Wendy's rebounds with push from investors

The nation’s No. 3 hamburger chain reported in April that same-store sales are up, operating costs are down and new products and innovations are on the rise.

Still, a special committee of the company’s board of directors established in May is exploring a possible sale. “While a sale is only one of the several alternatives under consideration, we believe it merits more thorough examination,” the company said in a statement posted June 18 on its Web site.

Wendy’s International posted first-quarter sales of $522.9 million, up from $513.4 million in the same quarter of 2006. Same-store sales in the United States were up 3.8 percent at company-operated stores and 3.7 percent at franchise locations for the quarter; during the same period in 2006, both types of same-store sales were down. Operating costs were down to $3.9 million in the first quarter, compared to $19.8 million for the same period in 2006 – a change primarily based on $15 million in incremental pretax advertising expense in early 2006 that did not recur this year.

The turnaround comes after a 2005 wakeup call, when Wendy’s International reported same-store sales had decreased for the first time in 18 years.

Many analysts blamed the decline on acquisitions that divided corporate focus, an issue that was resolved under new leadership in 2006. The successful spinoff of Tim Hortons coffee shops – a moneymaker – in the third quarter of 2006, and the sale of Baja Fresh Mexican Grill – a money-taker – in the fourth quarter, sharpened the focus on Wendy’s.

And it seems to be paying off.

QSR Magazine recently cited Wendy’s as consumers’ favorite quick-service restaurant for the second year in a row, and a new Zagat Survey taps Wendy’s as the most popular fast-food chain with the best facilities and food, including the best hamburger in the industry.

Show Me performance

Wendy’s International’s good news is gratifying for Sam Hamra, chairman and CEO of Wendy’s of Missouri.

Hamra, who opened his first Wendy’s on East Sunshine Street in Springfield in 1976, said he sees the changes in focus and leadership on the national level as positive.

Wendy’s of Missouri, with 23 locations and 780 employees, has bucked the national trend of recent years, with an increase in same-store sales every year for 12 years, though Hamra declined to disclose revenue figures.

Hamra attributes that growth to Wendy’s core strengths – which he said are fresh, quality food and fast, quality service – but particularly to a franchise-wide store remodeling and rebuilding campaign.

“Out of 23 restaurants, we have remodeled or rebuilt 21,” Hamra said.

Now remodeling its Sedalia restaurant and constructing a new Wendy’s to replace an existing store on Interstate 70 in Columbia, Hamra’s renovation program will be complete this year. But new projects are in the offing.

A seventh Springfield Wendy’s is under construction at 3558 S. Campbell Ave., and an eighth location will break ground this year in Airport Plaza at West Kearney Street and West Bypass.

“Then we have plans to build one, possibly two more Wendy’s restaurants in Branson,” Hamra said. Branson already has two Wendy’s restaurants, both on West Highway 76; Hamra did not disclose the locations for the new Branson sites, as the deals for those sites have not yet closed.

New ideas

Meanwhile, Hamra’s franchise is testing some of Wendy’s newest concepts.

“One that we’re testing in four of our restaurants – in Clinton, Warrensburg, Sedalia and Harrisonville – is the new breakfast program,” Hamra said. “We’ve been testing that product for over a year as part of the Kansas City test market, and so far, the results are good.”

Wendy’s International seems to agree, announcing it will add breakfast service in 20 percent to 30 percent of its locations this year. The company also announced a partnership with Procter & Gamble to add custom Folgers Gourmet Selections coffee at restaurants where breakfast is served. The Folgers rollout should take place by the end of June.

At least 10 new menu items will be introduced this year, including the new vanilla Frosty float, which is already available in Springfield and is being promoted with a Nintendo Wii giveaway.

Driving change

Many of the changes at Wendy’s International resulted from investor activism.

Billionaire Nelson Peltz, whose Trian Fund Management LP is a key shareholder, was able to nominate three directors to the Wendy’s International board, which resulted in the retirement of CEO Jack Schuessler and the promotion of Chief Financial Officer Kerrii Anderson to CEO and president. Besides shaking up the executive suite, Peltz also led the push to sell Tim Hortons and Baja Fresh, a move Hamra views as positive.

As the wave of change swelled in 2006, Wendy’s International closed 29 underperforming company-operated restaurants, sold Tim Hortons and Baja Fresh and stepped up brand promotion, while adding menu items such as Frescata deli sandwiches and the vanilla Frosty.

As of first-quarter 2007, Wendy’s International had posted 10 consecutive months of positive same-store sales. Earnings before interest, taxes, depreciation and amortization were $57 million for the first quarter of 2007, up 85 percent from a year ago.

But the company revised its 2007 earnings outlook June 17, suggesting annual revenues would be about $30 million less than originally projected.

“We produced significant improvement in the first quarter as we executed our strategic plan,” said Anderson in the quarterly release. “We continue to revitalize the Wendy’s brand, improve operations and focus on driving sales and profits.”

The formation of the special committee was announced April 25, and shares rose $5.31 on the news, closing April 26 at $37.99. Wendy’s (NYSE: WEN) was trading at $37.75 as of June 19.

Among the top buyer candidates, according to analysts, are Triarc Cos., owner of Arby’s, and Yum! Brands, owner of Taco Bell and KFC.

Peltz of Trian Capital Management is also president and CEO of Triarc.

In response to speculation that Triarc might buy Wendy’s International, Hamra said, “Based on what I’ve read about (Peltz) and heard about him, he believes in going in and strengthening an existing company and improving operations.” If that is the case, Hamra said, “I have no problem with him or his company having a controlling interest in Wendy’s International.”

Wendy’s of Missouri

1855 S. Ingram Mill Road

Sam Hamra, Chairman and CEO

Chuck Ocarz, President and COO

June Hamra, Vice Chairman

Established by franchise agreement in 1975, Wendy’s of Missouri opened its first restaurant in Springfield on March 15, 1976. It was the chain’s 224th location. There are now 6,658 Wendy’s restaurants systemwide. Wendy’s of Missouri has 23 Wendy’s locations.[[In-content Ad]]