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Analyst: Wendy's breakfast, burgers will lift sales by 4Q

Breakfast sales could reach up to $250k per store, according to an analyst's prediction

One securities analyst is predicting that Wendy’s breakfast and better-burger initiatives will pay off with substantial sales increases in the fourth quarter.

Following investor meetings with Atlanta-based Wendy’s/Arby’s Group Inc. on Wednesday, Morgan Stanley restaurant analyst John Glass wrote that the 6,600-unit Wendy’s brand likely would reach its 1,000-store target for its breakfast platform by year-end and debut its line of more premium hamburgers in October.

Glass estimated that breakfast could add $150,000 per store to average unit volumes at the outset, and the daypart’s sales eventually could ramp up to $250,000 per store. He also said the new burger line built around Dave’s Hot ’N Juicy Cheeseburger would be “the next big comp driver” at Wendy’s.

According to Nation’s Restaurant New research, Wendy’s estimated sales per unit for U.S. stores was about $1.35 million in 2010. An addition of $150,000 at breakfast would mean a more than 10-percent jump in average unit volumes.

Wendy’s has said its strategy in 2011 will focus on growing Wendy’s sales domestically through menu innovation and daypart expansion while making its first seriously coordinated push for international unit growth.

Wendy’s breakfast investment costs are averaging about $20,000 per store, Glass wrote.

“At this level, margins would be lower than the system average and would build as breakfast reaches $250,000 per store,” he said. “Some franchisee resistance to its rollout has slowed the process, but 1,000 units by year-end 2011 is still targeted.”

Wendy’s disclosed at an earlier investment conference that San Antonio and Louisville, Ky., would be the first markets to get breakfast up and running in 2011, joining test markets Pittsburgh, Phoenix and Shreveport, La.

The chain also began testing Dave’s Hot ’N Juicy Cheeseburger last fall in Las Vegas and currently has the premium burger in four test markets. Glass said he is bullish on the new burger line’s potential for driving sales. He noted, however, that the investment required of franchisees for the new menu items “requires a modest $13,000 to $23,000 per store capital expenditure, primarily related to a new toaster for buns.”

Wendy’s total capital expenditure for 2011 is to increase to $145 million, the company previously said in its fourth-quarter earnings statement. Glass said the company’s major investments would include accelerating store remodels and paving the way for unit growth in core U.S. markets and foreign countries.

Wendy’s previously said Japan, China and Brazil would be key international growth markets. Paying down debt also would be an option for the company in 2011, Glass added.

The company reiterated its guidance on commodity inflation during meetings this week with investors. While food costs are expected to rise between 2 percent and 3 percent in 2011, due mostly to spikes in beef, Wendy’s is confident that favorable chicken contracts and menu price increases of 1 percent to 1.5 percent in some markets would mitigate most of the inflation, Glass wrote.

Company officials said nothing specific about the ongoing exploration of strategic alternatives, including a possible sale of the 3,700-unit Arby’s brand, other than that the process is “on track,” Glass wrote.

“Management appeared pleased with the progress of strategic alternatives for the Arby’s brand and noted that recent business improvement and the relatively new management team should help bolster interest,” he wrote.

Contact Mark Brandau at [email protected]

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