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Is Wendy's/Arby's thinking donuts?
11/24/09 - Christa Hoyland
Wendy's/Arby's Group Inc. has been looking for a third brand to bring into the fold, and it may have found it in Krispy Kreme Doughnuts Inc. Business news service Briefing.com said Monday that the the donut brand was "the subject of chatter about a potential takeover by Wendy's/Arby's Group," as reported by Barron's.
Krispy Kreme may be a good investment. The company has fought hard to bring down costs and return to profitable operations after years of legal battles and significant losses last year. This spring, the company reported its first operating profit in four years. In September, the company reported same-store sales were up 5.9 percent while posting a loss of $157,000, a significant improvement over the $1.9 million loss in the same period last year, but down from a net profit of $1.9 million in the first quarter of the fiscal year. The company is finding success with a smaller retail concept store model and extending tests of its Kool Kreme soft serve ice cream line.
Wendy's/Arby's Group completed its merger last September, and both brands have been impacted by the economy, although Wendy's is faring better. Earlier this month, the company reported that its same-store sales were nearly flat for the most recent quarter due in part to the company's pulling back on breakfast offerings at its company stores.
Arby's, meanwhile, reported comps were down 9.0 percent. Net income for the quarter was $14.7 million, compared to a net loss of $12.1 million in the same period last year for Arby's former parent Triarc.
Both brands also have taken steps to improve brand equity and operations in the year since the merger. Earlier this year, Wendy's signed new creative agency Kaplan Thaler, which recently launched the "You know when it's real" positioning. The chain also has focused on improved research and development, launching boneless wings and the Bacon Deluxe, which features slices of Applewood bacon. The company also announced the formation of a national supply chain co-operative, which will begin in January and should help operators benefit from lower costs. Arby's has had a supply co-op for several decades.
Arby's has struggled in the competitive sandwich environment, responding with a series of $5.01 combo deals and the "Worth every penny" brand positioning. Company executives said the combos were improving the sales mix. Earlier this year, the company saw good initial results from its new Roastburger line, but consumers were more interested in aggressive value offers at company-owned stores. Arby's is testing a $1 value menu while maintaining its emphasis as a higher quality sandwich brand.
In June, Wendy's/Arby's Group completed an offering of $565 million in unsecured notes, saying it intended to use the proceeds to prepay outstanding debt and/or purchase another brand.
Charles Pinson-Rose, analyst with Standard & Poor's, earlier this year gave the company a negative corporate credit rating in his notes to investors. He cited intense value competition pressuring Arby's as well as the company's highly leveraged capital structure and limited-store and sales-growth opportunities as weaknesses. He wrote that he expected the company's recent completion of its senior unsecured note offering to result in a deterioration of its credit metrics.
