Executives at Wendy’s/Arby’s Group Inc. told investors Friday that value programs balanced with tests of premium items and a new breakfast rollout at Wendy’s could lay the foundation for a turnaround next year.
The call with investors came after the Atlanta-based company swung to a net loss in the third quarter on falling sales at both Wendy's and Arby's, higher commodity costs and impairment charges. The company warned that economic pressures would continue in the fourth quarter and said its full-year results would be at the low end of its guidance.
For the Oct. 3-ended third quarter, Wendy’s/Arby’s posted a net loss of $900,000, or zero cents per share, which included special charges of $20.7 million. In the same year-ago quarter, the company booked net income of $14.7 million, or 3 cents per share.
Revenue for the latest quarter fell 4.7 percent to $861.2 million. Same-store sales fell 1.7 percent at Wendy's and 5.7 percent at Arby's.
For the full fiscal year, Wendy’s expects to come in near the low end of its guidance. The previously stated expectation was a decline of between 3 percent and 5 percent in earnings before interest, tax, depreciation and amortization.
Wendy’s to focus on value, breakfast
Wendy’s third-quarter revenue fell 2 percent to $600.7 million. The chain's same-store sales drop reflected declines of 3.1 percent at corporate stores and 1.3 percent at franchised locations. The gap was a result of price increases that franchisees took on several items, a move Wendy’s will consider for its corporate stores, according to company chief executive Roland Smith.
Smith acknowledged that not only did the economy continue to pressure consumer spending and force competitors to discount aggressively, but the 6,554-unit Wendy’s also had a tough same-store sales comparison against July 2009, when the chain's launch of boneless wings drove results above 2 percent.
Wendy's did see positive momentum in transactions during the third quarter, which it attributed to the debut of four new premium salads. The items shifted Wendy’s sales mix of salads from 4 percent to a high point of 11 percent in the quarter.
Yet Wendy’s lost market share on value transactions, necessitating the launch of its “My 99” everyday-value menu campaign. Individual value programs did well when they were advertised separately, like $2.99 meal deals, but fell off once the promotional support was pulled back, Smith said.
“We haven’t walked away from value, but our promotions have been disjointed,” he said. “Consumers need to be told on a regular basis what to expect, and they didn’t know we had value every single day. That was the impetus for the launch of 'My 99.' The advertising is upbeat and getting a great response, and we think that will shore up value transactions.”
This week Wendy's debuted new French fries, which will be fried with the skin on and seasoned with sea salt, and confirmed the test of a line of premium cheeseburgers featuring thicker patties, red onions and crinkle-cut pickles.
“The premium items will drive same-store sales. We have an emphasis on our salad line — and next year we’ll launch seasonal salads — as well as our new fries and the test of our brand new premium-cheeseburger line," Smith said. "The combination of all those we believe will get us back to positive same-store sales. We see it happening in October and think it will continue in November and December.”
Wendy's other major menu initiative next year will be its new breakfast lineup, which is currently being tested in four markets and is slated for a systemwide introduction in the second half of next year.
“Wendy’s has one of the highest average unit volumes in the sector, at approximately $1.4 million annually, yet we generate that with practically no breakfast sales,” Smith said. “It’s the fastest-growing daypart in our sector. We acknowledge some skepticism over our breakfast efforts, linked to prior unsuccessful attempts, and this time we’re stressing quality over speed to market. We’re anticipating a late 2011 national rollout, and we think [a breakfast launch] can lead to other daypart opportunities, including stores open 24 hours where appropriate. Opportunities exist in beverages and snacks as well, and those would leverage our existing infrastructure.”
Arby's value menu helping sales
Arby’s third-quarter revenue fell 10 percent to $260.5 million. Same-store sales fell 5.9 percent systemwide, including declines of 9.5 percent at corporate units and 4.1 percent at franchised restaurants.
In explaining the wide gap in same-store sales losses between Arby’s franchised and corporate stores, Smith pointed to easier comparisons to 2009’s third quarter for franchisees, who largely did not participate in aggressive promotions run last year by the corporate stores, including the Wednesday Freebies and 5 for $5 programs.
“In 2009, the company stores ran some very aggressive in-store promotions while getting the Value Menu ready to launch,” Smith said. “That drove transactions and sales, but from a margin standpoint it didn’t help profitability. Franchisees in most cases didn’t run them, so they were lapping significantly less aggressive same-store sales. From an October standpoint, I expect that gap to close. It’s too early to tell from October franchise sales because most of them aren’t in yet, but we believe company stores may slightly outperform them.”
October same-store sales increased 5.5 percent at corporate restaurants, due in large part to national advertising support for the $1 Value Menu. Executives expressed confidence that the 3,685-unit sandwich brand would find the right balance of value options and premium products, like an Angus sandwich currently in test.
Smith added that Arby’s recently introduced a chocolate turnover that has built up the average check as an add-on, and a newly launched premium onion ring side also has increased the ticket to an average per-person check of $6.80 in October.
“We’re excited that this might be the first step in turning around the brand,” Smith said. “We believe the success in October wasn’t just about advertising but also many things in the turnaround plan beginning to take hold. 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.”
Atlanta-based Wendy’s/Arby’s Group operates or franchises more than 10,000 quick-service restaurants worldwide.
Contact Mark Brandau at [email protected].
