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Frosty times

Wendy\'s may be on the block despite improvements



When he got up to speak at his company’s shareholder meeting in April, the applause was so subdued that Wendy’s Chairman James Pickett had to urge more intensity out of the audience. “Come on, a little more enthusiasm, we have great news for you!” he said.

This is not an uncommon problem for Wendy’s these days. Despite improving financials, company management is struggling to convince some key investors, analysts and even some franchisees that its moves to reinvigorate the brand are enough. “I think in most cases there is a recognition that we need a more dramatic turnaround than we have had to date,” said Dave Norman, chief financial officer for DavCo, a large franchisee based in Silver Spring, Md., with more than 160 stores throughout the Mid-Atlantic States.

Included in the company’s most recent financial report was an announcement that Wendy’s could be on the block. The Ohio-based restaurant chain said a committee of its board would explore “strategic alternatives” for its future. Such alternatives could include either a recapitalization or a sale. The announcement sent the company’s stock price skyward 16 percent the day after it was made.

Not everybody welcomed the news. Management was clear when asked at the shareholder meeting that the talk of a possible sale was a “board decision,” and noted that its sole focus was on its rebuilding plan. Also at the meeting, family members of Wendy’s iconic founder Dave Thomas said they did not like the prospect of a sale. “I hope it doesn’t happen, but everything is going to work out the way it’s meant to be,” Wendy Thomas, Dave’s daughter and the chain’s namesake, told the Associated Press.

Yet there is little disagreement that Wendy’s has a long way to go before it fully emerges from its long slump.

Founded in Columbus, Ohio, in 1969, Wendy’s could do no wrong for many years. By the early part of this century, the nation’s third-largest hamburger chain was threatening Burger King for the No. 2 slot, and McDonald’s was even looking over its shoulder. “In some ways they were acting like No. 1 and McDonald’s was acting like No. 2 and Burger King wasn’t even in the ballpark,” said Chris Muller, director of the Center for Multi-Unit Restaurant Management at the University of Central Florida.

Then the company suffered numerous setbacks, some of which were beyond the company’s control, not the least of which was Thomas’ death in 2002. The affable Thomas, who had engineered Wendy’s reputation for quality and innovation, was the face of the franchise on its television ads and became an American icon with his folksy charm. “He was their soul,” said Muller. Another blow was the 2005 incident in which a San Jose woman said she found a finger in her chili—an accusation that would prove to be false, but Wendy’s was criticized for not acting quicker in defending itself.

Many of its problems were self-inflicted, however. In 2002, Wendy’s bought Baja Fresh, the California-based Mexican food chain, but couldn’t get the brand off the ground. Same-store sales plummeted and the chain lost money. Last year Wendy’s sold Baja for $31 million—a fraction of the $275 million it paid for the chain.

DavCo’s Norman said operating margins also began deteriorating in 2002, though company revenues kept increasing, masking the problem—especially at Tim Horton’s, the high-flying Canadian doughnut chain Wendy’s merged with in 1995. Then, in late 2004, Wendy’s revenues began declining. Same-store sales—a key measure of company health—fell as much as 5 percent or more at company and franchise locations for nearly two years.

Some believe Wendy’s lost its identity. Competitors like McDonald’s and Burger King improved their restaurants and added premium sandwiches, taking away from Wendy’s traditional market for quality. And the company struggled to recover from the loss of Thomas. Muller said the company didn’t build on Thomas’ legacy. “They walked away from the brand,” he said.

Wendy’s struggles led to a high-profile push for changes by one of its largest shareholders, Nelson Peltz, of Trian Fund Management, which owns 8.3 percent of company stock. At Peltz’s urging, Wendy’s placed three of his appointees to its board, sold Baja Fresh and spun off Tim Horton’s. Company CEO Jack Schuessler stepped down in April and was replaced by Kerrii Anderson, who had been CFO since 2000.

The company began closing under-performing stores and started focusing on improving franchisee relations, promoting former franchisee Dave Near to its chief operations officer. It also added new items to its menu, including Frescata sandwiches, which helped Wendy’s reverse its two-year same-store sales slide with a slight increase in the second quarter of 2006. The company plans another 10 new products this year, half of which have already been introduced, including the Frosty Float and the Steakhouse Double Melt.

Now the company wants to target the kids market with improved children’s meal options. And, Wendy’s plans to take another shot at the $30.5 million breakfast market, one in which it tried and failed to enter in the 1980s. The company offers breakfast in five markets and plans to expand it to half of its stores by 2008.

Malcolm Knapp, a restaurant consultant out of New York, believes that Wendy’s has a good shot at making it in the breakfast market this time around. “That will give them a nice lift,” he said. Others are skeptical, noting that breakfast is increasingly competitive and Wendy’s would have to go against not just McDonald’s, but Starbucks. “They may be coming late to the party,” said Ron Paul, president of Technomic, the food-consulting firm out of Chicago.

Norman said breakfast would help franchisees leverage their fixed costs. “It’d be great if we had a highly-profitable breakfast rollout,” said Norman, who nonetheless said that breakfast could be a problem if it cannibalizes the lunch business.

So far, Wendy’s efforts appear to be working. Revenues increased 2 percent in the first quarter. Same-store sales increased for the fourth straight quarter, by 3.8 percent for company-owned restaurants and 3.7 percent for franchises. And comparable net income increased from a loss of $5.9 million last year to a $14.5 million profit this year.

Still, the company’s stock price hasn’t quite responded to the improvements and Norman said its profit margin has a long way before it returns to its 2002 glory days. Amid the continued pressure, Wendy’s created a board committee of independent directors, led by Pickett, to explore options. Those options could include a change in Wendy’s strategic plan; a merger or a sale, and the company said there is no guarantee that any changes will come out of the committee’s work.

“A number of stakeholders have offered suggestions about strategies to improve performance and create additional value,” Pickett said in the company’s announcement. The board gave no timetable for its work, and company officials declined to comment for this story.

Reports after the announcement speculated that Peltz might be behind the drive, though Knapp said that independent board members could have orchestrated the move in part to fend off a future sales push.

Wendy’s announcement did come a week after Triarc Companies announced the sale of its asset management business, Deerfield & Company, so it could focus solely on its chain of 3,200 restaurants: Arby’s. Triarc also made known its desire to increase its presence in the restaurant industry, noting that it is “considering financing opportunities to further its goal of significantly increasing value through the acquisition of other restaurant companies.”

Peltz is Triarc’s CEO, at least until he steps down at the end of June, and there is considerable speculation that Triarc could make a play for Wendy’s.

Other possibilities could include Yum! Brands, which helped revitalize several chains, including Pizza Hut, KFC and Taco Bell, said Muller. Or a private equity fund could buy the company and take it private, which would free the chain from investor pressure often found on Wall Street.

Knapp, for his part, doesn’t believe that this is the time for Wendy’s to sell—and he also believes that the company may not have its heart set on the idea, given management’s recent performance improvements. “They’re in the middle of a turnaround,” Knapp said. “This is not the time to sell.”

Norman said a company that buys Wendy’s could have the motivation required to make the changes necessary to improve the company’s fortunes—so long as its purchase price isn’t so high that it is saddled with too much debt. “A new buyer is going to be motivated to do the types of things that the franchisees have been calling for the past couple of years,” he said.

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