WEN | Performing Well for Now

Wendy’s (WEN) was added to our SHORT bench as a result of our LONG thesis on McDonald’s. We still believe that it might be adversely affected by the resurgence of McDonald’s, but it’s not time to go SHORT on WEN yet.

 

Yesterday, WEN reported 2Q15 results, for the most part outperforming consensus, but as management put it, has room to improve on their value offering. The company-owned comp was +2.4% versus consensus of +1.7%, a 150bps decline YoY. This quarter was their toughest comp of the year at +3.9%, comps get easier in the 2H of the year. Total company revenue of $489.5mm beat consensus of $486.3mm, representing a decrease of -6.5% due to refranchising efforts. Company-owned restaurant level margins increased 40bps to 18.2%, beating estimates of 18.1%. Adjusted EPS came in at $0.08 below consensus of $0.09, representing an -11% decline YoY.

 

WEN | Performing Well for Now - 2Q15 CHARTS

 

Reimaged stores are having a strong impact, seeing 10-15% sales increases post completion, with 40-50% of that flowing through. Newly remodeled stores drove 170bps of the system-wide same-restaurant sales growth of 2.2%, which was above estimates of 1.6%. Management stated they are continuing to see strong results from core menu items and LTO’s. Recently introduced a refurbished chicken sandwich featuring new marinade and antibiotic free chicken, in certain test markets and hoping they can bring it system-wide. The company is notably having difficulties with price and value on some items, and working to fix it with value bundles in the $4-$6 check range. 

 

The company continues to invest in technology to improve customer interaction. They view Mobile Order & Pay and Self-Order Kiosks as a great ways to offset wage inflation, as well as improve the quality of the food and experience for the customer. Just staying on the wage topic for a moment, management was adamant that they do not, and their franchisees do not intend to pass a majority of this increase onto customers in the form of pricing. They will work on reducing staff, reducing hours, in general getting smarter around labor management. Management went as far as to say, “these wage increase will in the end hurt the very people they are intended to help.”

 

The hot topic in restaurants, the REIT was broached in this call, but largely pushed to the side by management. By 2017 they anticipate receiving $170mm a year in rental revenue, which is a strong dependent revenue stream they don’t want to get rid of.

 

MANAGEMENT OUTLOOK

WEN increased their outlook for 2015 adjusted EBITDA to $385mm to $390mm from its prior guidance of $375mm to $390mm, representing an 8% to 9% increase compared to 2014. The company also increased their outlook for restaurant operating margins by 50bps to 17% to 17.5%. EPS estimates remained constant at $0.31 to $0.33. The planned sale of 540 domestic company-operated restaurants is on schedule, and expected to provide $400mm-$475mm in pre-tax proceeds. Additionally, the company entered into an accelerated share repurchases transaction for approximately $165mm as part of a previously approved share repurchase authorization.

 

HEDGEYE OUTLOOK

We continue to think that looking out 1-3 quarters WEN sales will start to take a hit from the resurgence of McDonald’s. Until that happens this company will perform in line with expectations, comping at the 2.0% to 2.5% range. When MCD starts taking share, WEN will not be immune, it seems like the first company to get value right will win this race, our bet is on MCD. 


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