Quick-service restaurant chain The Wendy's Company (NASDAQ:WEN) released fourth-quarter 2018 earnings on Thursday before the markets opened for trading. While revenue tacked on a mid-single-digit increase against the prior-year period, operating profit declined as higher costs ate into company margins. Capping a credible if somewhat lackluster report on the last three months, management offered shareholders a middling yet realistic outlook for 2019. Let's review the details of the quarter and dissect Wendy's guidance for the current 12-month period.

In the discussion that follows, note that all comparative numbers are presented against the prior-year quarter (the fourth quarter of 2017).

Wendy's: The raw numbers

Metric Q4 2018 Q4 2017 YOY Growth (Decline)
Revenue $397.8 million $383.9 million 3.6%
Net income $18.8 million $142.1 million (86.8%)
Diluted earnings per share $0.08 $0.57 (86%)

Data source: The Wendy's Company. YOY = year over year.  

What happened this quarter?

  • North American same-store sales eked up just 0.2%, finishing the year with growth of 0.9%.

  • North American systemwide sales improved by 3%, while international sales (excluding the highly inflationary economies of Venezuela and Argentina) expanded by 12.1%, combining for total global systemwide sales growth of 1.9%.

  • The company opened a net of 37 North American restaurants and five international restaurants; this tally of 42 global openings was a bit off the pace of the 48 global units Wendy's opened in the fourth quarter of 2017.

  • Operating profit dipped 21% to $45.8 million. Competition in the quick-service restaurant industry -- exacerbated by the rising use of value meal promotions, as well as climbing costs -- resulted in weaker profit, as Wendy's reported a 7.5% increase in cost of sales. General and administrative expenses also rose significantly during the quarter.

  • The wide difference in net earnings between the current and prior-year periods seen in the table above results from a one-time tax benefit of $121.6 million due to U.S. tax legislation, which the company recorded in the fourth quarter of 2017.
  • Wendy's raised its quarterly dividend payment by 18% to $0.10 per share, effective from the March 2019 dividend payment. At current share prices, Wendy's annualized dividend sports an attractive yield of 2.2%.

  • The company announced a planned $25 million investment in its digital platforms in 2019 to spur sales. The investment consists of $15 million for improving the customer experience across the organization's digital assets and $10 million for the purchase of digital scanning equipment for Wendy's North American stores.

An exterior shot of a renovated Wendy's restaurant with a background of clouds and blue sky.

Image source: The Wendy's Company.

What management had to say

In Wendy's earnings press release, CEO Todd Penegor reflected on the completed year, and listed management's critical goals for 2019:

We are proud of the progress we made in 2018 to strengthen our brand by ensuring more customers enjoy Wendy's more often including expanding our number of restaurants, reimaging existing restaurants, and executing a well-balanced marketing approach that strives to drive profitable growth for our franchisees. Our resilient business model generated significantly higher cash in 2018, and we continued to reward shareholders by returning $350 million through dividends and share repurchases. In 2019 we will continue to build our foundation for growth by executing a balanced marketing approach that resonates with today's consumer, driving operational excellence across the organization, investing in our consumer facing digital capabilities, and further developing our global growth strategy.

Looking forward

Despite Penegor's positive outlook, on a quantitative basis, management remains cautious given both the uncertain outlook for continued global economic growth and competition from peers in North America. For 2019, the company expects global systemwide sales growth of 3% to 4%, which at the midpoint would simply equal 2018's 3.5% expansion.

Wendy's anticipates adjusted EBITDA growth of 2.5% to 4.5%, against 6.5% EBITDA growth achieved in 2018. Free cash flow is expected to rise slightly, from approximately $231 million in 2018 to a range of $230 million to $240 million in 2019.

While Wendy's presented a muted outlook today, shareholders can at least appreciate that projections are grounded in reality. Rising raw material and labor costs are forcing restaurants to raise prices, even as long-term trends show a slight decline in the number of people eating out versus eating at home. Last month, limited-service restaurants raised menu prices on average by 0.4% -- the biggest one-month jump in roughly a year.

In other words, caught between the need to nudge up core menu prices and the necessity of competing with one another on value offerings, fast-food chains will experience a challenging growth environment this year. Wendy's has forecast its results accordingly.