Wendy’s 1

Running head: WENDY’S RESTAURANT FINAL PAPER

Wendy’s Restaurant

Raymond Jackson, George Stroud, Jeff Burch

Indiana Wesleyan University

Alan N. Kronika

Wendy’s 2

Wendy’s Restaurant

Overview and History of Wendy’s and its Product lines

The Wendy's chain of more than 6,600 fast-food restaurants

controls around 13 percent of the enormous beef patty that is the

U.S. quick-serve burger market, making it No. 3 in terms of

market share behind Burger King and McDonald's. On November 15,

1969, Dave Thomas opened his first Wendy’s Old Fashioned

Hamburgers Restaurant in downtown Columbus, Ohio. He wanted to

provide a product that would be served the way his customers

wanted. The idea of creating something new and different in the

restaurant business of high quality and fresh ingredients is what

Dave Thomas believed would separate his business from the others.

Quality was such an important factor to Dave Thomas that he even

included it on the logo. The concept of quality continues to be

the number one priority for each and every Wendy’s.

How was Dave Thomas able to take a one store front

restaurant and turn it into an intentional corporation. With the

eventual success of the first Wendy’s restaurant, Dave began to

expand his operation. In August 1972, Wendy’s sold its first

franchise restaurant to L.S. Hartzog which was located in

Indianapolis, Indiana. To ensure the continual growth of the

Wendy’s brand, Wendy’s started the Wendy’s Management Institute

(WMI) in December 1972 with the purpose of creating a training

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facility to better assist managers, supervisors, and franchisees

with his or her management skills. An important moment in the

early stages of the Wendy’s franchise growth came on September

1976 when Wendy’s offered public stock with over one million

common shares selling for $28 per share on the NASDAQ Exchange.

Also, Wendy’s saw the opening of its 500th restaurant during that

year. After 10 years in the business, the 1500th Wendy’s opened

and they become the first national food chain to introduce a

salad bar. In May 1981, Wendy’s joins the prominent rosters of

public companies listed on the NYSE under the symbol name WEN.

The marketing advertisement campaign of “Where’s the Beef” in

1984 provided Wendy’s with its most successful year to date.

These moves and others helped to propel Wendy’s as a viable

company in the fast food industry.

Some of the Wendy’s signature eatables include Garden

Sensations salads, baked potatoes, Wendy's Old Fashioned

hamburgers and the Frosty which was perfect for dipping one's

Wendy's fries in. After the introduction of the salad bar, on

March 1992 Wendy’s again revolutionalized the industry by

introducing fresh salads to go. Wendy’s began creating fresh

salads that included chicken, deluxe garden, taco, caesar, and

side salad. In 1983, Wendy’s introduces the bake potato to its

menu and it was the first time a national food chain had done so.

Six years later, Wendy’s incorporated some of its costumer

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favorites under one low price of .99 with its super value menu.

Here costumers good get a bake potato, hamburger, fries, and

frosty for under a buck. The innovations of taking the different

food options has allowed for Wendy’s to better serve its loyal

costumers while attracting new ones.

Comments of Senior Management

According to the top officials at Wendy’s, the franchise is

doing very well. They have implemented a chain management system

to increase efficiencies and reduce costs. Wendy’s has hired

Clarabridge Text Analytics Solution to improve its customer

feedback program. They have also placed a key architect with the

implementation of Wendy’s success in a new role to identify and

capitalize on consumer trends. They are continuing to search for

more vertical integration, mergers, acquisitions and/or

investments. These measures and acquisitions will help to keep

the Wendy’s franchise able to streamline new revenue.

“In addition, controlling costs in the restaurant business is critical in order to drive shareholder value. With Corrigo, we will now have a service chain management system in place to drive efficiencies and reduce costs at each step of the facilities management process (QSR, 1/2000).”

