WENdy's: TOO FAR, TOO FAST

Takeaway: Wendy's has the leadership team to bring the company back to prominence in its space, but it will take some time.

This note was originally published May 09, 2013 at 08:03 in Restaurants

In CEO Emil Brolick, and the team he has assembled, Wendy’s (CEO) have the executive leadership to bring the company back to its former place of prominence in quick service restaurants (QSR). The indications from the quarter are that the turnaround will take some time. 

Dublin Was Not Built in a Day

We believe that the turnaround at Wendy’s is going to take time. Given that this recent run has been driven largely by multiple expansion, rather than earnings revisions.  We expect the stock to “take a breather” at this point given a lack of catalysts for it to continue on its current trajectory.   The next two quarters are likely going to see a choppy top line performance from WEN.

First Quarter Results

Despite sales coming in below expectations, Wendy’s managed to print an in-line earnings number of $0.03 per share.  Management raised its Adjusted EPS Outlook to $0.20-0.22, largely due to the refinancing of its indirect wholly owned subsidiary, Wendy’s International, Inc.

Quarterly stats:

  • SRS gained 1% in the first quarter “despite bank holiday and weather impact” vs consensus 2.3%
  • North America restaurant-level margins improved 100 bps yoy to 12.8%
  • North America co-op comps are guided to 2-3% (back end loaded)
  • Thinning out of the franchisee base as 90-100 closures expected in FY13

Takeaways

  • Discontinued breakfast offering will negatively impact ’13 comps, offsetting positive impact of reactivations.  The offset to this is the benefits from the image activation program. 
  • Wendy’s will serve as a backstop on GE loans to franchisees with at risk capital estimated to be “some fraction of $100mm”
  • Wendy’s is struggling with value-seeking customer – McDonald's (MCD) is making life very difficult for WEN to talk about value.  We believe that SSS could decline 1-2% in 2Q13
  • Still difficult to gauge how successful Image Activation will be – Tier 1 restaurant are too expensive and not providing the require returns.  WEN still experimenting with Tier 2 and 3 design and cost package.
  • Total cost to company, of fixing the asset base, remains severe – The initial $10 million incentive program will likely more than double over time.