Wendy's/Arby's Continues To Struggle

By Greg Sushinsky | March 03, 2010 AAA

The stock market has been grading on a curve. Last year's weak earnings set up a situation for easy comparisons on year-over-year quarterly earnings. This is why Wendy's/Arby's Group's (NYSE: WEN) recent earnings, a losing quarter, were hailed by some. While the earnings are an improvement over last year, there are still problems for the restaurant group.

A Lesser Loss
On flat revenue of $900 million, Wendy's/Arby's had a net loss of $13.6 million, compared with a loss of $393.2 million in last year's same quarter. The EPS was a negative three cents per share, compared with negative 84 cents last year. Excluding one-time costs, the EPS was positive seven cents versus positive five cents last year. For the full year, Wendy's/Arby's had a net profit of $5.1 million compared with a loss of $479.7 million last year. The troubled economy and the continued melding of what were two separate restaurant chains, Wendy's and Arby's, remain as the problems.

The Arby's Problem
Revenue was off by 7% for Arby's. Customers have been resistant to its premium prices, including its $5 meal, though the restaurant will attempt to expand the availability of its dollar menu. Same-store sales for Wendy's dropped by 3%, but the main problem remains Arby's. In a value-priced climate, the Arby's side of the business has found it tough to cement its place.

The premium sell approach Arby's has tried has been a major problem. This approach hasn't worked well with other fast food places, either. CKE Restaurants (NYSE: CKR), owners of Carl's Jr. and Hardees, has run into a similar problem. Although the burgers are regarded as premium burgers, customers haven't found their way into Carl's Jr. and Hardees enough. With same-store sales sliding, CKE will be taken private by equity firm Thomas Lee Partners.

Fast-Food Headwinds
There is even pressure on fast-food firms that are executing better. Buffalo Wild Wings (Nasdaq: BWLD), which has been a hot growth property, ran into an earnings miss this last quarter. Though the numbers and the trajectory overall are still good for Buffalo Wild Wings, it shows that any letdown in operations is liable to be punished by lesser results.

Other fast-food companies trying to execute a long-term turnaround, such as Krispy Kreme Doughnuts (NYSE: KKD), are finding the glacial pace of the economic recovery slowing them down. Krispy Kreme has been mentioned as a possible takeover by Wendy's/Arby's, but Wendy's/Arby's ought to concentrate on turning itself around first.

Wendy's Not Pristine, Either
Although Arby's is the bigger problem for Wendy's/Arby's, Wendy's hasn't been immune. Wendy's ill-fated foray into the breakfast arena went poorly. While Wendy's competitor Burger King (NYSE: BKC) continues to make hard-won headway in the space, Wendy's has not. Perhaps Wendy's/Arby's picked a poor time to attempt its invasion into the breakfast market, at the height of the recession while still trying to consolidate its own merger.

The Long and the Short Of Wendy's
Right now, Wendy's/Arby's group remains a potential turnaround play, as its sub-$5 per share stock price proclaims. Investors should wait to see a better direction and handle on the too-slow-to-be-fixed Arby's side. So for the near-term, this stock isn't a good buy. But both Wendy's and Arby's have previously been productive companies, so there is hope for this fast-food merger. First investors need to see Wendy's/Arby's function as a combined entity and compete better in the ultra-competitive fast-food world before buying the stock. (To learn more, see Sinking Your Teeth Into Restaurant Stocks.)

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