"A customer's experience in the restaurant industry is unique in that it can be affected by everything from cleanliness to the speed of service to the taste of the meal itself," said Glen Brandeburg, Wendy's senior vice president of operations integration, innovation and training, in a news release. "We are dedicated to providing outstanding customer service in every restaurant, every day. With the

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growing number of ways customers can communicate with us, we were looking for a solution that would speed our analysis, detect emerging issues and pinpoint troubled areas of our business at the store, regional or corporate level. Clarabridge provides a solution to do just that. Jonathan brings a depth of experience in the M&A area that will be invaluable as we continue to identify business opportunities for the corporation over the next several years,'' said chairman and chief executive officer Jack Schuessler. "He completed nine transactions since 1998 and has worked on several other business opportunities for the Windsor Group and GTE. We are very pleased to have Jonathan join our senior management team. Kathie is one of the key architects of Wendy's success over the past several years,'' said Schuessler. "She has led the evolution of Wendy's menu and new product development, spearheaded our programs to enhance Wendy's quality position with consumers, and significantly improved our supply chain effectiveness. In her expanded role, she will work with Jonathan and our M&A team to develop new business ventures and to identify opportunities to enhance the Wendy's brand. Kathie is an expert in the restaurant and food industry. She brings tremendous depth to our efforts to identify and capitalize on consumer trends,'' Schuessler said. (QSRweb.com, 3/2010)

"We are developing multiple financial options to execute our strategic initiatives,'' said Executive Vice President and Chief Financial Officer Kerrii Anderson. "For example, earlier this year we announced a joint venture between our Tim Hortons subsidiary and IAWS-Cuisine de France. We are investing about $35 million in the JV to build a baking facility in Canada with Cuisine de France to supply our Tim Hortons stores with French baguettes and breads. Other initiatives could include vertical integration, mergers, acquisitions or investments. We want to have the ability to move quickly on opportunities. “We continue to post positive sales increases at Wendy's and Tim Hortons against strong comparisons a year ago,'' said Anderson. "We feel good about our performance considering that the restaurant industry is feeling some impact from tough economic conditions. (QSR, 9/2002)''

Overview of Nearest Competitors

Wendy’s is No. 3 in terms of market share behind Yum

Industries (owners of Taco Bell, KFC, Pizza Hut, Long Johns

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Silver’s, A&W, and others) and McDonald's. Wendy’s biggest

competitors are Burger King, Starbucks, Subway, and McDonalds.

McDonalds is by far the largest fast food chain and when you

compare McDonalds v. Wendy’s there are a few factors that can

show why McDonalds is more successful. McDonalds turn their

inventory every 3 to 4 days where Wendy’s turns theirs every 9 to

10 days. The inadequacies of Wendy’s inefficiency can make

dramatic impact on their bottom line. Shorter cash on hand means

less advertisement, less stores, and it makes it harder to buy

back shares. When investors look at Wendy’s and see their money

tied up in inventory, this can slow down the growth of the

organization.

Economic forecast for the industry

The US fast food industry has steadily become one of the

leading economic industries in the United States, despite the

global financial turmoil. The US fast food industry grew at a

rate of around 4% year-on-year in 2009, and has been witnessing

consistent growth of industry over the past few years. A major

reason for this could stem from research that shows the fast food

industry is growing at a higher rate than the restaurant industry

due to comparative cost advantage and the increasing youthful

population. Leading fast food industry companies are increasing

their spending on promotional activities to expand business which

will continue to boost the nation’s fast-food industry.

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Forecaster’s research shows the US fast food industry is expected

to see a continued growth rate in the near future helped by

Americans busy lifestyle that encourages them to visit fast food

joints. The industry holds promising growth prospects for both

existing and new companies within the industry. The baseline for

the optimistic future outlook of the US fast food industry is the

rise in number of product varieties offered by fast food

businesses. These businesses have started going for international

expansion have began offering promotional deals and discounted

combo purchases in order to bring in revenue

Even with the promising forecast for the US fast food

industry the Wendy’s/Arby’s group has struggled as of late. In

2010 the Wendy’s/Arby’s group experienced a 11.5 percent drop in

first quarter earnings, and although it slightly improved it

still saw a 7.4 percent drop in the second quarter. These have

been among the weakest results reported by a large fast-food

chain corporation. These struggles in the market can stem from

the struggles that both Wendy’s and Arby’s were experiencing

before their merger in 2008. The Wendy’s/Arby’s group is still

working to catch up to its competition who is offering low dollar

value meals which is driving in customers. Wendy’s has fared

better in earnings since it started to promote its $2.99 value

meal along with its $1 value menu.

