CEO: Wendy's has 'quality bidders' for Arby's

AP News
Posted: May 10, 2011 4:08 PM
CEO: Wendy's has 'quality bidders' for Arby's

Wendy's/Arby's Group Inc. plans to raise menu prices, the latest in a stream of companies saying they will pass along higher costs for the ingredients in their products.

The fast-food giant on Tuesday blamed the rising prices of beef, bacon and cooking oil. It also said it had already raised prices late last year and in March.

The announcement came on the same day that the company reported that it lost $1.4 million in the first quarter and lowered its earnings estimate for the year.

Wendy's/Arby's has struggled through the recession and the economy's halting recovery, losing money for seven of the 10 quarters since the two chains combined in a deal engineered by billionaire investor Nelson Peltz in 2008.

Its leaders have a formidable to-do list. Besides stemming losses and raising prices without upsetting customers, they also need to get a piece of the breakfast action that is benefiting their rivals. And that's on top of selling off the Arby's chain, which represents more than 30 percent of revenue.

Wendy's/Arby's also blamed the rising beef costs for its decision to lower its predictions for adjusted earnings for the year, to between $330 million and $340 million. In March it had said it expected to make $345 million to $355 million.

Chief Financial Officer Steve Hare said the company expected a 20 percent increase in the price it pays for meat, up from previous predictions of 10 to 15 percent.

Wendy's/Arby's net loss of $1.4 million, or break-even per share, was narrower than the loss of $3.4 million, or 1 cent per share, in the same quarter last year.

Excluding a charge, the most recent quarter's earnings were 1 cent per share. Analysts had expected 2 cents per share.

The company has already factored Arby's sale into its 2011 earnings predictions. CEO Roland Smith tipped his hand slightly on deal news, telling analysts there are "several quality bidders" and that they have all done "significant due diligence."

Though the Arby's brand is the one getting the boot, it was also the chain that drove the first-quarter revenue increase. Overall revenue rose about 1 percent to $848 million, beating analysts' estimates of $820 million. But revenue rose 5 percent at the Arby's stores and fell slightly _ less than 1 percent _ at Wendy's.

Sara Senatore, an analyst at Sanford C. Bernstein, said some of the revenue increase at Arby's could be from last year's launch of a new value menu and a $4 fish sandwich combo added in February. Those promotional prices can give Arby's a short-term revenue boost while the restaurant is up for sale, but it could be difficult to maintain that momentum.

"Once you've got this menu in place, once you've promoted these things, how do you (repeat) that the following year?" Senatore said.

It was clear in Tuesday's earnings call which chain company leaders see as the future. Smith spoke enthusiastically about new salads, new fries, a pending makeover for its burgers and chicken sandwiches, and an upcoming new flavor of Frosty at Wendy's.

He spent much less time on Arby's, though he did say the Arby's turnaround is "progressing nicely."

Smith also said that the new products, aimed at competing with "better burger" chains like Five Guys Burgers & Fries, give the company room to raise prices.

The new burgers, to be introduced later this year, will have toasted buns, thicker patties and better toppings, he said.

Besides the revamped basic menu, Wendy's is staking its future on overseas expansion and a national rollout of breakfast.

Wendy's/Arby's has recently announced plans for restaurants _ mostly Wendy's _ in Singapore, Turkey, Argentina and elsewhere. The first Wendy's franchises in Russia will open this month.

Unlike some rivals, including McDonald's, Wendy's/Arby's does most of its business domestically. Of its 10,200 locations, only about 350 are franchises outside North America.

Wendy's is the only major fast-food hamburger chain that doesn't offer breakfast nationwide. The company launched breakfast in four test markets last year and said Tuesday it plans to expand to about 1,000 of Wendy's 6,500 restaurants by year end. Research groups predict breakfast will be one of the few restaurant segments to gain in sales over the next decade.

Senatore, the analyst, called the first-quarter results "modestly disappointing." She said Wendy's sluggish revenue indicates it's still losing business to McDonald's.