Wendy's Q3 loss widens to nearly US$4M as fast-food company pays off debts related to selling Arby's chain

Nevin Barich

NEW YORK , November 9, 2011 (Associated Press) – Wendy's Co.'s third-quarter loss widened as the fast-food company paid off costs related to selling the Arby's chain.

Shares of Wendy's tumbled more than 5 percent in early trading to $5.20.

Wendy's lost nearly $4 million, or a penny per share, missing analysts' estimates. In the same period a year ago, when it was still attached to Arby's, the chain lost $909,000, which was break-even per share.

This quarter's loss was largely from costs related to selling Arby's in July, including expenses for cutting jobs and retaining other employees.

Earnings from continuing operations, excluding one-time costs from selling Arby's, came to 5 cents per share. Analysts polled by FactSet expected 4 cents per share.

Wendy's was combined with Arby's for nearly three years, and now has to prove to investors that it can do better on its own.

Though revenue missed analysts' expectations of $617 million, it still rose 2 percent to $611 million.

Wendy's has been reshaping its menu with new ingredients and preparation methods for its salads, hamburgers and the rest of its offerings in an effort to attract more customers. The Dave's Hot `N Juicy burgers, a revamped burger line launched in October, "has exceeded our expectations and will re-establish our leadership in the premium-quality hamburger category," CEO Emil Brolick said in a statement.

The company didn't break down how much of the revenue gain came from the new burgers.

Wendy's also tipped its hand on how it plans to price its menu items to attract the greatest number of customers in a weak economy. Later this month, Wendy's will introduce a new "W" cheeseburger line, which it describes as mid-tier. Prices for those burgers would be somewhere between the 99-cent "value" cheeseburger and the premium Dave's Hot `N Juicy burger, which can cost nearly $6 for the biggest size.

Wendy's has previously talked about taking a "barbell" approach to pricing: offering high-priced and low-priced items to appeal to customers at both the top and bottom. But the new mid-tier burger "fills a gap and gives consumers a way to trade up from 99 cents to a more indulgent cheeseburger," said spokesman Bob Bertini.

Brolick, who will be navigating his first earnings call as Wendy's CEO, is under pressure to re-energize a chain that has suffered lackluster sales and squeezed profit margins over the past few years. Investors will want to know how Brolick, CEO for less than two months, will steer the company compared with predecessor Roland Smith.

Wendy's has previously said it is focused on offering breakfast nationwide. It's the only major fast-food chain that doesn't, and breakfast is one of the few restaurant categories expected to grow over the next decade. Smith had also been interested in expanding Wendy's in more markets outside the U.S., a tack that a variety of companies are taking as the U.S. economy continues to struggle.

It's likely that Wendy's is also interested in expanding its snack and beverage offerings, high-margin items that have helped the much-larger McDonald's Corp. grow revenue throughout the recession and its aftermath.

Like other restaurants, Wendy's is facing a double challenge of higher costs for ingredients and recession-weary consumers who are cautious about spending money on eating out. Even so, the chain managed to improve profit margins at company-operated restaurants to 13.7 percent from 13.4 percent, helped by higher prices on some menu items and trimmed expenses. Brolick noted what he described as "exceptionally high beef costs." The price of feeder cattle is around $1.45 per pound, up from about $1.15 a year ago, according to FactSet.

Wendy's sold Arby's to a private-equity firm in July, saying it needed to concentrate on improving Wendy's rather than trying to revive Arby's. The Wendy's/Arby's Group lost money in seven of the 10 quarters where it reported results as a combined company.

Wendy's tapped Brolick, the chief operating officer of Yum Brands and a 12-year Wendy's veteran, for the CEO job in September. Ten days after Brolick started as Wendy's CEO, Yum announced it would sell Long John Silver's and A&W, the chains that Brolick led, saying they "no longer fit our long-term growth strategy."

Former CEO Smith stepped down after Wendy's announced it would move its headquarters back to Dublin, Ohio, after the breakup. Smith said at the time that he wanted to stay near family in Georgia.

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