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Wendy's Earnings: 3 Things to Watch

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Founded by the legendary Dave Thomas in 1969, Wendy's (NASDAQ: WEN  ) , has been a square-burger staple in the American food industry for forty-four years. Wendy's is currently the world's third largest quick-service hamburger company, and it's aiming to distance itself from rivals such as McDonald's (NYSE: MCD  ) and Burger King (UNKNOWN: BKW.DL  ) . 

As the company is fast approaching another critical earnings report, investors should be looking at three critical factors to help determine if Wendy's is turning the corner.

Are franchise sales paying off?
In its most recent quarter, Wendy's announced a plan to sell 425 of its company-owned stores to franchisees. The move should drop Wendy's total store count to about 15%, and would have a direct impact on Wendy's bottom line. 

This isn't exactly a novel concept. In fact, Burger King just reported earnings that grew 35%, largely due to a well executed sale of 519 locations to franchisees. As the traditional fast food industry stalls, even McDonald's recent sales have been essentially flat, cost cutting measures are being explored by all of the players involved. 

While the franchise sales will only help profits in the short-term, Wendy's still needs the cash, so it will be important to hear how the move is progressing.

How are the new restaurant design concepts being perceived?
If you're a relative newcomer to Wendy's stock, you may be wondering why it needs to generate all that cash from franchise sales. In short, Wendy's is hoping to be a lot less like its traditional competitors.

During the last quarter, CEO Emil Brolick stated that a large portion of the proceeds from the franchise sale would be used for new store design efforts. Through the new designs, and its relentless ad campaigns stressing its quality ("now that's better!," etc.), Wendy's is trying to rebrand itself closer to fast-casual chains like Chipotle (NYSE: CMG  ) and Panera

It's no surprise why Wendy's would want to associate itself with a healthier crowd. Traffic in the fast-casual sector has grown 8% over last year, dwarfing fast food growth of just 1%. I think this is due largely to a tipping point in consumer sentiment; people have simply decided to be much more conscious of what they're putting in their bodies. Typical fast food consumers, are now looking for a healthier option.

Wendy's is looking at chains like Chipotle, which recently reported a ridiculous quarter in which same-store sales rose 6.2%, and salivating over the prospect of similar growth. In Wendy's opinion, up-scale looking restaurants and pretzel bun, "pub-style," gourmet sandwiches, are a means to that end. 

Will consumers buy it? I don't know, but we'll want to hear an update from Mr. Brolick on the progress of this transformation.

Won't someone think of the dividend?
In its most recent quarter, Wendy's dividend increase to $.05 was perceived, largely, as great news. I can see why analysts would think this, as Wendy's traditionally competes with chains like McDonald's; and McDonald's has raised its dividend four times in three years, at an average rate of 14%. 

However, Wendy's has told us that it wants to transform its brand. I've been very critical of Wendy's dividend, as I feel its only purpose is to placate antsy shareholders, and I still don't get it. The company obviously needs capital; it lacks the scale and breakfast menu to compete with McDonald's, and it must invest in new designs and menu options to compete with Chipotle and company.

It is baffling that the company would raise capital through franchise sales, while simultaneously increasing its dividend. Wendy's management must know that small moves toward a healthier brand will do very little; McDonald's and Burger King have already made small moves, with healthier menu options. Wendy's plans to break-free from the burger joints makes sense, so why squander the much needed cash?

I was reassured, at the very least, that the recently announced Q3 dividend was not increased.

Here's hoping that an analyst on the call finally asks Wendy's management why they feel a dividend is necessary. At the very least, listen for reassurance that it will stay put for some time.

It may sound crazy, but if you're an investor in Wendy's, a dividend increase could actually be a "sell" signal at this point. The company needs to reinvest capital if it ever hopes to grow measurably. 

Accountability is the key to success
Wendy's is in the midst of a transformation project of sorts, and investors should try to determine if it's for real. Watch for these three keys, they'll tell you if Wendy's management is following through on their promises from last quarter.

With any "turn-around" story, accountability to you, the shareholder, is critical to success.

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