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Wendy’s been a pioneer in the industry with their

introduction of garden fresh salads in 2002, and has always

promoted the use of their fresh ingredients as a selling point.

These selling points are not working the way they once did which

is prompting Wendy’s to relaunch its breakfast lineup across the

United States scheduled for late July 2011. Analysts say

breakfast is estimated to generate about $6 billion annually or

25 percent of McDonald's U.S. sales each year and if Wendy’s is

able to tap into that market it would be a great boost to the

Wendy’s/Arby’s group.

International markets and forecasts

Wendy’s international is currently located in 25 countries

worldwide. Like the US fast food industry, the global fast food

market is also seeing positive gains on the economic front.

Forecasters have predicted an increase in the global fast food

market to a value of $125.4 billion for 2011. This is an increase

of 22.2% since 2006 and shows an upward trend moving forward for

potential investors. With inflation sometimes an increase in

total value can be misleading, but the fast food market is also

forecasted to have a volume of 86.4 billion transactions in 2011

which would be an increase of 7.6% since 2006. Sales to quick

service restaurants account for 67.4% of the international fast

food markets value. Wendy’s however does not take part in the

global fast food industry as well as others have, such as

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McDonalds has over the years. Wendy’s used to have a restrain

base in Europe but has since pulled out and focused more on the

Caribbean’s islands and the eastern part of Asia. Potential

investors should be aware that Wendy’s does not soar in the

international market as well as other fast food companies do when

they are deciding what to invest in. They must also know that the

Americans do account for 63.1% of the global fast food market

making it the most lucrative of the global markets, which Wendy’s

sits as the 3rd largest fast food company in.

Weighted Average Cost of Capital

How do investors determine the weighted average cost of

capital? It is a calculation of a firm's cost of capital in which

each category of capital is proportionately weighted. All capital

sources common stock, preferred stock, bonds and any other long

term debt are al included in a WACC calculation. If everything is

the same, the WACC of a firm should increase as long as the beta

and rate of return on equity increases. Wendy’s assets are

financed by either debt or equity. Company’s such as Wendy’s

utilizes this information to figure out how much interest the

company will pay for each dollar it finances. Company directors

make use of the WACC in determining the economic plausibility of

expanding the company, or to acquire other entities. The risk

class determines whether the Weighted Average Cost of Capital can

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be used by the firm when assessing projects. The formula used in

determining a company’s WACC is E/V *Re + D/V * Rd*(1-TC)

Re = cost of equity Rd = cost of debt E = market value of the firm's equity D = market value of the firm's debt V = E + D E/V = percentage of financing that is equity D/V = percentage of financing that is debt Tc = corporate tax rate

Wendy’s Weighted Average Cost of Capital was found by using the

valuepro web site. Here it showed that Wendy’s WACC was 6.79%

which could be used to determine the viability of the company is

it decides to invest in future resources.

Characteristics of common stock

On September 29, 2008, Triarc and Wendy’s completed their

previously announced merger in an all-stock transaction in which

Wendy’s share holders received 4.25 shares of Wendy’s/Arby’s

Class A common stock for each Wendy’s common share owned. In the

merger, approximately 377,000.000 shares of Wendy’s/Arby’s Class

A common stock were issued to Wendy’s shareholders. The merger

value of approximately $2.5 billion for financial reporting

purposes is based on the 4.25 conversion factor of the Wendy’s

outstanding shares as well as previously issued restricted stock

awards both at value of $6.57 per share which represents the

average closing market price of Triarc Class A common stock two

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days before and after the merger announcement date of April 24,

2008. Wendy’s shareholders held approximately 80% in the

aggregate, of Wendy’s/Arby’s outstanding common stock immediately

following the Wendy’s Merger. In addition, effective on the date

of the Wendy’s Merger, Class B common stock was converted into

Class A common stock. In connection with the May 28, 2009

amendment and restatement of the Certificate of Incorporation,

Class A common stock was redestinated as common stock

(http://seekingalpha.com).

