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Turnaround Unfolds At Wendy’s (WEN)

 June 28, 2012 09:45 AM

(By Kevin Donovan) Every carnivore among us has a favorite burger chain and every investor a favorite turnaround story.  Have the twain finally met?

Wendy's (WEN) said late Wednesday it expects same-store sales will have increased a smart 3% in the quarter ending this weekend, up from the 0.8% gain in the first quarter of 2012.  It also reiterated its guidance for adjusted EBITDA from continuing operations of $320-335 million.

Investors should get a better handle on Wendy's future via an investor webcast the company is hosting this morning.  We don't think the company would be hosting the event on the heels of its preliminary same-store sales announcement if it weren't confident the company was on the right track.

[Related -The Wendy's Co (NASDAQ:WEN) Q4 Earnings Preview: Beefy Costs to Hurt Margins?]

For its part, Wendy's credited its new advertising campaign, saying it is gaining traction with fast-food consumers.

"We produced our fifth consecutive quarter of positive same-store sales, with exciting new products that we introduced under our ‘A Cut Above' brand positioning," President and CEO Emil Brock said in a press release. " We supported these product introductions with our new advertising campaign, featuring two different consumer advocates and the tag line ‘Now That's Better,' which has generated a very encouraging consumer reaction in a short period of time."

Wendy's share price has languished since reporting first-quarter results that missed expectations and threw into doubt the premise that the substantial position of Nelson Peltz and his Trian vehicle meant that savvy investors saw turnaround value in the chain.

[Related -The Wendy's Co (WEN), McDonald's Corporation (MCD) - Lock In Your Gains On This Fast-Food Stock And Buy Its Rival]

We think Wendy's early comment on quarterly same-store sales could signal better-than-forecast second-quarter results are in store.  Analysts are expecting earnings per share of $0.04 on revenue of $642 million. 

Wendy's has traded between $4.23 and $5.53 in the last 52 weeks.  At $4.48, the stock price is down about 16% year to date.  By comparison, rival McDonald's is down about 11% in 2012.

And by almost any financial measure, Wendy's lags McDonald's.  Its operating margin was just 5.32% in the latest quarter versus 31.59% for McDonald's.  Return on assets was 0.73% compared with 17.00% for McDonald's. 

As for valuation, Wendy's price-to-sales ratio is just 0.72 compared with 3.27 for McDonald's.  Margins need to rise for Wendy's stock to be afforded a richer valuation, we believe. 

Toward that end, the company said it is focusing on its "A Cut Above" brand positioning with premium products. In April, Wendy's introduced its new Spicy Guacamole Chicken Club sandwich and three premium sides – Chili Cheese Fries, Baked Sweet Potatoes and Macaroni and Cheese – with the advertising tag line "Now That's Better."

We think that will be tag line for investors as well.



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