Apr-27-2007

Wendy's sales talk sizzling

(topic overview)
CONTENTS:

DUBLIN, Ohio - Wendy's International Inc. announced Wednesday that its first-quarter profits fell 71 percent and said it has created a special committee of directors to consider strategic options, including a possible sale of the company. (More...)
"We believe the sale of Wendy's to private equity, rather than a strategic buyer, is the most likely scenario," but any sale probably would not be completed by the end of the year, analyst Larry Miller of RBC Capital Markets said in a note Thursday. (More...)
In the last four quarters, same-store sales -- the industry's benchmark for growth measured by receipts rung up at stores open longer than a year -- have been strikingly positive, including a 3.8% gain in the first quarter. (More...)
Anderson said the board was responding to ideas it had received from shareholders and others, about ways to boost shareholder value. (More...)
Wendy's expects chicken costs to rise between 3 percent and 5 percent for the rest of the year, while beef costs are forecast to be flat to down between 1 percent and 2 percent. (More...)
Income from continuing operations, which excludes the divested chains, was $14.5 million, or 15 cents per share, compared with a loss from continuing operations of $5.9 million, or 5 cents per share, last year. (More...)
"There is no specific timeframe to complete the review and there are no constraints on options to be explored by the committee," said James V. Pickett, board chairman, who will lead the committee of independent directors. (More...)
The company would report specific developments from the special committee as warranted, said Pickett, who will lead the panel. (More...)

REFERENCES

DUBLIN, Ohio - Wendy's International Inc. announced Wednesday that its first-quarter profits fell 71 percent and said it has created a special committee of directors to consider strategic options, including a possible sale of the company. Wendy's shares surged 12.6 percent in after-hours trading - up $4.12 to $36.80 per share - passing its 52-week high. [1] The CEO of burger chain Wendy's International has defended its decision to consider putting itself up for sale, adding that it was the board's decision, not hers. The company, which last year sold some subsidiaries under pressure from billionaire investor Nelson Peltz, this week announced that its board of directors was reviewing strategic alternatives for its business.[2] "I think it could be a good thing to sell," shareholder Ray Vawter said. "Ive always admired them on their new product offerings, and theyve always exhibited a lot of good new thinking." Billionaire investor Nelson Peltzs Trian Partners, which owns a big chunk of Wendys stock, has pushed the company to make changes to boost its shares and received three seats on the board in March 2006. His company Triarc Cos. controls fast-food chain Arbys.[3]

Addressing shareholders, Anderson pointed to improvements to the company's balance sheet as well as in operations, new product development and marketing. Without referring directly to Peltz and others, she noted that a large percentage of Wendy's shareholders are investors "that have a very short-term focus."[4]

One day after the company said it may put itself up for sale, investors and employees attending Wendy's International Inc.' s annual shareholders meeting there were still digesting the news.[4] April 26 -- Wendy's International Inc., the third-largest U.S. hamburger chain, put itself up for sale after a spinoff of the company's most profitable unit failed to boost the shares.[5] DUBLIN, Ohio -- In the past year, Wendy's International Inc. has spun off its Tim Hortons coffee-and-doughnut chain, dumped its money-losing Baja Fresh Mexican Grill and laid off employees at its corporate office. The company may now seek a boost to its stock price with another tactic - selling off what's left of the nation's third-largest hamburger chain.[6]

"We believe the sale of Wendy's to private equity, rather than a strategic buyer, is the most likely scenario," but any sale probably would not be completed by the end of the year, analyst Larry Miller of RBC Capital Markets said in a note Thursday. He pegged the value of the company at $38 a share, slightly above Thursday's trading price. [7] Of 15 analysts who have covered Wendy's in the past year, two rate the shares "buy,'' eight say "hold'' and five have "sell'' recommendations. Dave Thomas opened the first Wendy's in 1969, naming the restaurant after his daughter, Melinda Lou, who was nicknamed "Wendy.'' The company went public in 1976, raising $28 million, and by 1997 had opened its 5,000th restaurant.[5] OSI Restaurant Partners Inc., owner of the Outback Steakhouse chain, agreed to a $3.2 billion buyout in November. Rachael Rothman, an analyst at Merrill Lynch & Co., wrote in a note this week that Wendy's share price may be too high to attract private-equity buyers. "The valuation makes Wendy's a less attractive LBO candidate than some of the other quick- service restaurant chains,'' she wrote.[5]

