Baja Humbug at Wendy's

My wife and I are huge fans of Wendy's (NYSE: WEN  ) Baja Fresh Mexican fast food. Ever try the Baja Burrito Ultimo with chicken, sour cream, and guacamole? Mmmmmm, tasty. Sadly, we seem to be in the minority.

Yesterday, Wendy's reported a fourth-quarter loss of $135.7 million, or $1.20 per diluted share. That compares poorly with a profit of $64.7 million, or $0.56 per diluted share, for the same period a year ago. The primary culprit in the downturn was $190 million in goodwill impairment charges for the Baja Fresh chain. But even without the write-off, Wendy's would have earned only $54.3 million, or $0.48 per diluted share. That's 16% lower than last year's fourth-quarter net income.

Investors reacted poorly to the news as Wendy's share price slipped by more than 5% yesterday. Don't expect a recovery soon, either: The company said it will expense stock options in the upcoming first quarter and restate earnings to simplify historical comparisons with options expensed. Options costs would have reduced 2004 earnings by $0.14 per share and 2003 income by $0.12 per stub.

Frankly, I find the Wendy's story fascinating. The company says that the Baja Fresh franchise does well on the coasts but hasn't thrived in other areas. Plus, its higher-end offerings require pricier ingredients, and that's proved costly. Yet each of these problems is fixable. And that's good news. After all, every good business runs into temporary trouble now and again. It's those instances that create the stock market discounts that have made bargain-shopping investors rich over the decades. Could Wendy's get placed on the discount rack? Don't bet against it.

For related Foolishness:

Fool contributor Tim Beyers thinks Baja Fresh is the best of Wendy's fast-food offerings. What do you think? Share your thoughts with other Fools at the Wendy's discussion board. Tim didn't own shares in any of the companies mentioned in this story at the time of publication. You can find out what's in his portfolio by checking Tim's Fool profile. The Motley Fool has a disclosure policy.


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