Wendy's/Arby's Group (WEN)

Was able to ride the decline in WEN and closed out the position with the belief that even a dead cat will bounce but WEN is going from bad to worse.

The rest of ’09 and first quarter of ’10 are all about burgers for a buck. The obvious problem is the heavy fast food customer, young males, do not have the discretionary income or are not spending as much of their discretionary income as they did a few years ago. While the typical Arby’s (or Wendy’s) customer may not be the typical McDonald’s (McD) customer, a portion of the customer base overlaps with that of all fast food concepts. For the rest of this year, those customers who migrate among various fast food concepts are being drawn to McD and Burger King (BK). Specifically, McD has done everything right over the past few years and same-store-sales as well as the McD stock price have increased during that period. Now McD is struggling to keep the momentum (McCafe is not growing / driving as much traffic as was expected) and, as a result, have resorted to aggressively pushing 99 cent double cheeseburgers. Likewise, BK has entered the battle and is promoting 99 cent double cheeseburgers in an effort to hold onto market share. Wendy’s will ultimately have to participate in the burger war and Arby’s will continue to experience double digit same-store-sales declines since they lack a compelling value offer. Finally, there is seasonality in fast food (especially in colder, northern climates) and the first quarter of the calendar year is the slowest so things will get worse before they get better.

Same-store-sales declines = free cash flow squeeze. At an average-unit-volume (AUV) of $1.3 million, the typical Wendy’s will generate positive cash flow from restaurant operations if sales decline by 10% but obviously not as much free cash flow. Arby’s, on the other hand, has an AUV of slightly less than $900 thousand – uncomfortably close to break-even levels. When the double digit sales declines at Arby’s continue, the concept’s restaurant operations will be burning cash quickly. I say when sales decline because Arby’s is going to introduce a dollar menu. Currently, Arby’s has an average customer check in excess of $7.00 and the trade down effect from regular customers ordering from the dollar menu instead of their usual $6 Beef n Cheddar combo will cannibalize the overall sales. Make up for the lower average check by increasing the number of transactions? Don’t count on it. An Arby’s dollar menu will only slow the loss of customers.

Efficiencies have been achieved. At least the low hanging fruit like consolidating the corporate / executive functions of the merged companies has been completed. Operating efficiencies, like reducing food costs or other operating expenses, are a long and slow process. During a period of declining sales, like we are in now, any savings are offset by the higher percentage of sales that fixed costs account for. Q3’09 financial results improved at Wendy’s but primarily resulted from a drop in commodity costs (uncontrollable) and price increases. At some point, price increases will drive customers away and the current McD and BK $1 double cheeseburger war is likely to cause a trade down effect at all the burger chains.

Menu extensions, especially breakfast, have failed and nothing is in the pipeline. Breakfast is being abandoned everywhere but locations with strong morning traffic (where they should have had breakfast anyway). Approximately 300 Wendy’s or about 5% of the system that had introduced breakfast have now discontinued it. It’s not possible to be a player in breakfast without offering it at all locations (non-traditional locations like malls excluded). There is no convenience if customers have to figure out which Wendy’s offer breakfast and they certainly won’t go out of their way if they would have to drive past McD, BK or Dunkin Donuts.

Slowly expanding the number of units in operation. Cost of real estate, building and equipment do not allow for a sufficient ROI for any fast food concept (other than McD). If the ROI were favorable, WEN would be aggressively building new restaurants instead of buying back stock. In addition, financing sources for restaurant franchisees (like GE Capital) have exited the business.

Trian / Nelson Peltz holds an influential percentage of the outstanding stock. He always seems to make money but I’m not so sure about other investors. As an activist, he pushed Wendy’s (and Cracker Barrel for that matter) to financially engineer a higher stock price with non-recurring events like selling corporately owned restaurants and real estate but his actions when he controlled just Arby’s were the opposite – do as I say, not as I do.

Health trends do not materially impact fast food sales. Customers say they want healthier menu items but, when ordering, pay little attention of healthfulness. Convenience, impulse and/or cravings dominate what customers will order.

It may be waaay better than fast food but the stock should drop at least another 10%. Premium menu items will reward shareholders but not until unemployment is reduced significantly.

wendy's is going downhill fast. economy changes how people eat, and i have a feeling people dont waste their money at wendys when they are broke. Add to that the health food craze. This company has already taken a beating; and it won't recover until more important sectors of the economy recover.

wendys is great, arbys is a disaster, put them together and you have one dead company whose market cap is greatly overpriced based on book and earnings.

if this was just wendys, then id invest, but arbys is going to drag this down for a long time.

Bad time to be in unstable oil market. Think renewable energy

Too expensive for fast food market

This stock is pathetic. Wendy's can't compare with McDonalds and their facilities are rundown in comparison. Wendy's is better off than Burger King because Burger King's corporate management is terrible.

I wouldn't take this stock, regardless of it's hyped up P/E and low buy-in price.

WEN is a marriage made in hell of Wendy's Hamburgers and Arbys both QSR companies who are known recently for dirty, old and shabby looking facilities that need huge capital investment which in this economy is just not there. The Wendy's portion of WEN lost it's way when founder Dave Thomas passed away. Under Thomas they had a folksier feel that made people believe in the quality of the food. They had the best Two Tier pricing strategy with Dave's Super Value Menu and their Premium Sandwiches and Salads. They were the kings of the late night DT and had MCD and BK losing market share to them. Once they went off of their super value menu they lost market share in huge chunks to MCD who adopded Wendy's strategy with a $1 menu, Late Night / 24 Hours & Premium Chicken & salads. Wendys tried to bring back it's value menu but it was too late so they tried Breakfast which has been a huge failure and has made franchisees mad. The Arby's portion of the business has such a small market share that they don't impact market share of the major QSR competitors and Arby's bit off more than they could chew in buying out Wendys. Stay away from WEN you are better off with MCD and YUM for your Restaurant holdings. Stay away from full serve and fast casual in this economy for any restaurant part of your portfolio.

5

High food costs eat into margins. Wendy doesn't want to scare off customers by passing along costs.

headwinds

restaurants meeting financial realities.

Food costs are going up. Chain restaurants are reluctant to raise their prices as fast as their costs increase. I'm expecting some very tiny margins from all corporate restaurants.

CEO is a woman: Kerrii B. Anderson

great

As the deal with Arbies goes through, the two companies will combine to strengthen their status in the fastfood chain, but it will not be so great as to outperform the S&P 500.

Its a Buyout!!!

VALUE LINES - WORST PERFORMING STOCKS 13 WEEKS

breakfast is a waste o time and money to crowded and better players, work on your core

outrageous PE; poor earnings & crazy price jump on purposed sale? I'll take my chances