Wendy's officers did not elaborate on the announcement at the company's annual shareholders meeting Thursday morning. The company reported a 71 percent drop in its first-quarter profit for the quarter ended April 1, earning $14.7 million, or 15 cents a share, compared with $51.2 million, or 45 cents a share, for the first quarter of last year.[8] Concern that Wendy's may be sold was echoed by the company's namesake, Wendy Thomas Morse, whose dad, Dave Thomas, began the company in 1969 with a restaurant on E. Broad Street. He died in 2002. "I hope it doesn't happen," she said after the meeting, which was also attended by her mother, Lorraine, and several of Wendy's siblings, who together are franchisees with 32 restaurants. Other shareholders weren't opposed to a sale.[4] A consensus of restaurant analysts seems to believe Wendy's decision to look at possible sale is being driven by activist investors led by Norman Peltz and his company, Triarc Cos.[4] "If it results in more profit, I'm all for it," said Garry Newell, a Columbus resident. Most analysts who cover Wendy's said they were surprised by the company's announcement Wednesday to look at strategic options. A sale or a merger would be among several alternatives for Wendy's, along with revisions to the company's strategic plan and changes to its fiscal structure.[4] The special committee will review strategic options while management continues to focus on executing Wendy's current strategic plan to revitalize the brand and improve results at every restaurant in the system."[1] The nation's No. 3 hamburger chain said it has formed a special committee of directors to review options that could include a possible sale, merger or other business combination.[9] All of the committee members are independent directors. Several analysts said they were surprised at the timing of Wendy's announcement, given that sales and profits were beginning to recover at the struggling chain.[10]

At Applebee's, Mr. Breeden also joined the committee that is considering a sale or other strategic options for the chain. He didn't elaborate yesterday on what he is going to recommend, but he has said in the past that he doesn't think Applebee's should sell itself when the chain is "at the bottom."[11]

Triarc is a franchiser of the Arby's restaurant chain. Peltz has pushed Wendy's along as he has other companies in which he has bought stakes. Earlier this year, for example, he acquired a 3 percent stake in Cadbury Schweppes PLC. Within three days of his demand that the company sell its beverage unit the company agreed.[12] Wendy's could sell real estate to spike value. The company owns land and buildings at 644 sites and owns the buildings on another 570 stores out of its total 6,300 restaurants and could use the money to buy back stock.[13]

Domino's recently borrowed $1.85 billion to pay shareholders a hefty special dividend. McDonald's last week said it would sell most of its restaurants in Latin America to a licensee and funnel the $700 million in proceeds to investors, as part of a broader plan to reduce the number of restaurants it owns.[11]

In the last four quarters, same-store sales -- the industry's benchmark for growth measured by receipts rung up at stores open longer than a year -- have been strikingly positive, including a 3.8% gain in the first quarter. Wendy's plans to add to its breakfast menu beginning this year, putting it in competition with McDonald's and its established and expanding breakfast business as well as Burger King. [13] Anderson said business continued to improve in the quarter as the company continued initiatives to revitalize the brand and improve operations. Wendy's has had seven consecutive months of positive same-store sales, driven by new products such as its 4-Alarm Spicy Chicken Sandwich and the limited-time bacon mushroom melt cheeseburger.[14]

The sale would be a disappointment for the restaurant's namesake and daughter of founder Dave Thomas, Wendy Thomas. "I hope it doesn't happen, but everything is going to work out the way it's meant to be," said Wendy Thomas, who, along with her four siblings, owns 32 restaurants. Another daughter, Molly Thomas, said, "I have an emotional tie, so yeah, if they sold the company, I'd be very upset." Comments are the sole responsibility of the person posting them.[7] The company finished the quarter with 6,658 restaurants, 15 fewer than at the end of 2006. "With sales momentum heading in the right direction, management must now deliver on its promise to cut $100 million in costs and launch a national breakfast menu, both of which will be very challenging," A.G. Edwards & Sons said in a recent report.[15] Sales grew 2 percent to $590.2 million, from $578.7 million, while comparable restaurant sales at locations opened at least a year grew 3.8 percent at company-owned locations, and 3.7 percent at franchised restaurants.[8]

The announcement of a possible sale came after financial markets closed yesterday, along with word from Wendy's that its first-quarter earnings dropped 71 percent.[15] Wendy's said it does not intend to make periodic announcements regarding the strategic review, which it said could mean a possible sale, merger or other business combination.[15]

