News
Arby's national value menu lifts transactions, sales results
May 13, 2010
Arby's is beginning to see improvements in its number of transactions and improved margins as it implements its turnaround plan, said Roland Smith, Wendy's/Arby's Group Inc. president and CEO, to the company's investors during its first quarter earnings call.
Same-store sales were still down for the quarter ended April 4. Arby's North America systemwide comps decreased 11.5 percent, with company-operated comps down 11.6 percent and franchise comps down 11.4 percent.
Severe weather did impact comps to some degree. But with the launch of the company's national $1 Value Menu and its national advertising support, April comps and transactions improved, Smith said. Transactions improved from negative 10.4 percent in Q4 2009 to negative 1.2 percent in Q1 2010 as the value menu expanded across the system. After the national rollout, transactions improved to positive 4 percent in April.
Average check did decline 12 percent in new markets with the introduction of the value menu, Smith said. But the company expects average check to improve as time goes on, just as it has in other markets, where check average is down only about 7 percent.
The company has seen improved same-store sales since the launch of the value menu and expects that trend to continue.
"We believe positive transaction growth and getting more customers into our stores is the first step in successfully turning around the Arby's brand," Smith said.
Value messaging is an important component in that strategy, since consumers have ranked Arby's "at the bottom of the pack" from that standpoint, he said."We have already begun to see some change in perception, which just doesn't change overnight. We are encouraged by how quickly customers are giving us credit for that," due in part to revisions in the brand's creative and national advertising regarding the value menu.
With Wednesday's announcement of the hiring of Hala Moddelmog as Arby's president, Smith said he is confident her experience will enable her to continue to implement the turnaround plan and quickly reenergize the brand and rebuild traffic and same-store sales.
Increasing media efficiency and revitalizing Arby's product innovation are key strategies in the turnaround plan. The company's media plan includes doubling its media rate to 2.4 percent with three significant national events followed by local advertising. Smith said that national media is significantly more effective for the brand than local advertising, with customer traffic and same-store sales up in the weeks of the national message push.
The media plan includes revising its creative to focus on Arby's quality products in addition to the value menu, messaging that will be in local advertising in Q2. In May, that advertising will promote Arby's Beef & Cheddar sandwich. And in June, it will support the introduction of two new premium products, the new Steakhouse Toasted Sub and Prime Cut Chicken Tenders.
Arby's also is making progress on its three-year reimaging program launched this year. The company will spend about $100 million to reimage about 25 percent of the system to the new Pinnacle design, bringing the system to about 75 percent reimaged. The Pinnacle design stores have an improved curb appeal and customer experience and continue to report improved comps and margins performance, Smith said.
For the Q1, Arby's total revenue was down 11.5 percent at $252.7 million, compared to $285.7 million in same period year ago, primarily due to a decline in same-store sales.
Wendy's barbell strategy working
Wendy's saw much stronger results, with Wendy's North America systemwide comps up slightly at 0.8 percent. Wendy's North America company-operated same-store sales were up 0.2 percent and Wendy's North America franchise same-store sales increased 1.0 percent.
Wendy's total revenue for the quarter was up 1.1 percent at $584.7 million, compared to revenue of $578.2 million in the same period last year, including favorable foreign exchange translation.
"At Wendy's, we are very pleased with our overall progress," Smith said. "We are making significant improvements in restaurant operations and customer service, our product development pipeline is strong, and we are connecting with customers through improved marketing."
Despite severe winter weather in February, Wendy's recorded positive sales and its comps "were among the strongest in the quick-service restaurant industry," according to a company statement. Smith credited the brand's barbell strategy, balancing its value strategy with promotions for premium products such as its Premium Fish Fillet Sandwich and Bacon & Blue hamburger.
Wendy's has several new products and promotions lined up for the summer, including two new barbecue-flavored sandwiches — a bacon cheeseburger and a crispy chicken sandwich — that will launch later this quarter.
In Q3, the company will launch a new line of premium salads. Smith said the new salads have performed strongly in test even with a price point under $6. The test markets have found that customers are responding to the fresh, quality ingredients. The new salads — BLT Cobb, Baja, Spicy Chicken and Apple Pecan Chicken — feature 14 fresh ingredients, including romaine lettuce and grape tomatoes.
Wendy's also is moving forward with its new breakfast test, having selected a number of unique products that feature fresh, quality ingredients. Smith did not name specific products but mentioned ingredients such as artisan toasted muffins, fresh-cracked eggs, fresh-cooked bacon, Asiago cheese and Hollandaise sauce.
"These are items unlike any other QSR has from a breakfast standpoint," Smith said. "It is consistent with Wendy's positioning of real, fresh high quality products, and I think it is the answer to how we are going to make a significant impact in the breakfast business."
The new ingredients will be introduced into the three existing breakfast markets of Kansas City, Pittsburg and Phoenix in Q2 and Q3 and expand into additional company and franchise stores in Q4. The national rollout is expected in late 2011.
Wendy's also is moving forward with its reimaging plans, including the remodel of 100 stores in 2010 to the Curve and Tower designs. Both designs improve the brand's curb appeal and enhance the interior ambience for an improved customer experience, Smith said.
Formation of third purchasing cooperative
During the quarter, Strategic Sourcing Group Co-op LLC, which is responsible for sourcing certain non-perishable goods, equipment and services for both Wendy's and Arby's restaurants, was formed as a result of an initiative by Wendy's/Arby's Group, Wendy's new purchasing cooperative Quality Supply Chain Co-op and Arby's purchasing cooperative ARCOP Inc.
The company recorded a pre-tax $4.9 million charge in the first quarter 2010 related to a commitment to fund operating expenses of the purchasing cooperative over a 24-month period. The company will benefit from the purchasing efficiencies realized by company-owned restaurants and lower general and administrative expenses due to the transfer of strategic sourcing employees to the co-op.
Financial results
WAG revenue for Q1 was down 3 percent at $837.4 million as $864.0 million in the same period last year.
Net loss for the quarter was $3.4 million, or $0.01 per share, including after-tax special charges of $12.0 million, or $0.03 per share. First quarter 2009 net loss was $10.9 million, or $0.02 per share, including after-tax special charges of $15.0 million, or $0.03 per share.
For the first quarter 2010, the company recorded net pre-tax special charges of approximately $19.4 million ($12.0 million after tax), including integration-related expenses, impairment charges and expenses for SSG.
2010 outlook
The company also reiterated its 2010 outlook, which includes the following expectations:
- Positive same-store sales at Wendy's.
- Negative same-store sales at Arby's but improving on a year-over-year basis.
- Capital expenditures of approximately $165 million in 2010, up from approximately $102 million in 2009, which includes investments in 12 new company-owned Wendy's restaurants and 100 remodels of company-owned restaurants at each brand (200 total remodels).
Commodities are anticipated to increase 2 percent to 3 percent for the year but have begun to increase earlier than expected, especially beef.
Conference call replay
An archived replay of the webcast and accompanying slides of the company's conference call is available on the company's website.
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