifts that produced a net positive change of approximately 120 basis points. In addition, restaurant margin was favorably impacted by 80 basis points due to a year-over-year reduction in breakfast advertising expense.”

Howard Penney

Managing Director

Rory Green

Analyst