WEN – Coming Out Party

I truly believe that Roland Smith, CEO of Wendy’s, has the opportunity to become a legendary CEO in the restaurant industry and that I have a ringside seat to monitor the progress. I can’t tell you how many times we have seen this story play out in the restaurant industry. For one reason or another a brand is mismanaged for an extended period of time and business deteriorates to disastrous levels. After a period of time the right CEO comes along and mixes the right combination of people and processes, throws in some clever marketing and the mismanaged brand is golden again. Taco Bell, McDonald’s, Burger King, Chili’s, Bob Evans, IHOP, Red Lobster, Jack-In-the-Box and Olive Garden at one time or another have felt the pain of mismanagement. Today, Wendy’s, Starbucks, KFC and Applebee’s are currently feeling the pain of mismanagement.

As an investor, there is huge upside in finding the next brand that is going to move from the mismanaged category to the operating flawlessly category. I really believe that Wendy’s is the brand with the most upside potential, but it will not come easy. Any brand turnaround has to start at the top in the executive suite, so confidence in Roland is key to this story. While my relationship with the new CEO is brief, my relationship with others in the Wendy’s community is deep and long. For now, the team seems to be behind the new CEO and the other executives he has brought on. Below are some of the changes he is trying to make and the metrics that need to be monitored. The one warning that needs to be emphasized is that if Wendy’s is going to be successful, another brand is going to lose. Right now, all eyes are on Burger King as the brand with the most risk associated with a resurgent Wendy’s.

Recently, WEN announced in its 3Q08 earnings release its goal to drive an incremental $100 million in operating profit at its Wendy’s concept and to reduce corporate G&A by $60 million over the next 2-3 years. This week, the company presented to the investment community a roadmap of how and when it expects to achieve these goals.

Improve Wendy’s store-level operations and margins:

In the next 3 years, the company expects to drive an incremental $100 million in EBITDA at its Wendy’s brand and improve restaurant level margins by 500 bps. For reference, Wendy’s company restaurant margins have declined by over 400 bps in the last 6 years. Additionally, there is currently a 600 bps difference between company-operated and franchise-operated store margins from an EBITDAR standpoint (with the franchise-operated units leading the system) so there is considerable room for margin improvement at Wendy’s company-operated units.

The company expects to increase its restaurant-level margins to 16%-17% by the end of 2011 from its depressed 2008 estimated 11%-12% level with a 160-180 bps improvement in both 2009 and 2010, followed by a 150-170 bps increase in 2011. About half of this margin growth, or 230-250 bps, should be driven by labor efficiencies. Another 90-100 bps of savings should come from lower food costs. Better management of repair and maintenance is expected to drive an additional 60-80 bps increase in margins with the remaining 80-100 bps of growth expected to come from reductions in other costs, such as supply synergies and occupancy.

Right-Size Combined Corporate Structure:

WEN expects to drive $60 million in G&A savings by the end of 2010. The bulk of these savings will stem from reduced headcount and the company’s new shared service center, which will eliminate replicated key functions at both brands. Importantly, the company has already achieved $20-25 million of these projected savings in 2008, largely from reducing redundant top-level employees. The remaining $35-$45 million of savings should result from the 2009 opening of the company’s new shared service center, the implementation of a purchasing cooperative at Wendy’s and the completion of an IT project.

These two goals alone are expected to increase WEN’s EBITDA by $160 million over 3 years. The company is also focused on driving improved same-store sales growth at both brands, which is integral to the company reaching its $160 million profit growth goal, particularly as it relates to significantly growing margins at the Wendy’s concept. WEN outlined two other key goals, which included reducing its company-operated unit growth to increase free cash flow and developing a long-term strategy for international growth.

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