The Wendy’s Co. (WEN) has recently posted fourth quarter 2011 adjusted earnings of 4 cents per share, in line with the Zacks Consensus Estimate and above of the year-ago earnings by a penny. On a GAAP basis, the company’s earnings were a penny per share in the fourth quarter of 2011, level with the year-ago quarter.

In full-fiscal 2011, adjusted earnings were 15 cents a share compared with 17 cents a share in 2010. On a GAAP basis, earnings per share were $0.04 in 2011 and 2010.

Operational Highlights

Total revenue in the quarter under review grew 5.6% year over year to $615.0 million. In full-fiscal 2011, revenue was $2.43 billion, up 2.4% year over year. This sales increase was driven by both positive check and transactions.

Wendy’s North America company-operated same-store sales increased 5.1% while franchise same-store sales rose 4.2% leading to a North America system-wide comps growth of 4.4%. Launch of Dave’s Hot ‘n Juicy cheeseburgers in October, promotion of Asiago Ranch Chicken Club in November and addition of The W in an array of hamburger offerings helped drive the same-store sales.

Adjusted EBITDA also rose 10.5% to $80.9 million. Adjusted EBITDA was $331.1 million in 2011, up from $341.9 million in 2010.

Company-operated restaurant margin leaped 100 basis points (bps) to 15.0% due to sales leverage from increased pricing and higher transactions as well as favorable insurance adjustments, which negated a 170 basis-point adverse impact from commodity cost inflation.

Financial Position

Wendy’s ended the year with cash and cash equivalents of $475.2 million, long-term debt of around $1.4 billion and shareholders’ equity of around $2.0 billion.

In the full-year 2011, the company purchased 31 million shares for $157 million at an average price of $5.07 per share. At year-end, the company had approximately 390 million shares outstanding.

Store Update

At the end of the quarter, Wendy’s had 6,244 restaurants in North America, of which 1,417 were company owned and 4,827 were franchise operated. Additionally, there were 350 franchised Wendy’s restaurants in operation in 26 countries.

Outlook

For 2012, the company expects same-store sales growth of 2% to 3% at Wendy’s North America company-operated restaurants. Margins at Wendy’s are expected to improve approximately 50 bps. The guidance for margin includes same-store sales growth, partially offset by increased commodity costs of 115 to 145 basis points, owing to rising beef costs.

Capital expenditure will likely be about $225 million. Wendy’s plans to revamp 50 existing company-operated units in North America. An upgrade of restaurant point-of-sale technology is also slated.

For 2012, management believes the Wendy’s chain will be able to drive a low single-digit increase in adjusted EBITDA. Beyond 2012, the growth will likely be in the range of high single digit to low double digit. Wendy’s adjusted EPS growth rate is expected to outpace the adjusted EBITDA growth rate.

On the expansion front, management plans to open 40 franchise units in North America and approximately 55 franchisee and joint-venture outlets overseas. The company also plans to merge its Atlanta restaurant support center with the Dublin, Ohio restaurant support center in late 2012 that will likely involve $23 million cost of consolidation.

Our Take

Wendy’s seems to be on a turnaround track. The fourth quarter experienced the strongest same-store sales growth since the second quarter of 2004, thanks to the launch of premium Dave’s Hot ‘N Juicy cheeseburger line. In addition, Wendy’s generated positive transactions in 2011 after 2002.

However, Wendy’s faces stiff competition from industry biggies like McDonald’s Corporation (MCD) and Yum! Brands Inc. (YUM) in both domestic and international marketplaces. Steeply rising commodity costs also remain a cause for concern. A high transaction cost regarding the closing of Atlanta support center will also be incurred. We prefer to remain on the sidelines as we believe that the sale of the Arby’s chain has still a long way to go before fully paying off.

Wendy’s currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We maintain our long-term Neutral recommendation on the stock.

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