Wendy’s may gain momentum in the second half of 2013 at the expense of McDonald’s, according to at least one securities analyst.
The Wendy’s Co. expressed greater optimism for sales and margin growth for the remainder of the year than McDonald’s Corp., even though both companies reported only slight increases in same-store sales for the second quarter.
Oak Brook, Ill.-based McDonald’s reported a 1-percent increase in U.S. same-store sales for the second quarter, while those for Dublin, Ohio-based Wendy’s rose 0.4 percent at company-owned restaurants and 0.3 percent at franchised locations. Yet executives’ sentiments during the brands’ respective earnings calls diverged.
McDonald’s forecasted flat same-store sales for July, and executives said they expect a “challenged” environment for the rest of the year. Meanwhile, Wendy’s said its full-year same-store sales would range from 2 percent to 3 percent after climbing just 0.7 percent in the first half, suggesting robust sales next quarter.
Mark Kalinowski, restaurant industry analyst for Janney Capital Markets, predicted that Wendy’s could drive third-quarter same-store sales as high as 5 percent based on the performance of its Pretzel Bacon Cheeseburger, which is likely living up to expectations, he wrote in a research note. In a separate note covering McDonald’s second-quarter earnings, Kalinowski wrote that one reason McDonald’s predicts flat sales for July is because a resurgent Wendy’s began advertising its new premium sandwich nationally.
“This pressure on McDonald’s could last over the third quarter as a whole, and perhaps beyond, if Wendy’s adds its Pretzel Bacon Cheeseburger as a permanent menu item, which looks increasingly likely,” he wrote.
While not quite as bullish as Kalinowski, another analyst, Anton Brenner of Roth Capital Partners, wrote that Wendy’s would likely hit its high-end target of 0.5-percent growth in profit margin for 2013, provided that the company’s remodeling program and planned refranchising of 425 units overcome headwinds, such as a “continuing sluggish industry sales environment and Wendy’s lack of a breakfast program.”
Wendy's targets comps, margin growth
In Wendy’s earnings call, chief executive Emil Brolick confirmed that the Pretzel Bacon Cheeseburger was achieving its goals of driving third-quarter sales and elevating Wendy’s menu positioning.
“There are a lot of people that can afford to go to quick-casual restaurants, but there are many, many more that cannot afford or certainly not afford to go on a consistent basis,” he said. “So when you can give them Pretzel Bacon Cheeseburger-quality products at a QSR price, we think that’s a heck of a proposition, and you’re going to see more of it.”
Second-quarter same-store sales rose less than 1 percent due to inadequate sales of value items on the Right Price Right Size menu offsetting strong performance of the Grilled Chicken Flatbread limited-time offer, he added. Wendy’s acknowledged that dynamic in its first-quarter earnings call and has addressed it with more consistent value messaging, he said.
“I feel quite good about where we are on the calendar for the remainder of the year,” Brolick said. “Looking down the road, we’ve also begun to lay out a hypothetical calendar for next year and, particularly, the first quarter. I think that there’s some very exciting ideas that are in that calendar as well.”
Wendy’s second-quarter profit margin rose 2.6 percent from a year ago to 16.7 percent of sales, benefiting greatly from the discontinuation of breakfast and its advertising in several markets, chief financial officer Steve Hare said. But the brand is also projecting full-year margin growth of 0.5 percent to 14.5 percent of sales, due in large part to its sale of 425 company-owned restaurants, most of them less profitable units in the West, to franchisees.
The move is expected to reduce annualized general and administrative expenses by $30 million within 12 months, improve margins, and increase cash flow from rent and royalty income. It also would reduce Wendy’s corporate ownership of its nearly 6,500 restaurants from 22 percent of the system to 15 percent.
Wendy’s sold 24 restaurants to giant Pizza Hut franchisee NPC International — which recently agreed to buy an additional 13 locations — and has sold an additional 5 units in Kansas City, Mo., to another franchisee.
Brolick said the refranchising would be a way to accelerate Image Activation remodels among the franchisees but added that Wendy’s would lead the reimaging program in the company-operated system as well.
“The magnitude of the consumer response that we’re getting to these restaurants is an economic motivation by itself,” he said, “so we’re going to continue to be very aggressive about Image Activation.”
McDonald's stays aggressive in share game
McDonald’s officials said the chain of more than 14,000 U.S. units and nearly 35,000 locations worldwide would seek to increase its market share, as it did in the second quarter despite a contracting informal-eating-out market.
Chief executive Don Thompson said during the company’s earnings call that the products introduced in the second quarter — the Egg White Delight McMuffin, Blueberry Pomegranate Real Fruit Smoothie, Premium McWrap and new varieties of the Quarter Pounder — resonated with consumers. However, they could only partially offset wider declines in total foodservice demand in most of the brand’s major markets.
“I want to make sure that everyone understands that the informal-eating-out market is relatively flat and declining in many of the markets around the world, so we’re not going to change that menu pipeline execution strategy,” he said. “It is absolutely working. However, we are facing some headwinds, and so we’ll continue to execute that, continue to make our target to outperform in the marketplace as a whole.”
McDonald’s 1-percent gain in domestic same-store sales in the second quarter came as the larger restaurant market declined about 0.5 percent, he said, adding, “We know that we put things in place to address that in the U.S., and we have outperformed the competition.”
Executives added that McDonald’s has moved up its Monopoly Game promotion to July instead of lapping it year-over-year in October in order to drive sales of the new items, which all provided news in the chain’s growth categories of breakfast, beverages, chicken and beef.
“We know that Monopoly is always a great transaction driver, and these new products are prominently featured in the promotion,” chief financial officer Pete Bensen said, “so following those product launches up with Monopoly seemed like a very prudent thing to do.”
When analysts asked if the move opened up October and the fourth quarter for some other opportunity to drive traffic with a new menu item or platform, the executives hinted it would, but declined to elaborate.
Contact Mark Brandau at email@example.com.
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