Wendy’s to sell 425 units to franchisees

Buoyed by optimism over its new Pretzel Bacon Cheeseburger, shares of Wendy's Co rose to their highest in more than five years on Tuesday after the company announced the sale of hundreds of restaurants to franchisees and posted a higher-than-expected quarterly profit.

Wendy's also offered investors a strong sales and profit outlook, and raised its quarterly dividend by a penny to 5 cents a share. Its shares rose 11 percent in mid-day trade.

The sale of 425 company-operated stores to franchisees will cut costs, analysts say, and the proceeds will reassure investors that the burger chain can finance a long-term image overhaul. By the end of 2014, Wendy's will own 15 percent of its restaurants, down from 22 percent prior to the sales.

On the negative side, system-wide sales at established North American restaurants increased by 0.4 percent, well short of the 1.1 percent gain expected by analysts polled by Consensus Metrix that quarter.

The company said the miss was partly because some restaurants stopped serving breakfast in 2012.

Wendy's expects sales in established outlets to increase by 2 to 3 percent by the end of the year.

Analysts at Janney see the Pretzel Bacon Cheeseburger introduced this summer as a big driver in the expected gains.

Wendy's new burger is the latest in a string of extravagant innovations at U.S. fast-food restaurants. It is designed to attract younger consumers, who are less inclined to count the burger's 680 calories than their parents.

"We believe this key menu item will lead to some meaningful acceleration in Wendy's same-store sales that the Street does not currently anticipate," wrote Janney analysts Mark Kalinowski and Amy Babington.

Second-quarter net income came in at $12.2 million, or 3 cents a share, compared with a year-earlier loss of $5.5 million, or 1 cent.

Revenue rose to $650.5 million from $645.9 million.

Excluding debt retirement costs and other one-time expenses, earnings were 8 cents per share, topping analysts' average forecast by 2 cents, according to Thomson Reuters I/B/E/S.

Wendy's said it expected a long-term growth rate in the mid-teens for adjusted earnings starting in 2014, based on the profitability of its remaining restaurants, a more focused market, and cash from the sales.

The restaurants the company is selling off also tend to be locations with lower operating margins in the Western states, said CFO Steve Hare during an investor call. Selling them will allow the company to collect rent and royalties as well as work with about 100 new franchisees on rebranding efforts, the company said.

The chain reaffirmed its prior forecast for full-year adjusted profit of 20 cents to 22 cents per share.

In topping analysts' expectations, Wendy's outshone its main competitor McDonald's Corp, which reported lower-than-expected quarterly profit on Monday, and sees little change in same-restaurant sales in July.

The McDonald's slowdown presents a special opportunity for Wendy's as it prepares to roll out a marketing campaign with a redesigned logo, restaurant renovations and a "Right Price, Right Size" menu.

The new, simplified logo retains the image of a smiling, red-headed girl but uses a more modern font for "Wendy's" and removes the wording "Old Fashioned Hamburgers."

For Wendy's, the Pretzel Bacon Cheeseburger was a well-timed hit, coming as part of a wave of high-calorie menu offerings from the fast-food industry.

In June, Dunkin Donuts introduced a Glazed Donut Breakfast Sandwich, which consists of a fried egg with bacon inside a split glazed donut. A Dunkin Donuts spokeswoman said the sandwich is no longer being promoted, but is available upon request. McDonald's serves a late-night breakfast in some regions. And Burger King Worldwide recently debuted a bacon ice-cream sundae.

Wendy's has not said whether it intends to keep the seasonal burger on as a permanent menu item.

R.J. Hottovy, an analyst at Morningstar, said the pretzel-burger may end up a mere flash in the pan.

"There's always something else coming from other competitors" he said. "In the long term, it won't give anyone a run for their money."