Earnings Scorecard: Wendy’s/Arby’s

On November 12, Wendy’s/Arby’s Group Inc. (WEN) reported third quarter fiscal 2010 earnings of approximately zero cent per share, which lagged the Zacks Consensus Estimate of 4 cents and the year-earlier quarter’s earnings of 3 cents.

Given below is our report on the recent earnings announcement as well as subsequent analyst estimate revisions over short and long-term periods.

Earnings Report Flashback

Total revenue in the third quarter tumbled 4.7% year over year to $861.2 million. Sales from company-operated restaurants dropped 5.0% to $766.0 million and franchise revenue dipped 2.1% to $95.2 million. Revenues were hurt by sluggish sales both at Wendy’s and Arby’s restaurants.

(Read our full coverage on this earnings report: Wendy’s/Arby’s Disappoints)

Earnings Estimate Revisions — Overview

Following the release of Wendy’s/Arby’s Group’s third quarter results, estimate revision trends among the analysts depict a near-term negative outlook and a mixed long-term outlook. Let’s dig into the earnings estimate details.

Agreement of Estimate Revisions

Over the last 30 days, a downward trend has been noticed for the fourth quarter, with earnings estimates being increased by just 1 out of 14 analysts. On the other hand, downward revisions in estimates were made by 6 analysts.

The analysts expect growth to be restricted in the near term. With a high rate of unemployment and increased competition, higher commodity costs as well as challenging fundamentals, earnings growth is expected to be limited in the near term.

However, the analysts remained relatively optimistic on fiscal 2010 earnings as 5 out of 12 analysts raised their estimates while three lowered the same. For 2011, 2 analysts raised their estimates while 10 moved in the opposite direction, asserting the negative outlook.

The analysts are mainly negative on management’s expectation of decreased earnings for 2010 in terms of same-store sales at Wendy’s and overall adjusted EBITDA. While Arby’s showed signs of stabilization in the third quarter, turnaround at Wendy’s was slow.

Hence, the analysts prefer other quick service restaurants like McDonald’s Corp. (MCD) and Yum! Brands Inc. (YUM) owing to their better earnings visibility and comparatively cheaper valuation.

The trend was almost similar over the last 7 days with a clear negative outlook observed for the fourth quarters of fiscal 2010 and 2011. However, a slightly positive bias was noticed for full fiscal 2010.

Magnitude of Estimate Revisions

The magnitude of estimate revisions for Wendy’s/Arby’s Group has been moderate over the last 30 days. Following the release of third quarter results, the estimate for the fourth quarter was lowered by a penny. The estimate for 2011 was cut by 2 cents while the estimate for 2010 remained unchanged.

Currently, the Zacks Consensus Estimate for the fourth quarter is zero cents per share. For 2010 and 2011, the Zacks Consensus Estimates are 13 cents and 17 cents per share.

Our Recommendation

In the third quarter, we believe the company suffered from increased commodity costs and sales deleverage. Moreover, lack of an everyday value promotion and tough comparisons from the successful launch of boneless wings last year added to the worry.

However, Wendy’s/Arby’s Group has undertaken a massive remodeling program and is also investing to expand Wendy’s breakfast line-up and Arby’s Value Menu offerings to drive traffic and augment sales.

The company is also concentrating on enhancing shareholder value in terms of share repurchase authorization and dividend hike.

However, we believe Wendy’s/Arby’s is not yet totally immune to challenges stemming from a still uncertain economy. Although the company is strengthening its promotional activities, Wendy’s competes with fast-food giants like McDonald’s and Yum! Brands whose scale and market share are much larger.

The company has also slashed its fiscal 2010 outlook for Wendy’s North American company-operated same-store sales to down 1% from flat. Hence, we prefer to stay on the sidelines at the current level and look for a better entry point in future.

Wendy’s/Arby’s Group currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.

WENDYS/ARBYS GP (WEN): Free Stock Analysis Report

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