Wendy’s Arby’s Group Inc. (WEN), the third largest quick-service restaurant company in the United States, posted second quarter 2010 results on August 12, 2010. The company adjusted earnings surpassed the Zacks Consensus Estimate on the back of the Wendy’s restaurant profits. The recent earnings announcement, subsequent analyst estimate revisions and the Zacks ratings for both the short-term and the long-term outlook for the stock are covered in depth below.
Earnings Report Review
During the second quarter, Wendy’s/Arby’s posted adjusted earnings of approximately 7 cents per share, which surpassed the Zacks Consensus Estimate of 5 cents. Including one-time items, Wendy’s/Arby’s posted quarterly net income of $10.7 million, well below $14.9 million recorded in the year-earlier quarter. However, reported earnings of 3 cents per share remained flat year over year.
Total revenue in the quarter under review tumbled 3.8% year over year to $877.0 million and lagged the Zacks Consensus Estimate of $888 million. Sales from company-operated restaurants dropped 4.1% to $782.7 million and franchise revenues dipped 2.3% to $94.3 million. Revenues were mainly hurt by sluggish sales at Arby’s restaurants.
Adjusted EBITDA nudged up 3.2% to $120.9 million, attributable to reduced general and administrative expense and a continued expansion in Wendy’s company-operated restaurant profits.
Wendy’s total revenue in the quarter plunged 1.3% year over year to $607.4 million due to the decline in both company-operated restaurants (down 1.2%) as well as franchise revenues (down 1.4%).
Arby’s total revenue in the quarter fell 9.4% year over year to $269.6 million due to lower comparable-store sales. Company-operated restaurants sales declined 9.7% year over year to $250.3 million whereas franchise revenues slipped 5.4% to $19.3 million.
For 2010, Wendy’s expects same-store sales at North America company-operated restaurants to be flat, reduced from its previous expectations to be positive. Arby’s same-store sales are expected to be negative, though improvements are likely on a year-over-year basis. The company expects Wendy’s margin to expand year over year in 2010, but declined it to 70 to 90 basis points for 2010 as compared with its previous guidance of 90 to 110 basis points.
Earnings Estimate Revisions: Overview
Following the second quarter earnings release, the Zacks Consensus Estimate for the company has decreased, with the analysts covering the stock having a negative view on the stock. The company has also reduced its fiscal 2010 outlook. The earnings estimate details are discussed below.
Agreement of Estimate Revisions
From the table below, a negative inclination can be witnessed among the analysts. The analysts remained cautious on Wendy’s/Arby’s. In the last seven days, out of 15 analysts, 10 have reduced their estimates for fiscal 2010 and for fiscal 2011, 10 out of 16 analysts covering the stock have decreased their estimates. One analyst has raised the estimates for both fiscal 2010 and 2011.
Negative revisions by the analysts are based on a weaker sales outlook at each brand due to softer comparable-store sales as restaurant industry remains under pressure due to economic downturn, which has badly affected consumers’ disposable income. Additionally, margins are expected to decline based on higher commodity prices in second half of 2010.
One analyst has raised the estimates for fiscal 2010 and 2011, on expectations of the company benefiting from the brand strength of the core Wendy’s chain, international expansion and favorable cash position.
Magnitude of Estimate Revisions
The table below indicates that earnings estimates have decreased by 3 cents in both fiscal year 2010 and 2011, over the last 7 days. The magnitude of estimate revisions indicates that the analysts expect earnings to remain under pressure as the company reduced its 2010 adjusted EBITDA guidance to be down 3% to 5% year over year from its previous guidance of up low-to-mid single digits.
We believe there are strategic growth opportunities for both Wendy’s and Arby’s brands, including international development under dual-brand restaurants. In our opinion, dual-brand units, combining Wendy’s and Arby’s under one roof, can generate higher sales volumes and a better return on investment. The company has undertaken a massive remodeling program, and is also investing to improve Wendy’s breakfast line-up and expand Arby’s Value Menu offerings to drive traffic and improve the top line.
Additionally, 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. Management believes that there is room for over 8,000 restaurants outside North America.
While Wendy’s is showing slightly improving trends, Arby’s continues to face headwinds with sagging comps and falling margins. Moreover, an uncertain economy with a high unemployment rate and faltering consumer confidence along with steep competition will likely restrain the company’s growth in the near term.
Accordingly, Wendy’s/Arby’s shares have a Zacks Rank of #3 (short-term Hold recommendation). We also reiterate our long-term Neutral rating.
Apart from Wendy’s/Arby’s, another stock that promises long-term growth opportunities is Buffalo Wild Wings Inc. (BWLD), which has a Zacks Rank of #1 (short-term Strong Buy recommendation), as it has a long track record of success, a viable business strategy and a debt-free balance sheet.