Lately, sales have only been cooking at Wendy's (NYSE:WEN) donut-and-coffee franchise Tim Horton's. Its flagship brand's revenues continue to lack sizzle, and it may need to add more chipotle sauce to its menu to get sales at its Baja Fresh chain to take off. It seems that Wendy's is exploring other options to spice up business at its Mexican-food division, but will they truly add some fire to Baja Fresh's operations?
Management certainly noticed the success of McDonald's (NYSE:MCD) own Chipotle Mexican Grill (NYSE:CMG) spinoff. The burrito chain's share price doubled on its first day of trading, closing at $44. So it's hardly a surprise that Wendy's announced it would be exploring "strategic alternatives" for the Baja Fresh brand. Though the company didn't clarify what it meant by that, the phrase is usually code for "selling" or "spinning off."
The difference between the two progeny is that Chipotle had rising sales leading up to its emancipation, while Baja Fresh is in decline. As Rick Munarriz noted last month, Chipotle had rising comps, an increasing store count, and 33% sales growth over the first nine months of 2005. Contrast that with Baja Fresh's soggy performance, including slowly dwindling store counts, same-store sales off 3.7% for the year, and sharply declining revenues, down more than 10% for 2005. Investors were appropriately eager for the McDonald's scion, but one has to wonder how they'll receive Wendy's offspring.
McDonald's also retained a significant ownership stake in its chain. Chipotle's IPO offered 6.1 million shares, and though McDonald's sold 3 million of its own Chipotle shares, it still remains a majority shareholder. As I noted the other day, when management retains a large claim in the new company, it may signal the parent company's interest in its spinoff's success.
Wendy's seems to have other ideas, however. In a push to meet investor governance concerns, the hamburger chain appointed three new directors to its board. Back in December, some of those investors had filed a statement with the SEC urging Wendy's to fully divest itself of Tim Horton's, Baja Fresh, and another small chain the restaurant had acquired, Cafe Express. Management had initially intended to retain a stake of at least 80% in Horton's, but now it seems that it will spin off the entire chain within nine to 18 months. And with Tim Horton's showing increasing sales, its IPO could be just as popular as Chipotle's.
CKE Restaurants (NYSE:CKR) is also in the mix with its own La Salsa chain, and it's proving to be a crowded field. The restaurant industry's fast-casual market is projected to reach sales of $70 billion this year as roughly 150 chains vie for your dollars, including Quiznos and PaneraBread (NASDAQ:PNRA). Fresh-mex chains like Baja Fresh are also pitted against Mexican-style restaurants like Brinker's (NYSE:EAT) Chili's and Yum! Brands' (NYSE:YUM) Taco Bell. The fast-casual places use premium ingredients and offer a more upscale ambience than fast-food joints, but charge higher prices like their sit-down restaurant counterparts.
Baja Fresh's customers seem willing to shell out the extra green, but will investors similarly pay a premium market price -- especially for an apparently declining brand?
We've spiced up further Foolishness:
- McDonald's Burrito IPO
- Soggy Performance for Wendy's
- Finding the Next Chipotle
- Holy Burrito, Chipotle!
Fool contributor Rich Duprey does not own any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.
