After years of underinvestment in its brand, Wendy’s (Nasdaq:WEN) is pursuing an ambitious program to remodel its store base, and better compete with a group of peers it refers to as the “new quick service restaurant” (QSR) group. The program will be expensive, but could be just what the company needs to start boosting returns for shareholders.
Full Year Recap
Sales for the year at company-owned locations advanced 2.4% to $2.1 billion. Same store sales at these stores rose 2%, and across the Wendy’s system of company-owned and franchised locations, saw the opening of a net new 18 locations. Franchised revenues advanced 2.9% to $304.8 million to bring total company revenues to $2.4 billion, growing 2.4% in aggregate. Total worldwide units were 6,594 as of year end. The amount owned by the company at the end of the year was 1,417, or 21.4%.
Reported operating profit fell 8.9% to $137.1 million on higher commodity costs and one-time transaction charges of $45.7 million. During the year, Wendy’s sold off the Arby’s chain to focus on its namesake stores. Net income ended up in the positive territory at $9.9 million, following a $4.3 million loss in 2010. This worked out to earnings of 2 cents, but 4 cents when backing out what the company considered to be non-operating losses. Free cash flow trends were stronger and ended the year at roughly $100 million, or about 40 cents per diluted share. To know more about income statements, read Understanding The Income Statement.
For 2012, analysts project sales growth close to 4% and total sales just north of $2.5 billion. They expect earnings of 18 cents per share. During its analyst day, the company didn’t provide specific earnings guidance but did announce plans to ramp capital expenditures up to $225 million, or more than 50% ahead of 2011 levels.
A New Strategy
Wendy’s is basically emulating the strategy that McDonald’s (NYSE:MCD) used to revitalize its domestic store base. McDonald’s has spent great sums to remodel stores and has focused on improving food quality, as well as pushing through new food innovations, such as higher priced hamburgers. It has also targeted coffee and related beverages to boost traffic and profit margins. Its strategy has been hugely successful and has been implemented on a global basis.
Wendy’s has an ambitious goal to remodel most of its domestic store base. It will focus on company-owned locations and upgrade its staff in hopes of convincing franchisees to follow suit after seeing sales improvements of as much as 25%. It is also rolling out its own coffee brand and breakfast food to try and steal share from McDonald’s, which dominates the QSR market for breakfast. It is introducing higher priced burgers, and plans to accelerate its international capabilities after refreshing the domestic stores.
The Bottom Line
At this point, Wendy’s has much work to do to convince its franchisees and investors that it can revitalize what used to be an iconic restaurant brand. The new management team sees its primary competition as the “new QSR” players that include Chipotle (NYSE:CMG), Panera (Nasdaq:PNRA) and burger chains such as Five Guys Burgers. During its analyst day, the CEO spoke of peers and retail rivals such as Chik-Fil-A, Nordstrom (NYSE:JWN) and Walt Disney (NYSE:DIS) that have evolved from providing functional to emotional connections with consumers.
For several years, Wendy’s is unlikely to generate any excess free cash flow for shareholders. However, the revitalization program is overdue and necessary to ensure the firm’s competitiveness over the long haul. Management has referred to it as returning to a “Cut Above” rivals that have eaten Wendy’s lunch for a number of years now. For additional reading, check out 5 Must-Have Metrics For Value Investors.
At the time of writing, Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.