Wendy's cuts forecast after 'disappointing' 1Q results
The Wendy’s Co. revealed during Tuesday’s first-quarter earnings conference call that the brand’s attempt to entice customers from its value menu up to the mid-priced W cheeseburger backfired and led to disappointing results, prompting the company to lower its full-year earnings guidance.
Chief executive Emil Brolick said the development and marketing of the W cheeseburger was meant to address an imbalance in the chain’s barbell menu strategy, which had become weighted toward the My 99-cent Everyday Value Menu too heavily. However, rather than encourage value menu customers to trade up to a W at $2.99, the sandwich cannibalized sales of its premium counterpart, Dave’s Hot ‘N Juicy cheeseburger, which starts at a recommended price of $3.69 for a single.
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“The thought process was — and we recognize it wasn’t the right process — that we have this gap between our 99-cent items and our premium products, and can you create a mid-tier and get trade-up,” Brolick said. “But those 99-cent shoppers generally are 99-cent shoppers, and you’re not likely to move them up to $2.99. The W had low levels of drag-along sales of French fries and soft drinks. The positioning of the product was just not the right positioning.”
The negative impact of the W on Wendy’s sales mix, combined with food cost inflation of 2.2 percent in the first quarter, decreased company-operated profit margins by 1.6 percent to 11.8 percent of sales and led to sales that came in below expectations, the company said.
For the April 1-ended first quarter, Wendy’s net income was $12.4 million, or 3 cents per share, compared with a $1.4 million loss a year earlier that resulted in break-even earnings per share. The company’s sale of its investment in Jurlique International, a skin care company, benefited earnings per share by 2 cents, the company said.
Revenue increased 1.8 percent to $593.2 million, compared with $582.5 million a year earlier. Same-store sales rose 0.8 percent at company-operated locations in North America and 0.7 percent at franchised locations.
Wendy’s adjusted its full-year guidance for earnings before interest, taxes, depreciation and amortization down to a range between $320 million and $335 million.
Despite the rough start to the year, Brolick and chief financial officer Steve Hare expressed optimism that several initiatives from Wendy’s “Recipe to Win” would ensure that the brand reaches its new targets during this transition year and sets itself up for future growth:
• Pricing adjustments. Wendy’s already has tried to correct course on the W cheeseburger by raising the price from $2.99 to $3.19. It will no longer promote the W.
Further adjustments to the My 99-cent Everyday Value Menu are being tested, with the goal of maintaining visits from current value-conscious customers while also being more accretive to margins, Brolick said.
“We are not moving away completely from the 99-cent menu,” he said. “We are going to narrow it a bit, but the goal is to go through a testing protocol so we don’t lose a lot of our 99-cent customers.”