Wendy's (WEN) Q4 Earnings & Revenues Miss, Shares Down

The Wendy's Company (NASDAQ:WEN) reported lower-than-expected results in the fourth quarter of 2017.

Adjusted earnings of 11 cents per share in the quarter missed the Zacks Consensus Estimate of 12 cents by 8.3%. However, the bottom line increased 37.5% year over year, favored by lower share count.

Quarterly revenues of $309.2 million lagged the consensus estimate of $315.3 million by 1.9%. The top line marginally declined year over year driven by lower sales at company-operated restaurants, partially offset by higher franchise royalty revenues, fees and rental income. Meanwhile, comps at North America system restaurants were up 1.3%, compared with an increase of 2% in the previous quarter and 0.8% in third-quarter 2016.

Wendy's Company (The) Price, Consensus and EPS Surprise

Wendy’s system optimization initiatives, and Buy and Flip transactions have facilitated the company’s profit margin. However, fewer company-operated restaurants have affected the top line.

Notably, shares of Wendy’s declined 3.8% in after-hours trading on Feb 21. However, the company’s shares have rallied 18.5% in the past year, outperforming the industry’s gain of 10.4%.

Let’s delve deeper into the numbers.

System-wide Sales Discussion

Global system-wide sales, which include both company-operated and franchise restaurants, were $2.6 million in the quarter, up 3% from the prior-year quarter. North America system-wide sales were $2.4 million in the fourth quarter, reflecting a 2.6% year-over-year increase. System-wide sales for the International segment amounted $0.12 million in the quarter, compared with $0.11 million in fourth-quarter 2016.

Operating Highlights

Company-operated restaurant margin came in at 17.5% in the quarter, compared with 18.8% in the year-ago quarter. The 130-basis points (bps) decline was primarily caused by higher commodity and labor costs, partially offset by lower other operating costs.

General and administrative expenses in the fourth quarter were $51.9 million, down 15.2% from $61.2 million in the prior-year quarter. The decline reflected the company’s cost savings associated with system optimization initiatives and lower professional fees.

Fourth-quarter operating profit amounted to $66.6 million, a 15.9% decline from the year-ago quarter’s figure of $79.2 million. Operating profit dropped due to a year-over-year decrease in gains from the system optimization initiative.

Net income of $159.3 million increased a whopping 451.3% compared with $28.9 million in the fourth quarter of 2016. The net income massively gained from the recent U.S. tax regulation.

Adjusted EBITDA increased 14.2% year over year primarily due to higher franchise fees (as a result of system optimization, and Buy and Flip transactions) as well as a year-over-year increase in G&A savings. Also, adjusted EBITDA margin improved 420 bps to 33.6% on the back of positive impact of Wendy's system optimization initiative.

Balance Sheet

Cash and cash equivalents as of Dec 31, 2017 was $0.17 billion, compared with nearly $0.19 billion as of Jan 1, 2017. Inventories at the end of 2017 amounted to $3.2 million, up from $2.9 million at the end of 2016 and beginning of 2017.

Long-term debt totaled $2.26 billion at the end of 2017, compared with $2.27 billion as of Jan 1, 2017. Cash flow from operating activities increased 33.2% year over year to $251.6 million in 2017.

In 2017, the company repurchased 8.6 million shares for $127.4 million and distributed $68.3 million in dividends. Moreover, management authorized a 21% increase in its quarterly cash dividend rate and a new share repurchase program for up to $175 million of the company's common stock through Mar 3, 2019. The cash dividend of 8.5 cents per share is payable on Mar 15 to shareholders of record as of Mar 1, 2018.

Other Developments

In 2017, Wendy’s achieved 1.5% global net new restaurant growth, which represents the company's highest growth rate since 2004. North America contributed 0.5% to net new restaurant growth while International grew by 14.8%. The company expects 2018 global net new unit growth of approximately 2%.

Image Activation remains an integral part of the company’s global growth strategy, and includes reimaging existing restaurants and building new restaurants. During 2017, Wendy’s and its franchisees reimaged 551 restaurants in North America and launched 174 global restaurants. At the end of 2017, 43% of the global system was reimaged.

Also, during the fourth quarter, Wendy’s facilitated 130 Buy and Flips, bringing the full-year total to 540. The company continues to facilitate franchisee-to-franchisee restaurant transfers to ensure that restaurants are operated by well-capitalized franchisees that are committed to long-term growth.

2017 Results

Total revenues of $1.2 billion in 2017 fell 14.8% year over year due to lower sales in company-operated restaurants, partially offset by higher franchise royalty revenues, fees and rental income. Company-operated restaurant margin was 17.6%, down 150 bps from the prior-year quarter, due to higher labor and commodity costs, partially offset by lower other operating costs.

Net income was $194 million in 2017 compared with net income of $129.6 million in 2016. Adjusted EPS was 43 cents in the year, up 7.5% year over year.

2018 Outlook

For 2018, the company expects North America comps growth in the range of 2-2.5%, with commodity and labor inflation in the range of 1-2% and 3-4%, respectively.

Company-operated restaurant margin is expected to increase 17-18%. Adjusted EBITDA margin of approximately 33-34% is expected.

Adjusted EPS is anticipated in the range of 54 cents to 56 cents.

Long-Term Outlook Reaffirmed

The company continues to anticipate record global restaurant sales (in constant currency and excluding Venezuela) of $12 billion by 2020. Also, it expects to reach global restaurant count of 7,250 and intends to complete Image Activation of at least 70% of the global system. Notably, Wendy’s aims to realize free cash flow of approximately $300 million by 2020.

Zacks Rank & Peer Releases

Wendy’s carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Chipotle Mexican Grill (NYSE:CMG) posted mixed fourth-quarter 2017 results, with adjusted earnings of $1.34 per share, surpassing the consensus estimate of $1.32 by 1.5%. Earnings also grew 143.6% year over year on lower costs and higher revenues.

McDonald's (NYSE:MCD) reported fourth-quarter 2017adjusted earnings per share (EPS) of $1.71, beating the consensus mark of $1.59 by 7.5%. Earnings improved 19% from the year-ago quarter (16% in constant currency). The upside reflects strong operating performance and G&A savings.

Dunkin' Brands (NASDAQ:DNKN) fourth-quarter 2017adjusted earnings of 64 cents per share beat the Zacks Consensus Estimate of 63 cents. Earnings, however, stayed flat year over year, as a decline in adjusted net income was offset by lower shares outstanding.

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