Wendy's profit falls in 1st quarter as burger chain loses market share in value menu category

NEW YORK, N.Y. – Wendy’s is trying to reinvent itself as a purveyor of relatively higher-quality fast food. The problem is that its competitors are aggressively promoting cheap eats and stealing away price-conscious customers.

The Dublin, Ohio, company, which is known for its square hamburger patties and Frosty shakes, on Wednesday reported a first-quarter profit that met Wall Street expectations. But sales fell short of Wall Street’s hopes. The company noted that it lost market share in the value category, which accounts for about 20 per cent of the fast-food industry.

In a conference call with analysts, CEO Emil Brolick said Wendy’s plans to adjust its marketing to emphasize the 99-cent portion of its revamped “Right Price, Right Size” value menu, which offers options ranging from 99 cents to around $2. The company had replaced its 99-cent menu in January to boost profit margins and give its franchisees more flexibility in pricing.

Brolick emphasized that the company’s push to underscore the quality of its food remains a priority. The effort in part reflects the growing popularity of chains such as Chipotle and Panera, which offer food perceived to be of better quality and that commands higher prices.

But at a time when people are still being careful about their spending, Brolick added that Wendy’s also needs to keep reminding people about its cheaper options.

“Because let’s face it, there are a lot of other people who are,” he said.

For the January to March period, Wendy’s said sales at established company-run stores in North America rose 1 per cent, with higher prices offsetting a decline in transactions. The company said bad weather and shifts in the timing of the New Year and Easter holidays hurt its results.

At franchised stores, the metric edged up 0.6 per cent.

This figure is a key gauge of a restaurant operator’s performance because it strips out the impact of newly opened and closed locations.

McDonald’s, meanwhile, said Wednesday that sales at established restaurants rose 0.7 in the U.S. for April, helped by its new chicken McWraps and value menu. Wendy’s noted that it also has several new items planned, including its “Frosty Waffle Cones” that were introduced this week.

To recast itself to be more in line with fast-casual chains, Wendy’s is also investing heavily in remodeling its restaurants to have a modern, inviting look. For example, the new layouts include cozier seating areas, flat-screen TVs and fireplaces.

The company said it still expects to remodel half of its company-run restaurants by the end of 2015. Wendy’s has more than 6,500 locations, most of them in North America. In the U.S. and Canada, about 1,600 of them are company-run.

But Wendy’s is undertaking an image makeover at a tough time for the restaurant industry, with companies fighting over every dollar. McDonald’s is touting its Dollar Menu, and Burger King is offering two sandwiches for $5 and Whopper Jr. burgers for $1.29.

For the period ended March 31, Wendy’s earned $2.1 million, or a penny per share. That’s down from $12.4 million, or 3 cents per share, a year earlier. Last year’s quarter included a gain of $18 million, or 5 cents per share, on the sale of an investment. Excluding certain items, including remodeling costs, earnings in the latest quarter came to 3 cents per share, in line with Wall Street expectations.

Revenue rose 2 per cent to $603.7 million versus a year ago but fell short of the $615 million forecast of analysts polled by FactSet.

Wendy’s Co. cited a refinancing benefit for raising its 2013 adjusted earnings outlook to 20 cents to 22 cents per share, up from 18 cents to 20 cents per share. Wall Street had predicted 19 cents per share.

Its shares fell 34 cents, or 5.6 per cent, to close at $5.78 Wednesday. They have traded in a 52-week range of $4.09 to $6.19.


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