The Wendy’s Co. is testing new value promotions, as the Dublin, Ohio-based burger chain looks for new ways to attract price conscious customers, the company said on Wednesday.
Speaking on the company’s earnings call, Wendy’s executives suggested that premium promotions, such as the company’s $1.99 Ghost Pepper Fries, helped drive same-store sales up 2.2 percent in the second quarter ended June 28.
But the company acknowledged that its value menu hasn’t had as strong results.
“We know our Right Price, Right Size menu is not a sufficient value proposition to continue to attract value-seeking customers,” CEO Emil Brolick said on the earnings call. He said that the company is testing “value bundles” and the company expects to see those tests “pay off later in the year.”
“The disappointment is focused in the performance in the price-value area, and a lot of that comes at the lunch daypart,” Brolick said. “Our teams are getting very, very targeted on this. That always leads to an opportunity to address it quickly, which is what the goal is.”
The company would not provide details of the value tests, but Brolick said they’re being done “in a very thoughtful manner” that will not degrade Wendy’s positioning as a high quality brand.
Brolick said that, though the economy is improving, a certain percentage of customers are still ordering based on value, particularly in the quick-service restaurant sector. Disposable income has been flat for years now, and Brolick pointed to recent surveys that found 26 to 28 percent of consumers’ last restaurant purchase was on value.
Yet Brolick suggested the percentage might even be higher because many consumers might be buying on value, but don’t think they are.
“Consumers who are heavy users of QSR don’t have a lot of disposable income,” Brolick said. “Price-value is something important to them. We see that as something that will be important for a long time. We have to evolve our offering to the specific needs they have.”
Beyond value customers, Wendy’s continues to generate additional sales and additional profits through its refranchising and remodeling initiatives.
Revenues in the second quarter decreased 3.3 percent to $489.5 million from $506.1 million, largely because the company operates 141 fewer restaurants now than it did a year ago due of refranchising.
Wendy’s is quickly working to refranchise most of its company restaurants to franchisees with plans to sell 540 locations by next year — 280 of which to be sold this year. The company would then operate 5 percent of the 6,500 stores in its system. Most of its revenues would then come from franchisee royalties and rent payments that generate higher profits.
When the company is finished refranchising in 2017, for instance, it will generate $170 million in annual rental revenue, up from $68 million in 2014.
The company said it is already receiving the benefits of higher profits from its refranchising. Adjusted EBITDA, or earnings before interest, taxes, depreciation and amortization, increased 5.2 percent in the second quarter to $104.3 million from $99.1 million even though the company operated fewer restaurants. The figure was adjusted to exclude one-time costs.
Adjusted EBITDA margin was 21.3 percent, up from 19.6 percent. The company said that higher rental income, reduced general and administration expenses, due to the refranchising efforts, led to the higher cash flow and cash flow margin.
Net income for the quarter was $40.2 million, up 39 percent from $29 million last year, though that included $15.4 million in income from the company’s bakery that Wendy’s sold in June.
Earnings per share adjusted to factor out the bakery were 8 cents in the quarter, down from 9 cents. The company’s earnings included tax expenses related to its recent debt refinancing.
Wendy’s is building new locations and remodeling units. The company and its franchisees now have 1,000 locations under the new model. Wendy’s expects to reimage 450 locations systemwide this year, and it expects to build 80 new units, the highest number of new units in the system in eight years.
Executives said on the call that company operated same-store sales rose 2.4 percent in the second quarter, and the remodeled units contributed 170 basis points to that growth.
Contact Jonathan Maze at [email protected].
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