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Tickers in this Article: WEN, YUM, CMG, SONC, JACK
Fast food chain Wendy's (NYSE:WEN) reported a rise in revenue and income for its second quarter. The company is looking to re-start its growth following the completion of the sale of its Arby's division, and it is looking to the international markets to foster this.

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A Better Quarter
Wendy's earned $11.3 million or 3 cents a share, compared to $10.7 million or 3 cents a share in the year ago quarter. Revenue increased to $622.5 million from $607.4 million, a 2.5% increase. Same store sales were up 2.3% for the quarter, its best since the fourth quarter of 2008. Transactions increased 0.9%, while the average customer check rose 1.4%.

Wendy's company operated restaurant margin was 13.9%, compared to 16.4% in the second quarter of 2010. This 250 basis-point decrease was primarily due to higher commodity costs, which comprised 180 basis points of this decrease. The pressure of higher commodity costs on the fast food industry has continued to rise.

Post Arby's Plans
With the drag of Arby's no longer pulling down on Wendy's operations, Wendy's can now try to move forward less encumbered. Wendy's continues to advertise its new breakfast in additional markets, and has plans to bring out a new cheeseburger, Dave's Hot N' Juicy, in October. Plans for international expansion continue to be ambitious, as Wendy's will be adding significantly to its 333 franchise restaurants outside North America, with hopes eventually to have over 1,000. China, Brazil and Russia are included in the international plans. Still, although the emerging markets strategy is a key one, it will not necessarily be easy. It's hardly virgin territory. Fast food competitors such as Yum! Brands (NYSE:YUM) with its extensive operations in China have already staked out this potentially lucrative turf, so competition will be fierce just as it is on the domestic front.

Mixed Fast Food
Wendy's shares have been driven up, most likely due to the move of getting rid of Arby's. The divesting of Arby's, while it should be helpful, is no guarantee for Wendy's future success, however. The fast food space is still a difficult one. Rising commodity prices forcing higher input costs as well as a fiercely competitive industry are on the menu. Superstar Chipotle Mexican Grill (NYSE:CMG), for example, was even affected, although it still delivered strong earnings and revenue growth. Chipotle can still fend off higher commodity prices for a while as its operations are so strong.

Sonic's (Nasdaq:SONC) shares have also risen in the last year, but like Wendy's, this has been on the hope of a better performance. Both Sonic's revenue and earnings per share fell in the last year, and Sonic still carries a high debt load. Jack In The Box (Nasdaq:JACK) just reported its third quarter net income fell on lower refranchising income, while Yum! Brands, although thriving in China, now faces potentially rising labor costs in that increasingly important market.

Wendy's Prospects
The company reaffirmed its outlook for 2011 of same store growth for North American operations at 1% to 3%. Margins should be 50 to 100 basis points lower due to higher commodity costs. Adjusted EBITDA for 2011 should be $330 million to $340 million, with a 10% to 15% annual adjusted EBITDA growth a goal. (For more, see A Clear Look At EBITDA.)

Bottom Line
Wendy's has lofty goals for performance, despite the difficult economy and crowded fast food sector. The stock currently trades at 20 times forward earnings, so potential improvement has been priced in. It might be better for investors to go cautiously and take a wait and see approach to see how well Wendy's delivers in the quarters ahead.

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