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The latest in a series of disappointing earnings reports from Wendy's International (WEN, news, msgs) was overshadowed last week by the news that Triarc (TRY, news, msgs), parent of rival fast-food franchiser Arby's, was buying the struggling hamburger joint in an all-stock deal worth $2.3 billion.
It marks the end of a nearly 2½-year campaign by Nelson Peltz, who owns 10% of Wendy's through his ownership of Trian Partners, to force a turnaround at the hamburger chain.
The deal news pushed Wendy's shares up 4.2% on April 24, the day the deal was announced, and they've climbed an additional 9% in the days since.
Wendy's earnings report only reinforced the image of an underperforming brand. First-quarter earnings from continuing operations were $8.4 million, or 10 cents per share, well below the First Call consensus estimate of 17 cents and year-ago results of $15.1 million and 16 cents, respectively.
Results were hurt by higher breakfast costs, lower-than-expected sales and rising commodity prices. Previously reported first-quarter same store sales at U.S. company-operated restaurants fell 1.6%, compared to a rise of 3.8% a year ago.
Wendy's has been struggling for several years. It has failed to keep up with trends in the industry, such as boosting growth by focusing on breakfast and value menus. For example, last summer, while McDonald's (MCD, news, msgs) focused on making its franchises a convenient stop on the morning commute with its new and improved coffee, Wendy's served breakfast at only 500 of its 6,000-plus franchises.
Wendy's has suffered from an identity crisis since founder Dave Thomas' death in 2002. Thomas appeared in more than 800 commercials between 1989 and 2002. But without Thomas, Wendy's ad campaigns have been lackluster at best, especially compared to McDonald's and Burger King's (BKC, news, msgs) contemporaneous ads.
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"The company almost had to decide what they wanted to be from scratch," said UBS analyst David Palmer. "They seem to be switching from campaign to campaign."
Over the last 12 months, Wendy's has existed in a state of suspended animation as the Special Committee of Wendy's Board, formed to look into how to best right the struggling company, sought out alternatives. Ultimately, it decided to sell the company to Triarc.
"We believe this transaction with Triarc is in the best interests of all of Wendy's constituencies and represents superior value to what the Board anticipates Wendy's would have generated as an independent company," Wendy's Chairman James V. Pickett said in a press release.
In a joint press release, Triarc and Wendy's said that the deal should be completed during the second half of 2008, pending shareholder approval. With Peltz and his partner Peter May owning more than 35% of Triarc and their investment company Trian holding 10% of Wendy's, approval appears to be little more than a formality.
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Where's the beef?Coffee, chicken, salads and breakfast allow fast-food purveyors to expand their clientele, but hamburgers remain the big draw at chains such as Burger King and McDonald's.
Changes in how the company is managed may also reduce costs across the board. Operating improvements could lead to $100 million in annual savings; combining operations another $60 million. Profit margins, which have been falling, also need to be brought up to the levels of other fast food restaurants.
"Wendy's may have lost its way a little bit since Dave Thomas died," said Morningstar analyst John Owens. "If Peltz puts a plan that the franchisees can get behind, I think the prospects (for a turnaround) are good."
This article was reported and written by Ben Levisohn for BusinessWeek.
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