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Tickers in this Article: YUM, MCD, WEN
The Wendy's Co. (WEN) recently posted third quarter 2012 adjusted earnings of 3 cents per share, lagging the Zacks Consensus Estimate as well as the year-ago earnings per share of 5 cents. On GAAP basis, the company reported loss of 7 cents per share, wider than the year-ago quarter's loss of a penny per share.

Operational Highlights

Total revenue in the quarter under review inched up 4.1% year over year to $636.3 million, but fell short of the Zacks Consensus Estimate of $639.0 million. Wendy's North American company-operated same-store sales increased 2.7%, representing the sixth consecutive quarter of positive same-store sales at the company-operated outlets. Franchise same-store sales rose 2.9%.

Company-operated restaurant margins expanded 20 basis points (bps) to 13.9%, buoyed by improved same-store sales, partially offset by increased spending toward customer service initiatives and remodeling.

Liquidity

Wendy's ended the quarter with cash and cash equivalents of $453.6 million, long-term debt of around $1.5 billion and shareholders' equity of around $2.0 billion.

Share Buyback

Wendy's authorized a new share repurchase program for up to $100 million through December 29, 2013.

Dividend Hike

The company hiked its cash dividend by 100% from 2 cents per share paid previously. This equates to an annual pay out of 16 cents per share. The increased dividend will be paid on December 17, 2012, to stockholders of record as of December 3, 2011.

Store Update

Wendy's opened 23 franchised and two owned restaurants in the quarter, and shut down 2 company-owned and 27 franchised restaurants. At the end of the quarter, Wendy's had 6,543 restaurants worldwide.

The company acquired 24 franchised units in the Albuquerque, New Mexico area during the third quarter. Wendy's recently introduced an incentive program for franchisees offering a total of $10 million to reimage their restaurants in 2013.

Outlook

For 2012, management continues to believe that the Wendy's chain will generate adjusted EBITDA in the range of $320 - $335 million. For 2013, management expects adjusted EBITDA in the range of $350 - $360 million. Beyond 2013, annual adjusted EBITDA growth is expected to be in the high-single digit to low-double digit range.

Wendy's benefited from the reimaging program undertaken in 2011. Following the considerable success achieved from the reimaged restaurants, management plans to speed up overhaul activity in 2013, and intends to refurbish around 50% of the company-operated restaurants by 2015.

Our Take

Wendy's repositioning efforts seem to take longer than anticipated. The top-and bottom-line miss in the third quarter is indicative of the fact. Although the company is striving to stand out by reimaging restaurants, upgrading menus, resorting to other marketing initiatives, and closing underperforming stores, we believe all its attempts need sometime before they fully pay off.

Further, Wendy's faces stiff competition from industry biggies like McDonald's Corporation (MCD) and Yum! Brands Inc. (YUM) in both domestic and international market places. The company is expected to incur higher pre-opening costs associated with the reimaging activities going forward.

Currently, Wendy's retains a Zacks #4 Rank, which translates into a short-term 'Sell' rating. We maintain our long-term 'Neutral' recommendation on the stock.

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