The number three U.S. fast-food chain made 5 cents a share ex

special charges in third quarter, down 17% from a year ago but a

penny over views. Sales fell 4.7% to $861.2 mil vs. the $882.6

mil analysts expected. Wendy’s said demand for value menu items

fell off when it cut back on advertising. Wendy’s reported a

1.7% drop in the same metric. The firm expects 2010 EBITDA at

the lower end of its previous forecast of a 3%-5% decline

(Business Daily, 2010).

Wendy’s formed a special committee to explore a sale and

other strategies after billionaire investor Nelson Peltz and

former shareholder William Ackman urged the company to boost it

stock price. Wendy’s hired JPMorgan Chase & Co. and Lehman

Brother Holdings Inc. to evaluate potential strategies. Earnings

will be $1.09 to $1.23 a share, compared with a previous fore

cast of as much as $1.32, Wendy’s said. Analysts estimated

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$1.28; the average of 14 projections compiled by Bloomberg

Wendy’s suspended its forecasts for 2008 and 2009. Shares of the

company fell $1.47, or 3.7 percent, to $38.26 in New York Stock

Exchange composite trading, the biggest drop since February.

They have climbed 17 percent since the chain said April 25 that

it might consider a sale (http://www.bloomberg.com). Wendy’s

recently announced that its board of directors increased the

company’s stock repurchase authorization by $75 million to a

total of $325 million. Since the board of directors initiated

the stock repurchase program in August 2009, the company has

repurchased 47 million shares of its common stock for

approximately $223.1 million, at an average price of $4.73 per

share. Wendy’s/Arby’s have approximately $102 million available

for stock repurchases under the board’s authorization. The

increase in stock authorization is encouraging for the share

holders as it is likely to increase shareholder’s value

(http://dailymarkers.com).

Characteristics of bonds

The perceived risk of owning Wendy’s bonds rose. Credit-

default swaps based on $10 million of Wendy’s bonds jumped $8,000

to a record $198,000 today, according to prices compiled by

London based CMA Datavision. An increase in the five-year

contracts suggests deterioration in the perception of credit

quality. Acquirers, particularly leveraged buyout first, often

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finance acquisitions with debt and place it on the target

company’s books, leading to rating cuts. Credit-default swaps

were conceived to protect bondholders against default and pay the

buyer face value in exchange for the underlying securities should

the company fail to adhere to its debt agreements

(http://www.bloomberg.com). A buyout of Wendy’s/Arby’s Group

may cause weakness in the company’s bonds, if an acquisition uses

the addition of new debt in an attempt to spark gains in the

company’s stalled share price. The cost to insure Wendy’s legacy

debt with credit default swaps rose to 215 basis points, or

$215,000 per year to insure $10 million for five years, from 160

basis points before the news, according to Markit Intraday.

Holders of some of Wendy’s bonds are “at risk if this leveraged

buyout goes through,” Vicki Bryan, analyst at credit research

firm Gimme Credit, said in a note. Wendy’s 10 percent bonds due

2016 have provisions that would require the debt to be bought

back in an acquisition. Other bonds, however, don’t have the

same protections and would likely be subordinated to any new debt

taken on to fund an acquisition, she said. The company’s debt

had risen to around $1.5 billion as of April 210, from around

$750 million in March 2008, just before Nelson Peltz bought the

company. Wendy’s refinanced its near-term debt with new term

loan, which is likely to aid it in generating excess cash net of

its debt obligations (http://www.reuters.com). Tightened credit

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conditions and economic pressures have negatively impacted

Wendy’s, including the ability of the company to meet their

commitments under development, rental and license agreements.

