Wendy's Is on the Prowl

Yesterday, Wendy's International executives admitted to be on the lookout for new opportunities. Growth rates in the hamburger biz are just not enough to keep investors happy. Without share buybacks, the numbers would look even worse.

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By Todd N. Lebor (TMF TeeTime)
February 13, 2001

Wendy's International (NYSE: WEN), the third-largest hamburger chain in the U.S., is on the prowl for smaller operations that could provide growth, according to Reuters.

Wendy's International is already more than just a hamburger peddler. In 1995 it acquired Tim Hortons, a coffee and baked goods chain with nearly 2,000 locations. The acquisition seems to be paying off. Over the last two years, same-store sales at Tim Hortons have been nearly twice as much as at the flagship Wendy's Old Fashioned Hamburger joints. Similar to its chief competitors, McDonald's (NYSE: MCD) and The Burger King Corp., Wendy's is spreading its wings.

McDonald's picked up the bankrupt Boston Market on the cheap last year and also operates Aroma Cafe, Chipotle Mexican Grill, and Donato's Pizza. Burger King is part of the international food and drinks company Diageo (NYSE: DEO) that includes familiar brands such as Pillsbury, H�agen Dazs, and Guinness.

Last Friday, Wendy's released full-year 2000 earnings per share (EPS) of $1.44 versus $1.32 in 1999. This 9.1% bump in EPS was largely due to share buybacks over the year, as net income only increased 1.8% from $169.6 million to $166.6 million. Same-store sales at Wendy's restaurants worldwide grew 3.2% in 2000 on top of a 6.6% increase last year. The star performance came from Tim Hortons restaurants in Canada, with 8.8% same-store growth.

Management released EPS growth estimates for 2001 of 12% to 15%, but that will definitely require more share buybacks and acquisitions. Revenue growth is projected to come in between 8% to 10%. The company is looking for same-store sales growth in the range of 3.0% to 3.5% for Wendy's and 5.0% to 6.0% for Tim Hortons. Management is also looking for "productivity enhancements" to offset rising labor and food costs.

With only 5,800 Wendy's restaurants worldwide, Wendy's has plenty of room to grow. McDonald's is still adding more than 1,000 restaurants per year, mostly in international markets, while Wendy's only had about 450 hamburger joints outside U.S. boarders as of year-end. During the year, the company opened 286 new Wendy's in the U.S. and only 81 elsewhere -- compared to Mickey D's, which opened less than 10% of its new locations in the U.S. Tim Hortons is nearly exclusive to Canada but is trying to expand into several U.S. markets, such as upstate New York, central Ohio, and Michigan.

At half the number of restaurants as Burger King and 20% of McDonald's, Wendy's is in a distant third place. It's probably destined to remain the No. 3 burger-slinger for a long time to come due to industry growth rates.

Just looking at the five-year chart of Wendy's and McDonald's reveals that these stocks have been about as good for your portfolio as they have been for your cholesterol level. Both stocks are up less than 20% for the five-year period -- and that's not annualized! With a business model that takes 10 years to double revenues, don't expect any sudden moves in market position.

Todd Lebor is a co-manager for the Rule Maker Portfolio and lives in Alexandria, Virginia. At the time of publication, the writer did not own shares in any companies mentioned avove. Todd's other holdings can be found online, along with the Fool's complete disclosure policy.

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