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Wendy’s (WEN) Q2 Earnings & Sales Beat Estimates, Stock Up


Shares of The Wendy’s Company WEN were up 3.9% in yesterday’s trading session after the company posted strong second-quarter 2017 results.

Earnings and Revenue Discussion

Adjusted earnings came in at 15 cents, surpassing the Zacks Consensus Estimate of 13 cents by 15.4%. Moreover, the bottom line jumped 50% year over year on the back of the company’s system optimization initiatives and a lower share count.

Total revenue of $320.3 million surpassed the consensus mark of $298.7 million by 7.2%. However, it decreased 16.3% year over year. The decline reflects a reduction in the number of company-operated restaurants as a result of its system optimization initiative. It owned 251 fewer company-operated restaurants in the second quarter compared with the year-ago quarter. The decline was partly offset by higher franchise royalty revenue and fees and franchise rental income.

Wendy's Company (The) Price, Consensus and EPS Surprise

Comps at North America system restaurants were up 3.2%, higher than an increase of 1.6% in the previous quarter, and 0.4% growth in the year-ago quarter.

Profit Discussion

North America company-operated restaurant margin decreased 230 basis points (bps) to 19.6% primarily due to higher labor rates and increased commodity costs.

General and administrative expenses decreased 16.1% year over year due to cost savings related to the company's system optimization initiative, lower professional fees and legal reserves as well as lower incentive compensation accruals.

However, adjusted EBITDA (earnings before interest, tax, depreciation and amortization) increased 13.3% year over year despite the ownership of fewer company operated restaurants. The upside was driven by higher franchise fees as a result of the company’s Buy an Flip activity. Also, adjusted EBITDA margin improved 940 bps to 36.2%, owing to the positive impact of the company's system optimization initiative.

Image Activation

Image Activation remains an integral part of the company’s global growth strategy, and includes reimaging existing restaurants and building new restaurants.

At the end of the reported quarter, approximately 36% of the global system featured the brand’s new image. Meanwhile, Wendy’s and its franchisees continue to expect roughly 42% of the global system, image activated, by the end of 2017.

Additionally, the company reiterated its full-year 2017 net new unit growth expectations of 1% in North America. Internationally, the number of new units is now expected to increase 14% (higher than the previous expectation of 12.5%).

Going forward, it plans to continue facilitating franchisee-to-franchisee restaurant transfers through its Buy and Flip strategy for ensuring that restaurants are operated by well-capitalized franchisees who are committed to long-term growth. During the second quarter, Wendy’s facilitated 294 Buy and Flips, and continues to expect completing around 475 in 2017.

2017 Guidance Updated

For 2017, the company continues to expect adjusted earnings per share in the range of 45 cents to 47 cents, up approximately 13% to 18% from 2016 levels. The Zacks Consensus Estimate of 47 cents is pegged at the higher end of the guided range.

Furthermore, Wendy’s anticipates comps growth of approximately 2% to 3% for the North America system, in-line with the previous expectation.

Adjusted EBITDA is now projected to be in the range of $404 to $410 million, reflecting an increase of 3% to 5% compared with 2016 levels. Previously, the company anticipated the same to be around $400–$406 million, an increase of 2% to 4% compared with 2016.

Currently, restaurant margin is expected to be in the band of 18% to 18.5% compared with previous projection of approximately 18.5%.

Capital expenditures are still anticipated to be between $80 million and $90 million.

Long-Term Outlook Reaffirmed

The company continues to anticipate record global restaurant sales (in constant currency and excluding Venezuela) of $12 billion by the year 2020. Also, it expects to reach global restaurant count of 7,500 and targets to complete Image Activation of at least 70% of the global system. Notably, Wendy’s aims to realize free cash flow of approximately $275 million by 2020.

Moreover, it looks forward toward achieving adjusted EBITDA margin in the range of 38–40% by the end of 2020.

Zacks Rank & Peer Releases

Wendy’s currently sports a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Among other restaurant stocks, McDonald's Corp. MCD reported second-quarter adjusted earnings per share of $1.73, beating the Zacks Consensus Estimate of $1.62 by 6.79%. The bottom line also increased 19% year over year.

Chipotle Mexican Grill, Inc.’s CMG second-quarter 2017 adjusted earnings were $2.32 per share, which outpaced the Zacks Consensus Estimate of $2.16 by 7.41%. Also, earnings compared favorably with the year-ago quarter figure of 87 cents per share, given a substantial rise in revenues.

In second-quarter 2017, Domino’s Pizza, Inc. DPZ posted earnings of $1.32 per share, which outpaced the Zacks Consensus Estimate of $1.22 by 8.20%. Furthermore, the bottom line increased 34.7% year over year on strong sales and a lower share count.

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