Analyst: Wendy’s, Arby’s sales stabilizing

A check-up with dozens of Wendy’s and Arby’s franchisees has provided early signs of sales stabilization and perhaps growth in the fourth quarter for both brands, which have been dogged by declining same-store sales trends, according to a new report.

Interviews conducted by Deutsche Bank Securities analyst Jason West with a group of Arby’s franchisees — which comprise about 2 percent of the system’s restaurants — showed same-store sales improvement on a year-over-year and two-year basis.

“For our contacts, same-store sales were up slightly in October, up mid-single digits in November and up mid-to-high-single digits so far in December,” West wrote. “Overall for the fourth quarter of 2010, same-store sales were running at about plus 4 percent for these contacts. … The key point is that we continue to see signs of at least stabilization at the Arby’s brand, which has been a significant overhang on the stock.”

He noted that trends for the franchisees interviewed have had a 99-percent correlation with sales trends for all franchisees over the past seven quarters. However, that group’s results have been about 60 basis points higher than all franchisees’ numbers and 120 basis points higher than corporate-restaurant results.

Deutsche Bank is projecting fourth-quarter same-store sales increases of 1 percent for Arby’s franchisees and 2 percent for company restaurants, West said.

During the company’s recent third-quarter earnings call, chief executive of Atlanta-based Wendy’s/Arby’s Group, Roland Smith, expressed optimism that Arby’s was beginning to get traction on its turnaround plans, based in large part on a 5.5-percent increase in same-store sales in October. For the third quarter, same-store sales still fell 5.9 percent.

The 3,685-unit sandwich brand benefited greatly from the national advertising of its $1 Value Menu and the test of some more premium products like an Angus sandwich and a high-end onion ring, it said. Until that uptick in October, Arby’s had posted some of the quick-service category’s worst performing same-store sales numbers.

“We believe the success in October wasn’t just about advertising but also many things in the turnaround plan beginning to take hold,” Smith told investors during the November conference call. “October’s national ads this year were rolling over national advertising from 2009, so it wasn’t an anomaly, and that’s why we continue to be optimistic for November and December.”

Sister brand Wendy’s has taken a similar menu merchandising tack in the fourth quarter, heavily promoting the retooled “My 99” value menu in its advertising while rolling out Natural-Cut Fries, its new premium French fry seasoned with sea salt.

In interviews with Wendy’s franchisees, Deutsche Bank’s West heard generally positive feedback about the new fries — notably that they provided a modest lift to transactions — and detected an improvement in same-store sales.

“The franchisees we spoke with at Wendy’s, also covering about 2 percent of the system, have seen same-store sales in the plus-2-percent to 3-percent range so far in the fourth quarter of 2010,” West wrote. “Sequentially, trends have improved about 1 percent to 2 percent for these franchisees from the third quarter.”

West cautioned that the franchisee sample in Deutsche Bank’s report had been about 3 percent ahead of the Wendy’s system as a whole in terms of same-store sales during the third quarter of 2010, which caused him to project flat comparable sales for Wendy’s company-owned and franchised locations in the fourth quarter.

West noted that franchisees for 6,554-unit, Dublin, Ohio-based Wendy’s continue to signal a willingness to take some modest price increases in 2011.

Wendy’s/Arby’s Group operates or franchises more than 10,000 restaurants worldwide.

Contact Mark Brandau at [email protected]