We are maintaining our long-term Neutral recommendation on Wendy’s/Arby’s Group Inc. (WEN).
Wendy’s/Arby’s Group has outlined a multi-year turnaround plan to improve restaurant operating margins, reinvigorate brands, revitalize comparable-store sales and expand internationally. 2011 is expected to be a transitional year for the company.
Management believes that Wendy’s provides high growth opportunities with 6,500 restaurants in more than 20 countries. The company also remains firm in its plan to sell the Arby’s restaurants, to focus solely on building the Wendy’s brand.
In an effort to drive traffic and improve sales, the group continues to work on its breakfast line-up. In 2010, the company introduced its new breakfast in four markets: Pittsburgh, Kansas City, Phoenix and Freeport. In the first half of 2011, the company will serve breakfast in two additional markets, Louisville and San Antonio.
The company targets to have about 1,000 restaurants serving its new breakfast by the end of this year, over half of which will be franchised. This should help the company realize greater gains in 2012.
Management is also eyeing full-fledged overseas expansion in markets including Argentina, the Philippines and Japan. Further, Wendy’s has a long-term development agreement with franchisees in the Middle East, North Africa, Singapore, Turkey, Russia and the Eastern Caribbean.
Additionally, the company is exploring growth opportunities in China, Brazil and other key international markets. The company believes that there is room for more than 8,000 restaurants outside North America. Besides expansion, Wendy’s/Arby’s has adopted a remodeling program as well.
However, like all other restaurant companies, inflationary pressure remains an overhang on Wendy’s/Arby’s. The company anticipates commodity inflation of 2% to 3% during 2011.
Beef represents almost 20% of total food cost and bears the largest risk. The company uses fresh ground beef, the cost of which is expected to peak in the second and third quarters of 2011. Earnings estimates for 2011 have been reduced by 6 analysts out of 18 while only one analyst raised the same over the last 30 days.
Additionally, at Wendy’s, company-operated same-store sales in January suffered by about 1.5% to 2% due to severe winter primarily in Midwest and Northeast markets. This will lead to flat to positive same-store sales in the first quarter of 2011.
Zacks Consensus Maintained
Over the last 30 days, the magnitude of estimate revisions for Wendy’s/Arby’s Group has been the same with estimates for the first quarter and the second quarter being 2 cents and 6 cents, respectively.
Competition with bigger fast-casual restaurants like McDonald’s Corporation (MCD) and Yum! Brands Inc. (YUM) is expected to remain fierce regarding price, service, location and concept in order to drive traffic, leading to adverse effects on the company’s restaurant operating margins and profits. Wendy’s/Arby’s groupcurrently retains a Zacks #3 Rank, which translates into a short-term Hold rating.
MCDONALDS CORP (MCD): Free Stock Analysis Report
WENDYS/ARBYS GP (WEN): Free Stock Analysis Report
YUM! BRANDS INC (YUM): Free Stock Analysis Report
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