The Wendy’s Co. (WEN) recently announced its preliminary sales results for the fourth quarter and fiscal 2011. The company is scheduled to report its final results on March 1, 2012.
Wendy’s fourth-quarter 2011 adjusted earnings came in at 4 cents, in line with the Zacks Consensus Estimate but ahead of the year-ago earnings by a penny.
Total revenue in the quarter under review grew 5.6% year over year to $615.0 million. Adjusted EBITDA also rose 10.5% to $80.9 million.
In fiscal 2011, total revenue was $2.43 billion, up 2.4% year over year. Adjusted earnings in 2011 were 15 cents a share, in line with the Zacks Consensus Estimate.
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 comp growth of 4.4%.
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.
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 20 new and 50 existing company-operated units in North America. An upgrade of restaurant point-of-sale technology will also be in place.
For 2012, management believes the Wendy’s chain will be able to drive 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 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 cost of consolidation of $23 million.
Our Take
Wendy’s seems to be on a turnaround track. Its fourth-quarter 2011 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 way back in 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. Moreover, we prefer to remain on the sidelines as we believe that the sale of Arby’s chain has still a long way to go before fully paying off.
Wendy’s currently retains a Zacks #4 Rank, which translates into a short-term Sell rating. We maintain our long-term Neutral recommendation on the stock.
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