ATLANTA Wendy’s/Arby’s Group Inc. posted a net loss of $393.2 million for its fourth quarter, as impairment charges and continued slow sales at the Arby’s chain weighed down results.
The parent company to both the Wendy’s and Arby’s chains reported on Monday improving sales trends at Wendy’s, but weak results at Arby’s, which led one analyst to call the Arby’s business “a key swing factor” to a corporate turnaround.
Wendy’s/Arby’s Group, which was formed last year after Arby’s parent Triarc Cos. Inc. purchased Wendy’s parent Wendy’s International Inc. in a $3 billion-plus deal, said sales at the Arby’s sandwich chain were hurt by competitor discounting, specifically citing the $5 promotions at Subway. Arby’s posted a systemwide same-store sales drop of 8.5 percent for the quarter ended Dec. 28. Officials said it would look to drive sales with its new Roastburger sandwich line, introduced last week, as well as new roasted chicken, shakes and iced fruit teas. The chain also will test value-priced products, which officials did not detail.
“Arby’s experienced a difficult quarter as fast-food consumers shifted spending to value meals and deeply discounted sandwiches,” said Roland Smith, chief executive at Wendy’s/Arby’s. “Our sandwich category competitors continued to focus on $5 price points, which are below Arby’s average check of about $7.50.”
The negative sales trends, coupled with “the deteriorating economy and adverse stock market conditions,” drove the company to take a non-cash impairment charge of $460.1 million against Arby’s corporate restaurants. Arby’s system includes 1,176 corporate locations and 2,580 franchised units.
“Arby’s clearly needs to hit a home-run to stabilize same-store sales declines that are reaching double-digits,” said UBS Investment Research analyst David Palmer. “We will be watching closely to see if Arby’s can get to flat same-store sales — something that could be a significant catalyst for the stock.”
The Arby's write-down led to a corporate fourth-quarter net loss of $393.2 million, or 84 cents per share. Because this is the first quarter of results for the combined Wendy’s/Arby’s Group, there is no year-earlier comparison. In the prior-year fourth quarter, however, Triarc Cos. reported a profit of $33.3 million, or 33 cents per share, and Wendy’s International separately posted a profit of $14.1 million, or 15 cents per share.
Latest quarter corporate revenue more than doubled, to $896.5 million, from $320.6 million, as a result of the merger.
For the full year, Wendy’s/Arby’s posted a net loss of $479.7 million, on revenues of $1.82 billion.
At Wendy’s, fourth-quarter systemwide same-store sales increased 3.7 percent, which officials said was driven by the chain’s three 99-cent sandwiches, more compelling advertising and improved speed of service, order accuracy and restaurant cleanliness. In the fourth-quarter a year earlier, Wendy's same-store sales were about flat. The No. 3 burger brand had been struggling to move same-store sales into positive territory until this latest quarter.
The company said that breakfast at Wendy’s, while cut back last year, still represents an incremental sales driver for the chain, and a retooled strategy will be implemented in the years ahead. The Wendy’s chain includes 1,406 corporate restaurants and 5,224 franchised locations.
Wendy’s/Arby’s is targeting a 160- to 180-basis point, or between a 1.6 percent and 1.8 percent, restaurant margin increase at Wendy’s for 2009, from expected improvements in food, labor and restaurant operating expenses.
For the current year, Wendy’s/Arby’s plans to cut capital expenditures and open just 10 corporate Wendy’s units and five corporate Arby’s locations, down from openings of 15 units and 70 units, respectively. In addition, the company is working to combine Wendy’s and Arby’s credit revolvers and long-term borrowings under a single credit agreement.
After the results were announced, and news of a restructured credit facility was made public, Standard & Poor’s Rating Services lowered its ratings on Arby’s Restaurant Group’s corporate credit, and placed parent Wendy’s/Arby’s Group’s rating under credit watch, with negative implications. According to the S&P note, Wendy's currently has a $200 million revolving credit facility, while Arby's credit agreement consists of a $100 million revolving credit facility and a term loan with an outstanding balance of $495 million, as of Sept. 28, 2008.
“We believe the company likely paid a considerable amount of the balance in the fourth quarter to remain covenant compliant,” said S&P credit analyst Charles Pinson-Rose.
The move to combine the facilities was likely dictated by very poor performance at Arby's in the fourth quarter and the likelihood that those trends could continue this year, the S&P continued. "As such,” Pinson-Rose added, "we think that Arby's was in danger of breaching financial covenants of its credit facility in the coming quarters."
Contact Sarah E. Lockyer at [email protected].
