The Wendy’s Co. revealed during Tuesday’s first-quarter earnings conference call that the brand’s attempt to entice customers from its value menu up to the mid-priced W cheeseburger backfired and led to disappointing results, prompting the company to lower its full-year earnings guidance.
Chief executive Emil Brolick said the development and marketing of the W cheeseburger was meant to address an imbalance in the chain’s barbell menu strategy, which had become weighted toward the My 99-cent Everyday Value Menu too heavily. However, rather than encourage value menu customers to trade up to a W at $2.99, the sandwich cannibalized sales of its premium counterpart, Dave’s Hot ‘N Juicy cheeseburger, which starts at a recommended price of $3.69 for a single.
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“The thought process was — and we recognize it wasn’t the right process — that we have this gap between our 99-cent items and our premium products, and can you create a mid-tier and get trade-up,” Brolick said. “But those 99-cent shoppers generally are 99-cent shoppers, and you’re not likely to move them up to $2.99. The W had low levels of drag-along sales of French fries and soft drinks. The positioning of the product was just not the right positioning.”
The negative impact of the W on Wendy’s sales mix, combined with food cost inflation of 2.2 percent in the first quarter, decreased company-operated profit margins by 1.6 percent to 11.8 percent of sales and led to sales that came in below expectations, the company said.
For the April 1-ended first quarter, Wendy’s net income was $12.4 million, or 3 cents per share, compared with a $1.4 million loss a year earlier that resulted in break-even earnings per share. The company’s sale of its investment in Jurlique International, a skin care company, benefited earnings per share by 2 cents, the company said.
Revenue increased 1.8 percent to $593.2 million, compared with $582.5 million a year earlier. Same-store sales rose 0.8 percent at company-operated locations in North America and 0.7 percent at franchised locations.
Wendy’s adjusted its full-year guidance for earnings before interest, taxes, depreciation and amortization down to a range between $320 million and $335 million.
Despite the rough start to the year, Brolick and chief financial officer Steve Hare expressed optimism that several initiatives from Wendy’s “Recipe to Win” would ensure that the brand reaches its new targets during this transition year and sets itself up for future growth:
• Pricing adjustments. Wendy’s already has tried to correct course on the W cheeseburger by raising the price from $2.99 to $3.19. It will no longer promote the W.
Further adjustments to the My 99-cent Everyday Value Menu are being tested, with the goal of maintaining visits from current value-conscious customers while also being more accretive to margins, Brolick said.
“We are not moving away completely from the 99-cent menu,” he said. “We are going to narrow it a bit, but the goal is to go through a testing protocol so we don’t lose a lot of our 99-cent customers.”
• New advertising. Brolick said Wendy’s two new brand spokeswomen in its new ad campaign — a redheaded character using the “Now that’s better” tagline and Wendy Thomas hearkening back to the company’s values developed by her father Dave Thomas — would help the chain build sales.
Wendy’s also is supplementing its marketing with direct-mail coupons to encourage trial of new items like Signature Sides.
“While couponing is a new layer for us, it’s not something that we’re going to have in the marketplace on a constant basis,” Brolick said. “We have to make sure they work economically and for brand positioning, so this isn’t something we’re going to go overboard on.”
He also touted new chief marketing officer Craig Bahner, who joined the company recently from Procter & Gamble. Bahner “already is bringing a lot of discipline we didn’t have, and that lack of discipline led to some ideas like the W,” Brolick said. The new CMO will have the authority to change Wendy’s marketing even further if initial results underperform, he added.
• Remodeling. Wendy’s is still on track to remodel 50 company-owned locations and build 20 new corporate stores using its “Image Activation” prototype design, officials said. In order to accelerate that program in 2013, the company is refining the model to reduce costs from the current $750,000 price tag and is working with franchise lenders to set up a tiered-lending system for franchisees.
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“We want to go as fast as possible and get most of the system remodeled as we can,” Brolick said. “We have a range of average unit volumes and cash flows, so not every single restaurant has the capacity to deal the $750,000 investment. The lower end target might be in the $300,000 area.
“There is significant enthusiasm about these reinvestments among our franchisees. Anybody aware of the marketplace sees reinvestment on the part of McDonald’s, Burger King, Taco Bell and any other new competitors. When you image-activate a restaurant, everything seems to work better in the restaurant.”
All remodeled units support Wendy’splatform in test. That menu will extend to the Manhattan market, as well as an undisclosed market in the Northeast this year.
• Refinancing. In April, Wendy’s closed on a new $1.3 billion credit facility that retired an existing line of credit and would result in annual interest savings of $25 million, Hare said. The new balance sheet also would afford Wendy’s the flexibility to invest in more remodeling or possibly purchase franchise-operated locations.
Dublin, Ohio-based Wendy’s operates or franchises more than 6,600 restaurants worldwide.