November 9, 2016
Insights

Wendy’s Q3 Earnings Report: Here’s the beef


Wendy’s, the nation’s 3rd largest hamburger chain, released its modestly positive quarterly report today. The company reported $0.11 earnings per share for the quarter, beating the consensus estimate of $0.10 by a penny. Over a two-year period, Q3 same-restaurant sales increased 4.5% in North America.

Revenues were $364.0 million in Q3 2016, compared to $464.6 million in the third quarter of 2015 – but that decline is misleading since ownership of 433 restaurants was transferred to franchisers.

So what's going on behind the scenes? For a deeper dive into the data, we used SIGNUM for Restaurants to evaluate what the company did and didn't talk about on the call.

On Wendy's Q2 earnings call back in August, President and CEO Todd Penegor spoke about the chain's drive to sustain its "clear and compelling price value proposition to customers." This operation is extremely important in the macro context of declining grocery store prices, which serve as an existential threat to the entire restaurant category.

Here's where our data supports the earnings call: the news for Wendy's is very good in terms of price and menu stability.

Wendy's wants customers to walk in and know they're getting a good burger and fries – at a low price point. This consistency is a strength, and the data bears it out. In the chart above, note how flat the conversation is about Wendy's pricing, and how schizophrenic the same conversations about costs are at Five Guys over a 2-year period. Customers are weary of Five Guy's regional pricing and cost tweaks (usually increases) and comforted by the stable experience at Wendy's.

Even the popular "4 for $4 Meal," introduced in October of 2015, had no real impact on the quantity of conversation about Wendy's pricing. This is because the offer merely formalized the existing, successful status quo: tasty burgers, chicken nuggets, and soft drinks at low price points.

On the call, Wendy's executives discussed the campaign to have customers feel the food is "worth what I pay." Our data shows these efforts were largely successful.

While the consistent pricing and menu strategy has indeed been rewarding, it was perhaps the introduction of a limited-time offer that was most responsible for the growth.

On August 15th of this year, Wendy's introduced 50-cent Frosties. The offer was an immediate hit with consumers as it touched on two of their favorite things about Wendy's: low prices and the taste of the Frosty itself.

Note how the less-expensive Frosty gobbled up market share for dessert conversations in the hamburger space after the August release.

One concern for the chain, especially as it drives toward a franchisee-only model is the in-store experience. As we have seen, there is a clear benefit to the reliable cost and taste of Wendy's offerings. But there's a downside to that predictability; many of the storefronts need repair and modernization, processes that are more difficult to implement with a less centralized model.

One of the bellwethers for Wall Street analysts looking at Wendy's is the acceleration of its digital programs, including POS technology. The challenge today for Wendy's is that consumers online are not validating this progress.


Here our data revealed something that wasn't discussed on the call. Complaints about wait times at Wendy's are up 23% Q3 over Q2. The most common gripes center around word clusters like "slow" and "20 minutes."

In the final analysis, WEN's solid 3rd quarter was bolstered by the strength and affordability of its menu, in the face of declining grocery prices. Its strategic, selective use of LTOs ("4 for $4 Meal," and 50-cent Frosties) only served to reinforce this branding.

On the flip side of this stability is the aging of its physical locations and outmoded digital and mobile programs, which also hurt the in-store experience. The challenge going forward will be to improve those conditions while still transferring more of the business to franchisers.

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