Winning At Wendy's

(Friday, January 12, 2007) - This time last year, Wendy's was struggling with sliding same-store-sales. In the fourth quarter of 2005, not only were U.S. sales at stores open at least 13 months down more than 2%, but that soggy performance also followed worse declines in the same quarter of 2004. That kind of negative momentum can be tough to break, but with a quick turnaround, Wendy's made it look easy.
In 2006's fourth quarter, same-store sales registered about a 3% increase (3.1% at company-owned stores and 2.7% at franchised units). The company is clearly building momentum in the right direction, as each month of the quarter saw improved sales growth over the same month in 2005.

Wendy's management credits promotional menu items and improvement in operations, such as friendliness and speed of service. Yet those are easier said than done. I know that McDonald's tried for years to improve service, because I patiently held shares while continually thinking the turnaround was right around the corner.

Looking over what Wendy's has done over the past year, it is the closing of under-performing stores, re-franchising of company-owned stores, and slowed new-restaurant development that helped management focus more on running a tight ship rather than growth purely for growth's sake. New products are great for bringing in customers, but as a long-term investor, what you really want to see are more structural changes. Frescata sandwiches will only produce a temporary spike in sales if customers are turned off by slow or rude service. Refranchising stores, however, usually results in improved service, since franchisees have a huge incentive to make sure their stores perform.

Looking to the future, challenges to continued sales growth are waking up with the roosters as Yum! Brands' Taco Bell and Starbucks join Wendy's in the breakfast space.

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