The company said Wednesday that a special board committee had been formed to study options for the company, including a possible sale.[6] "A number of stakeholders have offered suggestions about strategies to improve performance and create additional value," said board chairman James V. Pickett, who will lead the committee examining a sale and other options.[16]

Anderson said the board was responding to ideas it had received from shareholders and others, about ways to boost shareholder value. She added that Wendy's management team would keep pursuing the turnaround strategy put in place last year. She also warned that rising prices for chicken and produce would pressure the company for the rest of the year. [2] In a conference call Thursday, Wendy's CEO Kerrii Anderson said the company's worst days are behind it. She made it plain that it wasn't her idea to recapitalize or put the company on the block. "This is a board decision," she said when one analyst suggested she was behind the recapitalization. Anderson, who acknowledged the company had problems in the past, said it's on track to increase revenue by 3 percent to 4 percent for the rest of the year despite higher costs.[12]

Analysts mostly believe that Wendy's will be taken private -- and possibly by Peltz, who owns 8% of the company's shares. He agreed last year not to try to take over the company or wage a proxy battle. That pact ends June 30, however.[13] John Glass, an analyst at CIBC World Markets, said that a leveraged recapitalization may be more feasible for Wendy's. In one scenario, he estimates that Wendy's could borrow $1.3 billion, refinance its current $520 million in debt and have the remainder, plus $100 million of the cash on its balance sheet, to pay a dividend of roughly $10 a share.[11] Of 15 analysts who have covered Wendy's in the past year, two rate the shares "buy,'' eight say "hold'' and five have "sell'' recommendations.[17]

The move took Wall Street by surprise -- and overshadowed Wendy's staggering 71% drop in first-quarter profit. It underscores a premise echoing on Wall Street that the restaurant chain's restructuring is too slow in coming after two years of lackluster results and shrinking market share.[13] The activist investors, which may control half of Wendy's outstanding shares, seem to want even more.[4] Peltz agreed to abandon a proxy fight, though the stand- still agreement with Peltz is set to expire June 30. His Trian funds held about 9.7 million shares as of December, making it the company's largest investor.[17]

Mr. Breeden complimented the board and management and said the chain is a fundamentally strong company. For many restaurant companies, these complex financial moves aren't something their investors are used to hearing about.[11]

Wendy's operates 6,658 restaurants. The company opened three new corporate-owned restaurants during the quarter, while its franchisees opened eight, but the overall number of restaurants dropped to 6,658 from 6,673 at the end of 2006 and 6,745 in first quarter 2006.[14] The company said it earned $14.7 million, or 15 cents per share, in the quarter ended April 1, down from $51.2 million, or 45 cents per share, in the same period a year ago, when the company was larger.[15] Subtracting Tim Hortons from the equation, the rest of company had a $5.9 million loss in first quarter 2006. "It's not apples and apples, it's cherries and grapefruit," she said of the comparison.[8]

The developments mark a whirlwind year for Anderson, who took over as chief executive after longtime CEO Jack Schuessler abruptly retired last year. She completed a flurry of transactions, including Tim Hortons initial public offering and eventual spin off, and quickly rededicated the chain to promoting the core business of signature square hamburgers and the Frosty, a dessert in a cup.[3] "We've had a lot of initiatives and we've executed them well over the last two years," Chief Executive Kerrii Anderson said. "That's created a tremendous amount of value over the last 12 months, and we have a responsibility to continue to create value."[6]

Company executives tried to reassure shareholders about the drastic moves on the table. "Dave Thomas always said that profit's not a dirty word," CEO Kerrii Anderson told the audience.[11]

Chairman James Pickett will lead the committee, the goal of which is to enhance value for shareholders, franchisees and other stakeholders, he said in a release from the company. He also said there is no time frame for the review and that the company will provide updates only as warranted.[8] "I'd hate to see it sold," said Mike Sullo, a Columbus resident who has been a shareholder since the company first sold stock to the public in 1976.[4]

