A month has gone by since the last earnings report for Wendy's (WEN). Shares have lost about 7.3% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Wendy's due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
Wendy's Q4 Earnings Beat, Revenues Miss Estimates
Wendy’s reported mixed preliminary results for the fourth quarter of 2018, wherein revenues missed estimates while earnings surpassed the same.
Adjusted earnings of 16 cents surpassed the Zacks Consensus Estimate of 15 cents by 6.7%. The bottom line also increased a whopping 77.8% year over year, primarily favored by the positive effect of lower tax rate from Tax Cuts and Jobs Act of 2017. Increase in adjusted EBITDA and fewer outstanding shares also boosted the reported quarter’s earnings.
Quarterly revenues of $397.8 million lagged the consensus mark of $400 million by 0.6%. However, the top line improved 3.6% from the year-ago quarter, driven by increased sales at the company-operated restaurants. Revenues also gained from an increase in franchise royalty revenues and fees, which were primarily driven by new restaurant development and lower franchise incentives.
Meanwhile, comps at the North America system restaurants were up 0.2% against a decline of 0.2% in the second quarter and compared with a 1.3% increase in the year-ago quarter.
System-Wide Sales Discussion
Global system-wide sales, including both company-operated and franchise restaurants, were $2.6 million in the reported quarter, up 1.1% from the prior-year quarter. North America system-wide sales were $2.5 million in the fourth quarter, reflecting a 0.9% year-over-year increase. Systemwide sales at the International segment amounted to $0.13 million in the quarter under review, up 5.6% year over year.
Operating Highlights
Company-operated restaurant margin was 16% in the reported quarter compared with 16.6% in the year-ago quarter. The 60-basis points (bps) decline was primarily caused by labor rate inflation and higher promotional activity, partially offset by pricing actions.
General and administrative expenses in the fourth quarter were $71.4 million, up 41.4% from $50.5 million recorded in the prior-year quarter. The increase reflected the $27.5-million legal reserve that was recorded in the fourth quarter of 2018. Excluding the legal reserve, general and administrative expenses would have decreased by 13%. The decline was due to lower incentive compensation accrual, and lower employee compensation and related expenses as a result of the company's G&A savings initiative.
Fourth-quarter operating profit amounted to $45.8 million, marking a 21% decrease from the year-ago quarter’s figure of $58 million. Net income of $18.8 million declined from $142.1 million recorded in the year-ago quarter.
Adjusted EBITDA increased 9.8% from the prior-year quarter, primarily from revenue growth, and lower general and administrative expenses. Adjusted EBITDA margin also expanded 160 bps to 34%.
Balance Sheet
Cash and cash equivalents as of Dec 30, 2018, was $431.4 million compared with nearly $171.4 million as of Dec 31, 2017. Inventories at the end of the fourth quarter amounted to $3.7 million, up from $3.2 million at the end of 2017.
Long-term debt totaled $2.30 billion as of Dec 30, 2018, compared with $2.26 billion as of Dec 31, 2017.
Wendy’s authorized an 18% increase in the quarterly cash dividend rate. The new dividend rate of 10 cents per share will be effective with the next dividend payment, which is payable on Mar 15, 2019, to shareholders of record as of Mar 1, 2019.
In 2018, management repurchased 15.8 million shares for $270.2 million and distributed $80.5 million in dividends. At the end of 2018, the company had $147.4 million remaining under the existing share repurchase authorization.
Other Developments
In 2018, Wendy’s had 159 global restaurant openings, with an increase of 77 net new units. This suggests roughly 1.2% global net new restaurant growth in 2018.
Image Activation remains an integral part of the company’s global growth strategy, and includes reimaging of existing restaurants and building new ones. At the end of the year, 50% of the global system was image activated. In 2018, Wendy’s facilitated 96 Franchise Flips.
Outlook
For 2019, the company expects global system-wide sales growth of 3-4%. Adjusted EPS is anticipated to grow 3.5-7%. Adjusted EBITDA growth of roughly 2.5-4.5% is expected. Wendy’s expects global net new unit growth of 1.5% in 2019.
For 2020, global systemwide sales are expected to be $11.5 billion, with free cash flow of approximately $275 million.
How Have Estimates Been Moving Since Then?
Fresh estimates followed a downward path over the past two months.
VGM Scores
Currently, Wendy's has a subpar Growth Score of D, however its Momentum Score is doing a bit better with a C. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Wendy's has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
The Wendy's Company (WEN): Free Stock Analysis Report
Original post