Problems at Wendy’s: You Know When It’s Real

Times are still tough in the world and this could indicate reasonable prosperity for cheap fast food establishments with dedicated customers, but some, like Wendy’s/Arby’s, cannot just sit back, and must rather innovate and fight for continued market share. A recent announcement has been made regarding their agreement with Wenrus Restaurant Group Limited to open 180 combined Wendy’s/Arby’s restaurants in the next 10 years in Russia. This is to be part of a 400 store international expansion in the aforementioned Russia, the Caribbean, Japan, Brazil and China. This would represent a 4% increase in total number of stores, which as of April stood at 10,231. Of these, 6,546 are Wendy’s and 3,685 are Arby’s.

At this point international success would mean very good things since North American sales have not been so hot. Same store sales for the quarter at Wendy’s were only down 1.7%, but Arby’s was down 7.4%. Investors fret not because margins are improving and the most recent month was only down YoY because of the 2009 unveiling of boneless wings at Wendy’s. I’m not even sure if I’m being sarcastic in making this statement. I had tried the wings back then and was not that impressed, and the 2010 month they are comparing the wings to includes the introduction of premium bacon cheeseburgers, a slap in the face to their other 20 burgers featuring bacon (there will be more on consumer sentiment later, and by consumer sentiment I mean my sentiment).

The good news is that WenArb saw 3.2% growth in EBITDA and that the execs are optimistic on future sales and growth initiatives. Wendy’s drop on in same store sales has been parred by the popularity of their new premium salad line. The quality of these salads is actually quite high. Even better is the re-emergence of the spicy chicken nuggets and the small frosty on the dollar menu coming in September. In high school I had a standard order at Wendy’s that included a 5 piece nugget, junior bacon cheeseburger with no tomato, medium fry, and a small Frosty; this ran for $4 plus tax. The same order now would be over $5; that’s 25% increase in price in 5 years, while Burger King double cheeseburgers and McDoubles have decreased in price.

While Wendy’s has been raising prices, the ever-over-priced Arby’s has been trying to shed themselves of this particular opinion. In August and September the price of a junior deluxe roast beef meal will be reduced to $2.99. This is a good deal, since the meal for a regular used to be up around $5.50. One of Arby’s highest priorities right now is improving value perception. Taken from their earnings call they are working on the following areas: “serves food made with fresh ingredients, has great tasting food, affordable to eat often, serves high quality food, offers premium quality sandwiches and good value for the money.” Some of this seems very cookie cutter, and applicable to any fast food restaurant, but some things contradict. The fresher ingredients get, the more expensive they become and it seems that Arby’s may be banking too much on the public caring just how fresh their food is. I would think that to most, fast food is fast food, the general freshness level will be the same at McDonald’s, Burger King, or Wendy’s; and nearly everything is coming out of a freezer in the back (it is this sort of thing that sets Panera and Chipotle apart). Aside from all of this, Arby’s says that the dollar menu is here to stay, even though I think the public is aware of just how little they are getting for a dollar. At other establishments where lets say there is a small, medium, and large offering of a product and a dollar menu is introduced, the small becomes the dollar menu item. At Arby’s they made new cups to put the Jamocha shake in for a dollar, and I am fairly sure the same can be said for the fries (we’re on to you Arby’s). They will also be offering a price cut in core items like the Beef and Cheddar. Arby’s has unveiled a 30 items under $3 marketing campaign in test markets. This may help get people through the door but it has yet to be quantified.

Perhaps the biggest news to come from all of this is that Wendy’s, like Subway and Sonic, will begin tackling the beast that is the breakfast market. They have already begun to do so in Pittsburgh, Kansas City, and Phoenix and hope to take this national in 2011. They claim to have a fresh egg and cheese muffin offering, panini sandwiches (I’m guessing like the ones at Dunkin Donuts), and an oatmeal bar, not sure if this means bar as in Nutri Gran or bar as in station to put a bunch of stuff on top of oatmeal, like a baked potato bar. Wendy’s also claims to have taken great strides in finding a premium coffee supplier. This should not be that difficult since I’d assume they still have their old Tim Horton’s contacts available. WenArb is also remodeling several of their US stores, like McDonald’s has done. They hope to have completed 100 of each by the end of the year. I do not frequent either enough to notice the difference, or they have yet to get to New Jersey.

So those are WenArb’s short and long term goals for future growth. Unfortunately I cannot offer any predictions as to how their stock price will react to this as this has not been as much of a financial piece as it has been a rather skeptical overlook of their business. They have high hopes and I wish them all the best since I do have a long position established a few years ago; it’s just that some of their competitors look much more appetizing right now, pun intended.

-Jeff