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We maintain our bullish stance on Wendy’s.

WEN reported 2Q13 EPS results that were $0.02 better than consensus.  More importantly, 2Q13 adjusted EBITDA was $102.1 million versus the Consensus Metrix estimate of $95.1 million.  Same-store sales were +0.4% for company-owned stores and +0.3 for franchised stores versus Consensus Metrix estimates of +1.1% and +0.9%, respectively.  Due to the successful July launch of the Pretzel Bacon Cheeseburger and the recent announcement of strategic operational initiatives, we believe the company is well positioned for the balance of 2H13 and 2014.

Below are some of our thoughts on WEN’s 2Q13 results.

The Big Story

The company announced a plan to sell about 425 restaurants as part of its ongoing brand transformation in order to help optimize its restaurant portfolio.  The company also laid out the anticipated benefits of this initiative:

  • Improved company-operated restaurant margin of 50bps or more
  • Reduced annualized G&A of about $30 million by the end of 1H14
  • Lower annualized depreciation expense of about $30 million by the end of 1H14
  • Higher cash flow due to an increase in rent and royalty revenue, lower ongoing capex, and proceeds from the sale of these restaurants
  • NPC will be a meaningful buyer of the stores, if not all of them 

What We Liked

  • New focus on an asset-light model
  • The company has recognized its operational deficiencies and created a feasible plan to address these issues
  • WEN is trending toward the high end of its full-year outlook for adjusted EBITDA ($350-$360mm) and adjusted EPS ($0.20-$0.22)
  • Strong focus on brand transformation – reimaging, including new restaurants, products and packaging along with a new logo
  • Expect stronger same-store sales in 2H13 and remain on track to achieve full-year same-stores sales growth of 2-3% in North American company-operated restaurants
  • The company raised its annual EPS growth rate target from the high single-digits/low double-digits up to the mid-teens beginning in 2014
  • Wendy’s intends to begin repurchasing shares in 3Q13

Red Flags

  • Although same-store sales numbers improved year-over-year, they fell short of expectations
  • Lost market share in the QSR value landscape, but the outlook is better for 2H13
  • 4Q adjusted EBITDA could be down over 10% year-over-year due to the company’s Image Activation franchisee incentive program
  • 2013 full-year D&A could be up about 15-20%







Howard Penney

Managing Director