Wendy’s/Arby’s Group, Inc. (WEN) recently posted first-quarter 2010 results that topped Zacks expectations on the back of the Wendy’s brand, but continues to be hurt by sluggish sales at its Arby’s restaurants, making the recovery difficult for the restaurant chain.

The quarterly earnings came in at 2 cents a share compared to 1 cent in the prior-year quarter, and a penny ahead of the Zacks Consensus Estimate. On a reported basis, including one-time items, the company posted a quarterly loss of 1 cent a share, an improvement over a loss of 2 cents in the year-ago quarter.

Wendy’s/Arby’s Group has undertaken a massive remodeling program, and is also investing to improve Wendy’s breakfast line-up and expand Arby’s value for menu offerings to drive traffic and improve sales.

Wendy’s/Arby’s Group, which competes with big players like McDonald’s Corporation (MCD) and Burger King Holdings Inc. (BKC), is trying to lure consumers who are becoming comfortable spending as the economy eases, but are still seeking value-menu offerings.

The company is expanding its $1 value menu at the Arby’s restaurants, after its $5.01 combo meals failed to gain traction. Arby’s also plans to roll out Steakhouse Sub and a Prime Cut chicken sandwich in second-quarter 2010.

The initiatives taken by the company and television advertising are showing results. Although comparable-store sales at company-operated Arby’s stores dropped 8.4% in April, they improved 320 basis points over the first quarter 2010, whereas traffic rose 4%. However, management indicated that comparable-store sales at Arby’s restaurants will remain negative in fiscal 2010, though they are expected to improve on a year-over-year basis.

Management expects fiscal 2010 comparable-store sales at Wendy’s restaurants to be positive. However, in April, comps fell 0.5%.

Wendy’s/Arby’s Group said that total revenues tumbled 3.1% year-over-year to $837.4 million. Sales from company-operated restaurants dropped 3.2% to $748.2 million and franchise revenue dipped 1.6% to $89.3 million.

The quick-service food chain said that the adjusted EBITDA soared 14.7% to $92.1 million due to a fall in cost of sales, whereas the adjusted EBITDA margin expanded 170 basis points to 11%. For fiscal year 2010, management hinted at an adjusted EBITDA growth in the low to mid-single digit range.

Wendy’s/Arby’s Group was formed through the merger of Triarc, the franchisor of the Arby’s restaurant chain, and Wendy’s, the owner-operator-franchiser of the fast food chain, which was completed in September 2008.

Wendy’s Operating Highlights

Wendy’s total revenues for the quarter inched up 1.1% to $584.7 million. Company-operated restaurants sales climbed 1.1% to $512.7 million, whereas franchise revenues edged up 1% to $72 million.

The company-operated comparable-store sales grew marginally by 0.2%, whereas franchise comparable-store sales rose 1%.

Company-operated restaurant margin for the quarter expanded 430 basis points to 15.4%, reflecting a fall in commodity costs, operational efficiencies in labor and certain controllable costs, lower advertising expenses and higher margin products.

Wendy’s ended the quarter with 6,540 restaurants, of which 1,390 were company-owned and 5,150 were franchised operated.

Arby’s Operating Highlights

Arby’s total revenues for the quarter fell 11.6% to $252.7 million due to lower comparable-store sales. Company-operated restaurants sales declined 11.6% to $235.5 million, whereas franchise revenues slipped 11.4% to $17.3 million.

The company-operated comparable-store sales dipped 11.6%, whereas franchise comparable-store sales plunged 11.4%.

Company-operated restaurant margin for the quarter contracted 340 basis points to 10.8%.

Arby’s ended the quarter with 3,699 restaurants, of which 1,155 were company-owned and 2,544 were franchises.

Wendy’s/Arby’s Group Financial Aspects

Wendy’s/Arby’s Group ended the quarter with cash and cash equivalents of $507.3 million, long-term debt of $1,501.9 million and shareholders’ equity of $2,261.2 million.

Management expects capital expenditure of $165 million in fiscal 2010, which includes investments in 12 new Wendy’s company-owned restaurants and 100 remodels of company-owned restaurants at each Wendy’s and Arby’s brand.

As of May 7, 2010, Wendy’s/Arby’s Group had repurchased 40 million shares, aggregating $190.2 million at an average price of $4.76 under its $250 million share repurchase authorization. The company has $59.8 million remaining under the authorization.

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. While Wendy’s is showing improving trends, Arby’s continues to face headwinds with sagging comps and falling margins. We see limited upside potential in the stock until an improvement in Arby’s performance is visible.
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