"I feel elated," Grinstein said. "For the 47,000. they're the ones who went through all the angst and made the sacrifices. It's for them I feel extreme relief." Delta's reorganization plan will give unsecured creditors between 62 percent and 78 percent of the value of their allowed claims as shares of new Delta stock.[18] More than 95 percent of creditors voted to endorse the plan for Delta to leave bankruptcy as a stand alone carrier. That plan had been put in jeopardy by a $9.8 billion hostile takeover bid launched last fall by Tempe, Ariz. -based U.S. Airways Group Inc. Delta successfully persuaded creditors to back its blueprint to emerge from bankruptcy and reject the buyout offer.[18] Delta is also giving 1,200 managers a 2.5 percent stake, valued at $240 million, in the reorganized company.[18] In recent months, though, Delta's financial situation has improved, with the company projecting a 2007 pretax profit of $816 million, excluding special charges and reorganization costs.[18]

Delta now employs 47,000 people. Next week, 39,000 of them are expected to receive cash and new stock in Delta worth a total of $480 million.[18]

The company's existing stock, which will be worthless, continued to trade until the court's approval of the plan.[18] Reuters is the world's largest international multimedia news agency, providing investing news, world news, business news, technology news, headline news, small business news, news alerts, personal finance, stock market, and mutual funds information available on Reuters.com, video, mobile, and interactive television platforms.[19] Within two years the turnaround was deemed successful enough that the stock market jumped at the chance to buy Burger King's stock.[12]

Wendy's expects chicken costs to rise between 3 percent and 5 percent for the rest of the year, while beef costs are forecast to be flat to down between 1 percent and 2 percent. Food costs will be higher than expected this year because demand for the fuel additive ethanol is driving up the price of corn, which affects feed and chicken prices, Wendy's said. On the call, Anderson said she was "concerned about the forecast for inflation increases and its effect on consumer spending." [10] McDonald's was still the largest and Wendy's was in third place when a truce was declared in 2003. "Fast-food players have been operating fairly rationally in recent years, but that could change quickly given the fast-food wars of earlier in this decade," Owens said.[12]

Income from continuing operations, which excludes the divested chains, was $14.5 million, or 15 cents per share, compared with a loss from continuing operations of $5.9 million, or 5 cents per share, last year. [20] Analysts surveyed by Thomson Financial had expected, on average, a profit of 13 cents per share on revenue of $592 million.[15]

Revenue for the quarter ended April 1 rose 2 percent to $590.2 million from $578.7 million in the year-earlier period.[9]

"There is no specific timeframe to complete the review and there are no constraints on options to be explored by the committee," said James V. Pickett, board chairman, who will lead the committee of independent directors. [1] Shareholders, during what may have been the company's last annual meeting, were confident the board would make the right decision.[21] With Peltz's three seats on the 13-member board, Peltz currently doesn't have operating control of the company. His possible actions include taking the company private under his umbrella or putting his manager in charge.[12]

The company would report specific developments from the special committee as warranted, said Pickett, who will lead the panel. [22]

REFERENCES

1. AP Wire | 04/25/2007 | Wendy's 1Q earnings off 71 percent, sale may be possible
2. index
3. Wendys shares surge as burger chain says its exploring possible sale - International Herald Tribune
4. The Columbus Dispatch : Sell Wendy's? Some hope not
5. Bloomberg.com: U.S.
6. courant.com | Wendy's Exploring Sale Of Company
7. Burger chain forms panel to explore a possible sale : Business : Ventura County Star
8. Wendy's stock price reacts favorably to news of possible sale - New Mexico Business Weekly:
9. Wendy's explores possible sale - The Clarion-Ledger
10. Wendy's CEO says review was board's decision
11. Cattle Network - Connecting The Beef Industry Worldwide
12. Wendy's sales talk sizzling | Chicago Tribune
13. Wendy's to Consider Sale, Shares Jump ((BKC), McDonald's Corp. (MCD), (THI), (THI.T), Wendy's International Inc. (WEN), Yum! Brands Inc. (YUM), (US580135), (US88706M), (US988498)) | SmartMoney.com
14. Wendy's share price reacts favorably to news of possible sale - Business First of Columbus:
15. York Dispatch - Wendy's exploring possible sale
16. Wendy's shares jump 16% after talk of a possible sale
17. Bloomberg.com: U.S.
18. Delta to Exit Bankruptcy Next Week - Newsday.com
19. Wendy's CEO says review was board's decision | Reuters
20. WIStv.com Columbia, SC: Wendy's considers possible sale amid turnaround
21. Wendy's shareholders meet amid talk of sale | Chron.com - Houston Chronicle
22. The Cincinnati Post - On the menu

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