Despite missing market profit guidance expectations for 2018, shares of fast food chain Wendy's (WEN 16.81, +0.59 +3.6%) recoup a portion of the last week’s losses. In-line earnings and lower general and administrative expenses were likely enough to quell investor concern.
Wendy’s reported Q4 adjusted earnings of $0.11 per share compared to $0.08 a year ago. The increase was mostly due to a reduction in the weighted average diluted shares outstanding, and the net positive impact from the Tax Cuts and Jobs Act of 2017.
To that end, net income was $159.3 million in Q4, compared to net income of $28.9 million in Q4. The year-over-year increase of 451.3% resulted primarily from a decrease in the effective tax rate due to revaluing deferred tax assets and liabilities at the lower U.S. corporate tax rate as a result of the Tax Cuts and Jobs Act of 2017.
Revenues in the quarter were mostly flat year-over-year to $309.2 million, slightly lower than market expectations. This result came despite the ownership of 90 fewer company-operated restaurants at the end of Q4 compared to the beginning of last year’s Q4, which resulted in fewer sales at company-operated restaurants, offset by higher franchise royalty revenue, fees and rental income. Additionally, North America same-restaurant sales came in slightly worse than the market expected, increasing 1.3% in Q4.
Wendy’s reported company-operated restaurant margin of 17.5% in Q4, compared to 18.8% last year. The 130 basis-point decline was mostly the result of higher commodity and labor costs, partially offset by lower other operating costs. Adjusted EBITDA was $104.0 million in Q4, compared to $91.1 million in the fourth quarter of 2016.
The outlook for 2018 came in below market expectations at EPS of $0.54-0.56. Wendy’s sees North America same-restaurant sales growth of about 2.0-2.5% for 2018. Labor inflation is expected at about 3-4% while commodity inflation should be around 1-2%. Management expects General and administrative expense of about $195 million for the year. Adjusted EBITDA is expected at about $420-430 million.
Further down the road, Wendy’s sees free cash flow about $300 million (from the previous expectation of $275 million) by 2020, mostly due to the impact of tax reform, on capital expenditures of about $65 million. Management sees adjusted EBITDA margins of 37-39% on a global restaurant count of about 7,250 from the previous expectation of about 7,500.
All told, this quarter’s in-line EPS was likely better than feared. Shares of WEN now trade about up 2.4% YTD versus the -1.2% loss the stock carried last night into the print.