Like one of its stuffed burritos -- Enchilado Style -- Baja Fresh has gotten to be too much and too sloppy for its parent Wendy's (NYSE:WEN). The company will be closing down 18 of its Baja Fresh eateries, with Wendy's taking a goodwill writedown between $175 million and $195 million.
As you will typically notice when a company takes one of these charges, Wendy's is stressing that this is a noncash charge. On the surface, that's true. Good will is a line item that helps balance out the balance sheet when a company makes an acquisition for more than the value of the acquired company's book value.
Yet while it's a seemingly hollow phantom item and marking it down doesn't rough up the company's cash balance, let's not let Wendy's skate away so easily. When a company takes a charge to its good will, it's an admission that, in retrospect, it overpaid when it first bought the other company.
Because of Baja's blunders, fourth-quarter results for Wendy's will show a loss of at least $1.02 a share.
The company has a plan in place to help remedy Baja Fresh's problems. I'm a fan of the chain's grub, yet I have sometimes stayed away because takeout orders take too long unless I call them in ahead of time. I have avoided eating there with my kids because of the elevated seating. So when I hear the chain's CEO talk about improving operating efficiency and adding more family-friendly booths, at least I can nod along and accept that changes for the better are on the way.
However, for Wendy's investors, bigger than the choice of Baja's fresh sauces and salsas is the worthy concern of whether Baja Fresh belongs in Wendy's portfolio in the first place.
It seems as though burger chains like to diversify their concepts with a little action in south of border fast food. McDonald's (NYSE:MCD) kept Chipotle even as it sold off Donato's Pizza last year. Jack in Box (NYSE:JBX) has Qdoba Mexican Grill. CKE Restaurants (NYSE:CKR) has Green Burrito. Why? It's not as though the chains are promoting Tex-Mex burgers on their flagship chain menus.
However, diversity helps. While it's hurting Wendy's right now, the company can point to strength at its Tim Hortons chain. So, sure, while the company may be blurring the definition of "non-cash charge" the way all companies do when they take their whacks at good will, the burger format's volatile ways welcome a little variety to help out during the lulls.
Do you think burger chains should stick to their knitting and not diversify into other concepts? Have the burger wars subsided? All this and more -- in the McDonald's Discussion Board. Only on Fool.com.
Longtime Fool contributor Rick Munarriz has usually enjoyed his meals at Baja Fresh. He does not own shares in any of the companies mentioned in this story. He is a member of the Rule Breakers analytical team, seeking out tomorrow's great growth stocks today.
