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Wednesday, July 6, 2011

The Beef Stops Here...

Taking time off for the July 4th weekend was probably one of the best decisions I made all year. It is incredible how one can get caught up in the day to day minutia of the markets and you don’t even realize how cluttered your mind becomes with information. The longer you go without taking a break to recharge the old batteries the more you become like those Bing! search engine ads with the people spouting off useless information when asked a question. So for me and the family it was off to one of the best summer places I can think of in New England, which would be Narragansett, RI.

 I won’t go in to much detail about Narragansett except to tell you that it is a wonderful town to vacation in during the summer and the town beach is perhaps one of the best family friendly beaches I have ever been to. The beach itself is a wonder of nature with a long stretch of white sand bordered on one end by the old Seawall and the Narrow River on the other end.  There really is something for everyone there from surfing, building sand castles, floating in the river to just sitting with your beach chair in the water as the tide goes out.

Well to make a long story short while down in the Isle of Rhode we were searching for a place to get a roast beef sandwich quickly as in fast food.  Initially we were told that we should try Walt’s roast beef a local “mini” chain but the nearest one was too far. At this point we decided to check and see if there were any Arby’s located nearby as they have been affiliated with Wendy’s for a while and I would have thought there would have been more locations nearby. So after doing a little searching I found out two things first that the nearest Arby’s is located in Massachusetts and that Wendy’s was also miles away.

Now I have followed Wendy’s stock for a while as I have long felt that in this down economy fast food places would benefit as a result of their ability to provide larger portions of food at less cost than healthy alternatives. It is sad but true that there are many among us who are either filling in meals or forced to essentially live off “the dollar menu.”.  The trend is what it is and it has and continues to enrich the shareholders and owners of companies like McDonalds (NYSE :MCD) and Yum Brands (NYSE :YUM).  I am not looking to get in to the negative health aspects for those that do utilize fast food as a staple as there are many issues , like obesity or excess sodium. Fast food is just that a meal on the go and I don’t believe that it was ever intended to be a lifestyle choice but unfortunately economics sometimes trumps good decision making.

Back to Wendy’s which has been in existance since I was a kid. In keeping with the spirit of July 4th the story of Wendy’s depicts a true American success story. The founder Dave Thomas started Wendy’s in 1969 in Ohio and became a household name just a few years later.  Thomas focused on quality and presented himself in many of the ads. Wendy’s first giant leap in popularity came in 1984 with the unbelievably popular and very humorous “Where’s the beef?” campaign. For those of you too young to remember the commercial featured a then elderly lady, think it could be your grandmother, looking at a very skimpy burger asking the now famous question. As a result of the commercials the Wendy’s franchise grew nationwide. 

Later on by the 1990’s Thomas was out in front of the cameras doing his own commercials and his folksy style connected with people and Wendy’s continued to grow.  By the time Thomas died in 2002 he had appeared in some 800 commercials and 9 out of 10 Americans knew who he was and his restaurant chain.

Triarc a holding company, run by Nelson Peltz, was attempting to change itself from a holding company in to a true food company.  Over the years building the food empire Triarc acquired Snapple, Royal Crown Cola, Mistic Brands and Cable Car Beverage Company.  In 2008 Wendy’s International was acquired by Triarc in an attempt to become a full service food and beverage company. The acquisition of Wendy’s added about 5,200 restaurants to the Arby’s Group’s holdings of 3,700 locations.

 Triarc brought together the Wendy’s and Arby’s brands, but the latter has been a drag on earnings for a long time. Then on June 13, 2011 it was announced that Wendy’s\Arby’s group was selling the majority of its Arby’s chain to Roark Capital Group, although they will retain an 18.5% stake in Arby’s. Retaining the stake allows them to participate in some of the upside should Roark engineer a turnaround.  Roark is spending $130 million in cash and assuming $190 million in debt to acquire the Arby’s business. In the meantime Wendy’s appears to be the value trading essentially at book.

The problem for Wendy’s is both that Arby’s was underperforming and they had lost their focus. The latest ad campaign “You know it’s real” is an improvement over some of the prior ones. If Wendy’s can get back to focusing on the core business and the “mop bucket” mentality that Dave Thomas brought to the fore then a turnaround is in the making. Wendy’s will have to look at its menu and offer the old classics and introduce some new items to draw in new customers. Over the years Wendy’s has stressed the idea of fresh and better quality and in this author’s opinion the management needs to raise the stakes to compete.  Wendy’s has fallen from the third largest fast food chain just a few years ago  to number 7 at present so there is room to grow.

So what this all boils down to is two things. First, the question is whether management will stay focused and make the right decisions to bring Wendy’s out of its funk. They have to execute as management no longer will have the crutch of Arby’s lackluster earnings and sales to hide behind.  Second, Wendy’s will have to evaluate their business model to see what is working and revamp that which is not in order to improve margins .

With the off loading of Arby’s I believe Wendy’s is in a competitive position and will have reduced its debt load as well as gained an infusion of cash. The market apparently agreed as the shares surged today almost 5% on more than double normal volume. Looking at the weekly chart for Wendy’s the stock has been in a chop with a slight upward bias above its 40 week moving average. The daily chart is no work of art and one can clearly see the choppiness and the near term bottom established with the June 13th announcement of the Arby’s divestiture.

 Today’s breakout on heavy volume looks good and if one is so inclined to speculate on a turnaround story then you could take a flier on Wendy’s.  I would keep the position on a tight leash and pay no more than $5.75 using a 15% trailing stop. If management has learned from the 3 year union that has ended in divorce then the growth potential is there. Wendy’s has many obstacles to overcome but the potential is huge. Maybe we will not be asking “Where’s the beef?” but instead “The Beef Stops Here!”
Wendys - Daily Chart Click on Image to enlarge

Wendy's Weekly chart - Click to enlarge

Pictures of Narragansett Beach if anyone is interested

The Famous Narragansett Towers and the old Sea wall in front..
Beach with the Narrow River in the backround

Some surf too
Looking from the Narrow River back to the beach

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