Article

Earnings call: Wendy's gears up for 'mid-tier' burger launch

Third quarter takes a hit from Arby's sale; however revenues and transactions up.

November 8, 2011 by Alicia Kelso — Editor, QSRWeb.com

The Wendy's Company has reported results for the third quarter ended Oct. 2, which included an increase in same-store sales and revenues.

Wendy's North American systemwide same-store sales were up 0.9 percent. Its company-operated restaurants' same-store sales increased 1.8 percent due to increased transactions of 1.1 percent, and an increased average check of 0.7 percent.

In his first earnings call since being named president and CEO, Emil Brolick said the chain is on track to post its first year of positive transactions since 2003.

The report also included news of a third quarter loss of $4 million, or 1 cent per share, related to the July sale of the Arby's chain. During the same period in 2010, the then-Wendy's Arby's Group lost $909,000, or break-even per share.

Another new burger launch, breakfast progress

During the earnings call, Brolick communicated his enthusiasm for the brand's direction based on early results from the new Dave's Hot 'N Juicy hamburger line, as well as the new Asiago Ranch Chicken Club.

And, although the company won't release sales numbers for these specific rollouts, he said the franchise base is excited because of the "significant success" of the Dave's Hot 'N Juicy launch.

"Customer response has been excellent and sales have exceeded our expectations," Brolick said.

Wendy's also is gearing up for the late-November launch of another burger offering, The W.

"Our December marketing message will focus on the launch of The W. It is a mid-tier price product with two 2.5 ounces of fresh beef and a surprise taste profile," he said. "We think this will position between Dave's Hot 'N Juicy line and entry-level hamburgers and is a compelling way to finish the year and put Wendy's in a position to enter 2012 with momentum."

Brolick said the launch of The W is a way to try and get some customers to "trade up" from the My 99 value menu products.

"This is a high taste profile, indulgent sandwich that did very very well in test markets," he said.

Brolick touched on Wendy's continued breakfast tests at hundreds of units, including the daypart's sales opportunities. For the past five years, 92 percent of traffic growth in the QSR segment has been in the breakfast space, which now accounts for 21 percent of all traffic.

"We believe there is an incredible opportunity for a fresher, higher quality breakfast. Our warm oatmeal bar has scored exceptionally well with consumers, who have given Wendy's breakfast a minimum of 9 out of a 10 score in multiple categories," Brolick said.

Wendy's continues to test its proprietary coffee, Redheaded Roasters, and baked goods. Starting with this call, however, the company will not provide store counts of the breakfast rollout for competitive reasons.

"We have to find a way to take advantage of the breakfast space and we're going to be aggressive but responsible about it. The ultimate goal is a full rollout," he said.

Revisiting the 'A Cut Above' position

Wendy's also reintroduced its "A Cut Above" position from 1969, when the company was founded by the late Dave Thomas. The position, Brolick said, focuses on building the brand, sales and profits by focusing on itself, not competitors.

The "A Cut Above" vision specifically embraces price, product, promotion, place, performance and people. "We will use these tools in a proprietary way what we call Wendy's kind of way,'" Brolick said. The ultimate goal is to return the brand to the "luster and performance" of the 1990s.

"The turnaround has already begun and we're confident it will be sustained. Our belief is to deliver 5-star quality at a 3-star price," Brolick said. "This is a brand vision everyone is excited about. Dave (Thomas) marched to the beat of a different drummer and so will we."

Brolick also discussed the four restaurant prototypes currently being tested by the company, including the ultra modern design first opened in Dublin, Ohio; the traditional design, in Virginia Beach, Va.; the urban design in Phoenix; and the contemporary design in Pittsburgh.

"We now have nine of these prototypes open and have seen significant sales growth above pre-renovation levels," Brolick said. "We're working to reduce the investment costs of these and are anxious to learn how well these sales sustain themselves."

Q3 financial highlights

• Consolidated revenues were $611.4 million in Q3 2011 and increased $10.7 million compared to Q3 2010 revenues of $600.7 million.
• Third quarter 2011 adjusted EBITDA, which excludes special items totaling $23.8 million for transaction-related costs, was $87.0 million, an increase of 6.5 percent compared to Q3 2010 adjusted EBITDA of $81.8 million, which excludes special items of $7.9 million.
• Third quarter 2011 income from continuing operations was $2.5 million, or $0.01 per share, including after-tax special items of $15.0 million for transaction-related costs, or $0.04 per share. Third quarter 2010 loss from continuing operations was $0.8 million, or $0.00 per share, including after-tax special items of $17.9 million, or $0.04 per share.
• Consolidated revenues were $1.8 billion, a slight increase compared to 2010 year-to-date revenues.
• Adjusted EBITDA, which excludes special items of $43.1 million, was $250.2 million, compared to 2010 year-to-date adjusted EBITDA of $268.7 million, which excludes special items of $33.9 million.
• Income from continuing operations was $13.6 million, or $0.03 per share, including net after-tax special items of $32.3 million, or $0.08 per share, compared to 2010 year-to-date income from continuing operations of $12.0 million, or $0.03 per share, including net after-tax special items of $47.7 million, or $0.11 per share.

Outlook

The company has reaffirmed its 2011 expectations for adjusted EBITDA of $330 million to $340 million. Wendy's initially expected to finish the year with a same-store sales growth of 1 to 3 percent at Wendy's North America Company-operated restaurants is now anticipated to be in the middle of the range, reflecting the strength of Dave's Hot 'N Juicy launch.

Wendy's North America's current unit development is approximately 20 company stores and 45 franchise stores, plus approximately 35 international franchise stores, one of which will be a joint venture store in Japan.

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