The new Wendy's/Arby's Group (NYSE:WEN), which formed when Arby's parent company, Triarc, purchased Wendy's for $2 billion last fall, recently released its first earnings report as the new, combined company. Although WEN reported a loss of $393.2 million, it was mainly attributable to a $460.1 million writedown of goodwill. Excluding the special items, the company earned 5 cents per share, with revenue at $896.5 million.

A Jekyll and Hyde Performance
Wendy's/Arby's had a dual personality performance for the quarter, with the same-store sales at Wendy's rising 3.7% while falling 8.5% at Arby's. The Wendy's side continues to operate well with its upgraded 99-cent value menu, but Arby's has just started a value list and is not discounting its premium roast-beef sandwiches. Industry observers say that Arby's needs to make some big changes and UBS equity analyst David Palmer believes Arby's needs to "hit a home run" to stabilize its sales decline. Standard and Poor's recently cut the Wendy's/Arby's credit rating and warned of a downgrade, and are also placing the company on CreditWatch while WEN combines the two companies' credit facility.

Revised Menus
Both Wendy's and Arby's are revising their menus. The Wendy's 99-cent value menu has recently been reworked, and Arby's is still searching for the combination that will bring value-conscious customers into its restaurants. Fast food juggernaut and value giant McDonald's (NYSE:MCD) continues to be the benchmark for which all other fast food companies should strive, as it is not only consistently profitable and growing, but its stock price has held up relatively well despite the declining stock market. While Wendy's/Arby's may not be able to fully emulate the McDonald's model, it must play elements of the value approach during this recession while it retools Arby's. In addition to menu makeovers at Arby's, the company plans to reduce several Wendy's/Arby's store openings, taking some of the fat out of the business.

In Their Own League
Even though the new Wendy's/Arby's combination is the third-largest fast food restaurant group, their $2 billion market is far from the $57 billion market cap of McDonald's. Wendy's/Arby's is more in the weight-class of such competitors as Burger King Holdings (NYSE:BKC), which saw its profit fall by $5 million, or 3 cents a share, in its February quarterly earnings report. Burger King faced foreign exchange currency issues as the stronger dollar dampened its earnings. McDonald's also faces these problems, but its enormous scale overrides much of the outcome. (For more information on foreign currencies, see Floating and Fixed Exchange Rates.)

Wendy's/Arby's battles Burger King in many locales, while two other burger restaurants, Sonic (Nasdaq:SONC) and Jack In The Box (Nasdaq:JACK) also remain strong players in the head-to-head burger wars. Jack In The Box's stock price has held up particularly well considering the market carnage. Sonic is about one-quarter the size of Wendy's/Arby's, and it must use its small scale advantageously in being responsive to rapidly changing business conditions. This is also something that the larger Wendy's/Arby's is striving for, and something that McDonald's, despite its large size, always seems able to do.

Serving Up Success
Wendy's/Arby's has a way to go before it will fully integrate the two partners into one strong restaurant unit. At the time of acquisition, Triarc, which previously ran Arby's, was profitable, and Wendy's was the weaker business partner. However, during the recession it's the Wendy's stores, products and brand that have are outperforming Arby's. Wendy's/Arby's needs to capitalize on this by playing to the strength of the Wendy's division while reforging the Arby's part of the combo to achieve value throughout. Investors might want to wait and see how this new restaurant sandwich gets though the recession before taking a bite. (For further reading, see Sinking Your Teeth Into Restaurant Stocks.)