Same-store sales at The Wendy’s Co. rose 0.4 percent in the second quarter, and the company on Wednesday lowered its sales expectations for the full year amid a “challenging” restaurant environment.
Specifically, Wendy’s said that the widening gap in prices between restaurants and grocers has hurt traffic at quick-service concepts so far in 2016.
“The continued gap in the cost of eating at home and dining out is at the widest point since the recession,” Wendy’s CEO Todd Penegor said during the company’s second-quarter earnings call Wednesday.
Penegor said that traffic momentum has slowed this year after increasing in each quarter in 2015. Quick-service traffic rose just 0.7 percent, the company said, citing data from the market research firm The NPD Group, and 0.2 percent in the second quarter — this after the sector had spent the past decade building its share.
Penegor thus called the first half of the year a “bump in the road.”
“QSR continues to win with customers,” Penegor said. “We’re confident this segment of the restaurant industry is well positioned to succeed.”
Still, Wendy’s same-store sales represent a slowdown from previous quarters as the chain used a combination of limited-time offers and its 4-for-$4 value offer to lure customers. Same-store sales rose 3.6 percent in the first quarter.
As a result, the Dublin, Ohio-based operator lowered its same-store sales guidance for the full year to 1 percent to 2 percent. It had expected same-store sales growth of 3 percent.
Investors were disappointed by the news. Wendy’s stock fell as much as 5 percent Wednesday morning, but recovered later and was down less than 2.5 percent.
Indeed, while Wendy’s had lower expectations for same-store sales, it also said it now expects a much more favorable decline in commodities. The company had initially thought that commodity costs would fall 3 percent. It now expects commodities to fall 5 percent to 6 percent. That’s due “mainly to continued favorability in beef,” Penegor said.
Still, Wendy’s said its ultimate strategy has less to do with same-store sales and commodity costs and more with a business model centered around franchising.
Wendy’s has been selling company-owned locations to franchisees, and on Wednesday said that it has buyers for all of those restaurants. It has 315 locations to sell, and expects those sales to be complete by the end of the year. Wendy’s plans to own just about 5 percent of its 6,500 locations.
“We’ve awarded all the markets remaining to be sold in 2016,” Penegor said. “The purchasing franchisees are strong operators” with a commitment to the chain’s remodel program, known as Image Activation.
Wendy’s earnings in the second quarter reflect its changed model. The company operated 361 fewer restaurants in the second quarter.
As a result, revenue fell 21.8 percent in the quarter ended July 3, to $382.7 million, from $489.5 million in the same period a year ago. The decline in revenue reflects the fact that Wendy’s has lower restaurant sales from company locations.
But EBITDA, or earnings before taxes, depreciation and amortization, when adjusted to factor out one-time events, decreased 1.7 percent, to $102.5 million, from $104.3 million the previous year.
Increases in royalties, franchise fees and higher rental income, coupled with more restaurant cash flow from the chain’s own remodels of company locations, nearly offset the decline in earnings from fewer company units.
And Wendy’s is now eyeing another stage of an effort it calls “System Optimization” — directing restaurants into the hands of certain operators, or “buy and flip.”
Wendy’s is acting as a third party in sales of franchisee-owned locations to other franchisees. Essentially, the company is buying those locations and then flipping them to operators it prefers. The company engineered 13 such transfers in the second quarter, and expects 200 such deals this year.
This strategy can get “restaurants into the hands of great operators” who are committed to remodeling the locations and building new units.
It can also provide the company with an income stream in the form of rental revenue. In some of the acquisitions, Wendy’s is leasing the buildings or land from their owners, and is leasing to the operator with an “appropriate spread” that varies from location to location.
“We want to make sure there is a great, strong economic model for the franchisee,” Penegor said.