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Wendy’s sales up in the midst of menu, store updates

First earnings report post-Arby's sale yields favorable results.

August 10, 2011

The Wendy's Company reported results for the second quarter ended July 3, its first earnings report following the sale of Arby's Restaurant Group Inc.

Among those results were a 2.3 percent same-store sales increase at North American company-operated units, and a 2.3 percent same-store sales increase at North American franchise-operated units. These results were driven by a 1 percent increase in transactions.

Wendy's company-operated restaurant margin was 13.9 percent, compared to 16.4 percent in Q2 2010, a decrease of approximately 250 basis points primarily due to higher commodities costs and incremental advertising to support the introduction of Wendy's new breakfast menu.

Total revenues for the company were up $15.1 million, or 2.5 percent.

"We are very pleased with these results, especially with our same-store sales increase and our transactions," said Roland Smith, president and CEO of The Wendy's Company, in a conference call today. "These results indicate the initiatives we put into place are working."

Smith outlined seven key growth initiatives the brand is working on, including:

• 'Real' brand positioning;
• Improving the core menu;
• Introducing new, exciting products;
• Expanding breakfast;
• Focusing on operational excellence and customer service;
• Modernizing facilities; and
• National and international expansion.

A menu overhaul

To embrace the 'real' brand positioning initiative, based on the "You know when it's real" ad campaign launched in 2009, Wendy's has launched several new menu items that Smith said have the quality of a fast casual model, and the cost/convenience of quick-service.

Recent introductions include the Berry Almond Chicken salad, Berry Frosty Parfait and the Berry Frosty Shake. This month, Wendy's has added two new items to the "My 99" menu, including the Monterey Ranch Crispy Chicken Sandwich and the Crispy Chicken Caesar Wrap.

"We are seeing sales from these items. July's same-store sales were up 1.7 percent and we expect positive trends to continue in the back half of the year," Smith said.

Also new to the menu is the Caramel Apple Frosty Parfait, with real Ghirardelli sauce, and Wild Berry Tea.

In the pipeline is an expanded beverage line and more snack items, allowing Wendy's to focus on higher margins and incremental sales, Smith said.

The beverage line will include a greater focus on coffee, as the chain readies for the launch of a premium, proprietary line – with beans grinded in-house – called "Redhead Roasters." The product is expected to complement Wendy's new breakfast menu that is currently rolling out in select markets.

"A great coffee program is critical to any successful breakfast line," Smith said. "We are also testing bakery products for the breakfast menu, including muffins, sweet rolls and bagels."

The breakfast menu is available in 300 units, and will be expanded to about 1,000 stores by year's end, including 600 franchised locations. Early test results of the breakfast line have yielded incremental weekly sales increases of 10 percent.

"We are very encouraged by the sales and the customer reactions to our breakfast line," Smith said.

Wendy's also is planning a heavier focus on improving its chicken offerings and is currently testing a new Bruschetta Chicken Sandwich with diced tomatoes and a balsamic glaze. The new "gold chicken line" is expected to be available early next year.

In October, Dave's Hot 'N Juicy burger line will roll out nationally. The items feature 40 percent more beef than the current burgers and premium toppings such as crinkle-cut pickles and red onions, and are served on a butter toasted bun. Smith said there has been a 2 percent to 3 percent increase in sales in markets testing this burger line.

Remodeling program and incentives

Wendy's enhanced menu complements the chain's remodeling program currently in test. Two stores have opened in the Columbus, Ohio, market, where Wendy's relocated its headquarters upon its break from Arby's.

The remodel program features four design choices: modern, contemporary, traditional and urban. Elements include large exterior windows to brighten up the dining space; outdoor patio seating; updated landscaping; a WiFi bar; lounge seating; natural finishes such as real wood and stone; and digital menu boards at the counter and at the drive-thru.

Smith said customer response has been "very positive" at the Columbus units and sales in the first two weeks post-redesign have been up more than 50 percent.

"We're very excited about our new designs. In order to have a customer experience be as positive as it needs to be, you have to have a physical plan equal to that. The sales surprised us, but the customers love the new look. We think we hit upon something by putting up a great new contemporary design and a great new menu," Smith said.

Wendy's is offering some franchise incentives to get on board with the new menu initiatives and designs. Included is a $20 million loan program to add breakfast equipment and royalty abatement to help fund advertising about the daypart. Also, the Q4 launch of Dave's Hot 'N Juicy requires new equipment and some of the franchisee loans will be subsidized or aided by supplemental loan guarantees.

"These franchisee programs are not unusual. Part of our responsibility is to ensure that we strategically provide direction for the brand by testing different programs and products that will benefit franchisees in the marketplace," Smith said. "We need our franchisees to participate with us and we think it's only fair that we assume some of the risk involved because not every test works."

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