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Wendy's (WEN) Tops Q1 Earnings & Sales but Shares Decline

The Wendy’s Company WEN posted better-than-expected first quarter 2016 results with earnings per share (EPS) and revenues beating the Zacks Consensus Estimate.

Backed by the strong first quarter results, the company raised its guidance for profit and EPS.

However, share price of this restaurant operator decreased almost 9% in yesterday’s trading session as it warned of a slight slowdown in sales in the second quarter.

Earnings and Revenue Discussion

Adjusted earnings came in at 11 cents, beating the Zacks Consensus Estimate of 6 cents by 83.33%. Also, earnings increased 83.3% year over year as a result of growth in adjusted EBITDA and lower share count as a result of buybacks.

Total revenue of $379 million beat the consensus mark of $351 million by 8%. However, it declined 16.2% year over year. The decline reflects a reduction in the number of company-operated restaurants as a result of its system optimization initiative. It owned 375 fewer company-operated restaurants in the first quarter of 2016 compared to the last year.

Comps at North America system restaurants were up 3.6%

Franchise revenues were $119.5 million in the first quarter compared with $94.2 million in the year-ago quarter. The 26.8% increase was due to higher rental income, royalty revenues and franchise fees primarily as a result of the company's system optimization initiative, as well as a rise in comps.

Profit Discussion

North America company-operated restaurant margin increased 250 basis points (bps) to 17.2% driven by higher same-restaurant sales, positive impact from the company's image activation reimaging program and lower commodity costs.

General and administrative expenses increased 8.2% year over year owing to higher professional fees and legal reserves and an increase in incentive compensation accruals. While adjusted EBITDA improved 21.4% year over year, EBITDA margin improved 800 bps to 25.9% due to the positive impact of the company's system optimization initiative as well as the lease buyout gain.

System Optimization Initiative

Per the system optimization program, the company intends to decrease its ownership to approximately 5% of the total restaurants by mid-2016. The planned sale of 315 domestic restaurants to franchisees is on schedule. This includes 55 units sold in the first quarter. This follows the sale of approximately 826 restaurants in the last three years as part of the company's system optimization initiative.

As per the system optimization program, the company is also working on reimaging. The company and its franchisees plan to reimage a total of 430 system-wide restaurants and open 110 new restaurants in 2016. The company plans to remodel at least 60% of Wendy's North America restaurants by 2020-end.

2016 Outlook Raised

Wendy’s upped its earnings, EBITDA and comps guidance for 2016. The company raised its 2016 earnings per share guidance to a range of 38 cents to 40 cents from its prior guidance of 35 cents to 37 cents.

The company expects comps at company-operated restaurants to increase almost 3% for the North America system. It now expects adjusted EBITDA to be in a range of down 1% to up 1% compared to the prior expected range of down 2% to flat.

Other than better-than-expected first quarter results, the increase in guidance reflects an improved outlook for commodity costs. Commodity costs are now expected to decline approximately 3% compared to 2015.

Second Quarter Outlook

Management warned that second quarter comps growth will fall slightly short of the full year target of approximately 3%, possibly due to tougher-than-normal spring weather in the Northeast part of the country where Wendy’s has a high concentration of restaurants.

Long-Term Outlook Re-affirmed

Over the long term, the company expects average unit sales volumes of $2.0 million. Further it expects restaurant margin of 20% and restaurant development growth of 1,000 new restaurants.

Wendy’s currently carries a Zacks Rank #2 (Buy).

Stocks to Consider

Other well ranked stocks in the restaurant industry include Restaurant Brands International Inc. QSR, Dave & Buster's Entertainment, Inc. PLAY and Carrols Restaurant Group, Inc. TAST. All these stocks sport a Zacks Rank #1 (Strong Buy).

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