Key financial ratios

Wendy’s faces stiff competition in the overall fast food

industry, as McDonald’s holds a dominating 18% share of the

market with Wendy’s and Burger King holding shares of

approximately 2% each. In recent years Wendy’s has been lagging

behind McDonald’s and Burger King in same stores sales growth,

and indicator of how established franchises are faring. In

addition to traditional hamburger-based fast food restaurants,

Wendy’s must compete with chains such as Subway, Yum! Brands and

Jack in the Box. The table below is Wendy’s financial ratios

compared to the number one competitor, McDonald.

Wendy’s McDonald’s

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The competition among fast-casual restaurants is expected to

remain fierce with respect to price, service, location and

concept in order to drive traffic, which may adversely affect

Wendy’s/Arby’s Group restaurant operating margins and profits.

Wendy’s/Arby’s anticipate commodity inflation of 2% to 3% in the

second half of 2010. Thus, a rise in commodity prices will

negatively impact the margins of the company. The company

expects Wendy’s margin to expand year over year in 2010, but

decreased it to 70 to 90 basis points as compared with its

previous guidance of 90 to 110 basis points

(http://research.investingminds.com).

Conclusion

After reviewing the facts, we recommend a person should

invest in the company. There are strategic growth opportunities

at Wendy’s and Arby’s brands, including international development

under dual-brand restaurants. Dual brand units, combining

Wendy’s and Arby’s under one roof, can generate higher sales

volumes and better return on investment, and provide a

development opportunity in high cost real estate markets in the

U.S. Wendy’s/Arby’s Group remains on track to achieve adjusted

EBITDA growth in the mid-teens range in fiscal 2011 through

improvement of company-operated restaurant margins at the Wendy s

brand and achieving G&A savings target of $60 million on an

annualized basis. Moreover, the cash position of the company is

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solid, as of the end of the quarter Wendy’s/Arby’s has cash and

cash equivalents of $508.4 million. As a result, the company

continues to pay down debt and return value to share holders

through share repurchase and dividend. The company’s goal is to

create superior and sustainable value for stockholders. As

strong cash flow generators, in addition to investing in organic

growth opportunities. Wendy’s believe in the importance of

returning capital to its stockholders. Wendy’s Board of

Directors has authorized a 33% increase in the quarterly cash

dividend. This move further demonstrates a commitment to

delivering stockholder value as well as implementing longer-term

initiatives.

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References

QSR. (January 1, 2000). Wendy’s Appoints Schuessler CEO. Retrieved on November 20, 2010 from http://maintenancetalk.com/blog.php/cmmsblog/comments/wendys_to_drive_operational_excellence_in_facilities_management/

QSR. (September 6, 2002). Wendy’s announces initiatives, August sales. Retrieved on November 21, 2010 from http://www.qsrmagazine.com/news/wendys-announces-initiatives-august-sales

QSRweb.com. (3/22/10) Wendy’s selects Clarabridge CEM text analytics solution. Retrieved on November 20, 2010 from http://www.qsrweb.com/article/95858/Wendy-s-selects-Clarabridge-CEM-text-analytics-solution

(n.d). Wendy’s/Arby’s Group,Inc. Retrieved from Datamoni Authority database.

Wendy’s/Arby’s misses guidance.(November 1,2010), Business Daily. Investors Business Daily. Retrieved from Ebscohost.

(n.d).Wendy’s/Arby’s Group, Inc Company description.Seeking Alpha. Retrieved from http://seekingalpha.com.

Zacks Investment Research.(June 2, 2010).Wendy’s/Arby’s Raises Stock Buyback. Retreived from http://www.dailymarkets.com.

Josh Fineman.(June 18, 2007). Wendy’s Cuts Annual Profit Forecast, Will Study Sale. Bloomberg. Retrieved from http://bloomberg.com.

Karen Brettell. (June 11, 2010). US CREDIT-Wendy’s debt could weaken on possible acquisition. Reuters. Retrieved from http://reuters.com.

(n.d). Wendy’s International. Retrieved November 19, 2010 from http://research.investingminds.com.

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