Wendy's (WEN) Tops Q2 Earnings; Stock Declines As Comps Fall

The Wendy’s Company (NASDAQ:WEN) posted better-than-expected second-quarter 2016 results with earnings as well as revenues beating the Zacks Consensus Estimate.

Backed by the positive outcome in the second-quarter results, the company raised its guidance for profit and EPS.

However, share price of this restaurant operator decreased almost 3% in yesterday’s trading session as it reported weak second-quarter comps and also lowered its comps guidance for the year.

Earnings and Revenue Discussion

Adjusted earnings came in at 10 cents, beating the Zacks Consensus Estimate of 9 cents by 11.11%. Also, earnings increased 25% year over year backed by higher margins and lower share count due to share buybacks in the quarter.

Total revenue of $382.7 million beat the consensus mark of $367.4 million by 4.28%. However, it declined 21.8% year over year. The decline reflects a reduction in the number of company-operated restaurants as a result of its system optimization initiative. It owned 361 fewer company-operated restaurants in the second-quarter of 2016 compared with the year-ago quarter.

Comps at North America system restaurants were up 0.4%, much lower than the increase of 3.6% in the previous quarter.

Franchise revenues were $123.5 million in the second quarter, up 18.2% year over year due to higher rental income and royalty revenues primarily as a result of the company's system optimization initiative.

Profit Discussion

North America company-operated restaurant margin increased 370 basis points (bps) to 21.9% driven by lower commodity costs and the positive impact from the company's image activation reimaging program.

General and administrative expenses increased 0.5% year over year owing to higher professional fees and legal reserves.

Meanwhile, adjusted EBITDA declined 1.7% year over year due to fewer company operated restaurants. EBITDA margin improved 550 bps to 26.8% due to the positive impact of the company's system optimization initiative.

System Optimization Initiative

As per the system optimization program, the company intends to decrease its ownership to approximately 5% of the total restaurants by the end of 2016. The planned sale of 315 domestic restaurants to franchisees is on schedule. This includes 55 units sold through the second quarter. This follows the sale of approximately 826 restaurants in the last three years as part of the company's system optimization initiative.

As part the program, the company is also working on reimaging. The company and its franchisees plan to reimage a total of 430 system-wide restaurants and open 110 new restaurants in North America by 2016. The company plans to remodel at least 60% of Wendy's North America restaurants by the end of 2020.

2016 Guidance

Wendy’s raised the lower end of its 2016 earnings per share guidance by a penny. It guided EPS in a range of 39 cents to 40 cents, compared with its prior guidance of 38 cents to 40 cents.

The company expects comps increase at North America company-operated restaurants to range between 1–2%, lower than the previous expectation of 3%. It now expects adjusted EBITDA to range between flat to up 1% compared with the previous guided range of down 1% to up 1%.

The company also expects its adjusted EBITDA margin to range between 38–40%, higher than the previous target of greater than 35%.

Meanwhile, the company improved its outlook for commodity costs from a decline of almost 3% in 2015 and now expects it to decline approximately 5–6%.

Zacks Rank & Stocks to Consider

Wendy’s currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the restaurant industry include Del Taco Restaurants Inc. (NASDAQ:TACO) , Denny’s Corp. (NASDAQ:DENN) and Jack in the Box Inc. (NASDAQ:JACK) . All these stocks carry a Zacks Rank #2 (Buy).