Beef costs eat Wendy's profit; chain says 'record-high' costs expected to continue

NEW YORK, N.Y. – Wendy’s says higher beef costs are eating into its profit.

The chain known for its square hamburger patties on Thursday reported a lower-than-expect profit for its third quarter, noting that beef costs were “much higher than our initial projections.” It also said it expects the “record high” costs to continue. A day earlier, Burger King’s biggest U.S. franchisees, Carrols Restaurant Group, said its beef cost rose 32 per cent from a year earlier.

McDonald’s and Chipotle have also said they faced higher beef prices in the quarter and that they expect the pressure to continue.

It’s not just beef costs that are pressuring Wendy’s profit margins. The company, which has more than 6,500 locations, is redesigning its restaurants as part of a push to recast itself as a more premium fast-food chain akin to Panera. Restaurant closings during the renovations hurt overall sales and profitability. But Wendy’s has stressed the new designs ultimately help boost sales.

For the quarter, The Wendy’s Co. said sales rose 2 per cent at company-owned locations, and 0.5 per cent at franchise-owned locations. It attributed the difference to the higher number of company-owned restaurants that have the new look. The increase in sales at company-owned locations was the result of a higher average check, however, which offset a decline in customer traffic.

CEO Emil Brolick also noted the company “lost momentum” in the value segment, which he said accounts for a quarter of the broader fast-food industry. As such, he said the company will more heavily promote its “Right Price Right Size” menu.

“You have to deal with this group of consumers,” he said.

Looking ahead to next year, Wendy’s also expects profit to be pressured by minimum wage increases and the implementation of the Affordable Care Act, which requires large employers to provide insurance to full-time workers. To help offset those pressures, Wendy’s said it plans slash costs by $30 million, primarily through the “realignment” of its U.S. field operations and savings at its restaurant support centre in Dublin, Ohio.

For the quarter, the company said it earned $22.8 million, or 6 cents per share. Excluding one-time items, it earned 8 cents per share, which was a penny shy of Wall Street expectations, according to Zacks Investment Research.

Revenue of $512.5 million also fell short of the $516.7 million analysts expected.

Wendy’s said it still expects full-year earnings in the range of 34 cents to 36 cents per share. Sales are now expected to rise 2.5 per cent at established company-owned locations for the year, down from its previous forecast of growth of 2.5 to 3.5 per cent.