WEN: Making All the Right Moves

Takeaway: WEN is on our Investment Ideas list as a long.

Good Quarter, Better Announcements

Wendy’s reported 1Q15 results this morning, delivering a top line miss ($466.2 million vs $472.8 million estimate) and a bottom line beat ($0.06 vs $0.05 estimate).  Company owned same-store sales of +2.6% fell short of the +3.1% consensus estimate, while franchise same-store sales of +3.4% surpassed the +2.6% consensus estimate.

In addition to solid operating results, management announced several new initiatives in this morning’s press release.  The company announced its intent to sell off its non-core bakery operations in May 2015, provided an update on its debt refinancing to be completed by June 1 and its newly announced intent to return net proceeds of approximately $1.1 billion to shareholders via share repurchase (~27% of equity value), and revealed plans to provide updated guidance on June 3 to reflect these initiatives.

We continue to like Wendy’s on the long side, given its willingness to transform the business model to a leaner, more efficient machine.  The newly pending sale of its non-core distribution business supports this stance and should allow for greater sourcing flexibility, enhance focus on the core business, and eliminate future bakery capital expenditures.  As a whole, Wendy’s new operating model will deliver more predictable earnings growth, higher EBITDA margins, and higher earnings quality, while requiring less capital outlay.  The sell-side will continue to overlook the story here, until they no longer can.

Side Note: Is Panera Paying Attention?

We recently called PNRA out as the next activist target, given its recent underperformance and seeming inability to turn around the operations of the business in a reasonable amount of time.  Our number one suggestion for fixing Panera was to sell off non-core assets.  Panera currently produces and distributes its fresh dough through a leased fleet of temperature controlled trucks owned and operated by the company.  The proceeds from the sale could be redeployed back into the business or returned to shareholders.  Both options are more attractive than owning this low margin non-core business.  Contact if you’d like to access our recent Black Book on the name.

What We Liked in Wendy’s 1Q15 Print

  • Bottom line beat
  • Strong franchise comps
  • North America company owned restaurant margin improved 160 bps y/y
  • Adjusted EBITDA margin improved 360 bps y/y due to increased royalties & income and a reduction in G&A
  • Debt refinancing on schedule for June 1, with the intent to return net proceeds to shareholders through share repurchases
  • Plan to divest non-core bakery operations in May 2015
  • Lowered 2015 capex outlook by $15 million to $250-260 million
  • Lowered 2015 food inflation outlook from 4% to 1.5% given lower than anticipated beef prices
  • Raised company restaurant margin outlook to 16.5-17% to reflect easing commodity prices
  • Planned update from the company on June 3

What We Didn’t Like in Wendy’s 1Q15 Print

  • Top line miss
  • Disappointing company comps
  • Revised company operated comp outlook from 3% to 2.5-3%

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