Shares of fast-food Wendy’s Arby’s Group (WEN: Charts, News, Offers), the third-largest American fast-food restaurant company, trended lower on Monday after it announced weak third quarter earnings due to high commodity costs and poor sales at both restaurants. The company has continued its trend of disappointing numbers, and has failed to impress investors since early 2007, when its shares traded at over $20 per share. The shares have tread water for the past two years, bouncing steadily in the $4-$5 range. Now, with rumors of a possible takeover buzzing, it may be time to take a closer look at the troubled fast food company.
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The company lost $909,000 in revenue, with revenue falling 5 percent to zero cents per share, on revenue of $861.2 million. The Street expected an optimistic 4 cents per share on revenue of $882.6 million, considering the bullish nature of rivals McDonald’s (MCD: Charts, News, Offers) and Yum! Brands (YUM: Charts, News, Offers). Analysts were sorely disappointed as the company tripped over nearly every hurdle thrown in its way the past quarter. Wendy’s North American same-store sales fell 1.7%, with Arby’s dropping 5.9%.
Wendy’s, long a laggard behind the larger fast food chains, announced a rather ambiguously worded plan of improving the quality of its food with natural ingredients, and premium products such as sea salted French fries and thicker burgers. The chain has not announced any ambitious value menu plan changes or a shift towards higher margin beverage products – both key strategies that have powered McDonald’s current bull run in the face of a looming commodities crisis. The company has also failed to announce any global strategy whatsoever, lacking a powerful global backup to the fading North American fast food market and the weakening American dollar. Both Yum! and McDonald’s have stayed strong in this arenas, tapping into the explosive popularity of American fast food in the emerging middle class of BRIC markets.
Arby’s has also been punished for its lack of a value menu, as most of its sandwiches cost over $5 and have experienced considerably lower sales with the softening economy. CEO Roland Smith has claimed that its new, cheaper options, starting with its junior deluxe roast beef sandwich and its $2.99 meal, is the start of a less expensive, more competitively priced line, a concept he admitted was foreign to the company. “It just takes time to build awareness around a concept that Arby’s has never had in its 44-year history,” stated Smith. Arby’s lost a lot of customers during the recession to its shrewd rivals, which quickly rolled out dollar/value menus, and has been fighting ever since to win them back.
The company also plans to pursue international growth in Dubai, Turkey, Russia and a re-entry into Japan, where its franchise agreement was terminated due to a dispute with its franchisee last December. Earlier this year, it announced plans to develop 400 international restaurants and open between 35-40 in the coming year. A fourth of these are planned for Turkey, which the company views as an untapped market. The company has been careful to avoid Yum! stronghold China and McDonald’s saturated markets, which include most developed nations and emerging markets.
On a brighter note, the company authorized $170 million in additional stock buybacks and raised its quarterly dividend to 2 cents, from 1.5 cents. However, looming rumors of a takeover by billionaire Nelson Peltz’s investment firm, which owns 25% of Wendy’s Arby’s, has temporarily suspended any further dividend increases and buybacks.
The company also guided considerably lower for the next quarter, expecting an EPS of 3 cents, as opposed to the previously projected 5 cents. Wendy’s and Arby’s sales are both expected to drop an average of 1% for the year. These are negative signs that indicate that shares of WEN may continue to tread water for some time. The company needs to reorganize its value menus and narrow its product lines if it hopes to be truly competitive in global markets which favor lower prices and simpler selections. It also needs to brace itself for rising commodity prices as McDonald’s has done, rather than absorbing them head on. If the company can quickly connect these dots before things get worse, then it may have a chance to stay competitive in its industry.
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Wendy’s Q3: Fresh Fries, Stale Earnings – Wendy’s disappoints once again.
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Leo Sun is long-time market follower and finance writer. He regularly contributes to the Stock of the Day analysis.
