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Agenda
• Sector Trends• Company Overview• Thesis• Risks• Valuation• Q&A Wendy’s/Arby’s Group (WEN)
Rachel NabatianWill Zhang
Mayank Vidyarthi
Agenda• Sector Overview
• Company Overview
• Thesis
• Risks
• DCF
Sector Overview and Trends• Customers increasingly price-sensitive
– Unemployment, underemployment remain high– Wealth destruction, increased savings rate
• Conditions strongly favor lower-cost dining– Quick-service restaurants offer best value
• “Magic $5 price point”– Meals for $5 or less (e.g. Subway $5 Foot-
longs)
Competition
Overview: Wendy’s• Known for square burgers• Wendy’s 99¢ Menu• Historically low margins (around
~11% vs. Industry avg. of 17%)• Margin Improvement Plan Ahead of
Schedule• Average ticket is $4
Overview: Arby’s• Specializes in premium roast beef
sandwiches– Unique among QSR’s
• Historically had high average ticket– $7.50 vs. under $5 for typical QSR’s
• Historical margins in line with industry average (~17%)
Revenue Breakdown by Operating Segment
Wendy's Company-Owned
Arby's Company-Owned
Wendy's Franchises
Arby's Franchises
59%31%
8%2%
Sources of RevenueDelivery of food
Bakery items and kid’s meal
Royalty income from franchisees
Rental income
Startup franchise fees89%
1.9%
8.2% 0.18%
Thesis• Merger = Turnaround
–Wendy’s increasing margins–Arby’s offering more value
• Macroeconomic Trends Favor QSR’s Over Casual Dining Outlets
• Short and Long-Term Growth Catalysts
• DCF
Reasons for Merger• Wendy’s underperformance since 2002
– Founder Dave Thomas died in 2002• Wendy’s historically low operating margins
– Poor cost control– High breakfast item costs
• Lack of coherent marketing message• Thomas was instrumental in Wendy’s
advertisements
• Arby’s benefits from Wendy’s large size
Triarc Acquires Wendy’s• Initiated by Nelson Peltz
– Triarc board member– Well known in the food industry with
turnarounds for• Snapple• Kraft • Cadbury Schweppes• Heinz
– Held 10% of Wendy’s shares
Merger Details• Completed on September 28, 2008• All-stock transaction
– Wendy’s shareholders received 4.25 shares of Wendy’s/Arby’s common stock for each Wendy’s share
• Triarc renamed to Wendy’s/Arby’s Group• Triarc CEO Roland Smith becomes CEO
of Wendy’s/Arby’s
The Turnaround Artist• Roland Smith, President and Chief Executive
Officer• Turnaround Experience
– Arby’s, 1994 to 1999• Tripled op. profit from 1996 to 1998• Industry leader same store sales growth
– American Golf, 2003 to 2005• Grew revenue and profits • 38% IRR to investors
– AMF, 1999 to 2003 • Out of Chapter 11 • Reduction of total debt by two-thirds• Positive comp sales growth
The Turnaround Artist• Gets it done
– Went to West Point– U.S. Army for seven years
• Platoon leader• Executive officer • Deputy director of Army programs • Aide-de-camp • Aviation maintenance officer• Pilot
First there was Wendy’s…
Then there was Arby’s…
And they formed the Wendy’s/Arby’s Group
The Turnaround• Combining “best practices”• Margin-focused turnaround at Wendy’s
– Goal: Improve operating margins from 11.7% in 2008 to 16.7% by 2011
• Value-focused SSS turnaround at Arby’s– Goal: Increase SSS by providing value-based
menu offerings• Merger synergies
– $60 M target G&A Savings
G&A Savings• Key projects:
– Integrating Shared Services Center– IT systems integration
• Achieved $25M in cost savings in 2008• On pace to achieve $10M - $25M savings
in 2009
Wendy’s: Impressive Margin Improvements
• Target: 500 bp operating margin improvement by 2011
• +370 bp improvement from Q2 '08 to Q2 '09– Commodities were flat over this period from
hedging• Margins were 15.9% in Q2 '09, back to
levels not seen since early 2000’s
Already at 15.9%, well above 13.3-13.5% target
Margin Improvement Areas• Tighter control of controllable costs
– Labor hours– Wasted food (Actual cost – theoretical cost)– Utilities
• Higher same-store sales from new menu items, promotions, marketing campaigns
Arby’s: Strategic Shift to Value-Based Menu
• Initiatives aimed at repeat customers– Comprise 50% of sales– 1 extra visit each year =
3% SSS improvement– Offering more value
items• July: $5 BBQ Bacon
Cheddar Roastburger– 1.1% SSS increase
from June to Julyhttp://www.youtube.com/watch?v=ssukzKa5P0w
Arby’s: Premium Products For Great Value
• Starting in Q4: $5 premium roast beef sandwich combos– Full-sized sandwich + Fries + Drink = $5.01– Premium quality: “Worth every penny”
• August promotion: 5 for $5 Family & Friends Feast:– 5 Roast Beef Sandwiches for $5 ($1 each)
Arby’s: Improving Value Improving Same-Store Sales
Coming October ‘09: Introduction of $5 Combo Meals
July ‘09: BBQ Bacon Cheddar RoastburgerCombo Promotion
Average Arby’s Meal Price$7.50 $5
Wendy’s: New Menu Items• Boneless chicken wings introduced in
June– 2.0% increase in same-store sales in July
• Premium “Bacon Deluxe” cheeseburger to be introduced in Q4 2009
“But aren’t all these turnaround benefits already priced in?”
“But aren’t all these turnaround benefits already priced in?”
• To answer your question, Doug, no! – Trading at acquisition values – Does include the predicted synergies of $60M– Does not include:
• Organic op. margin improvements which are ahead of schedule
• Arby’s dramatic SSS improvement• Cost savings beating everyone’s expectations,
beyond predicted $60M
Wendy’s: Quality Products
“It's waaay better than fast food... It's Wendy's.”
Casual Dining vs. QSRsCasual Dining
• Cheesecake factory
• Applebee’s• P.F. Chang’s• Denny’s
QSR’s• Wendy’s• Arby’s• McDonald’s• Burger King• Chipotle• Panera• Taco Bell
QSR’s Are Undervalued Compared to Casual Dining
• Casual dining trading above year-ago levels
• Short interest as % of Share Float:– QSR’s: 4%– Casual Dining:17%
• High-growth for casual dining = riskier
QSR’s: Still Undervalued
Deteriorating SSS for Casual Dining
Casual Dining Supply > Demand
QSR’s Show Strong Margins
WEN achieved good margins in Q2 09, despite weak performance of Casual Dining Restaurants
Short-Term Catalysts• Improving operating margins at Wendy’s• Value-driven same-store sales growth at
Arby’s• New menu item launches at Wendy’s• $50M stock buyback plan
Long-Term Catalysts• Breakfast
– Testing phase in select stores• International stores
– 135 stores in Middle East and N. Africa franchised by Al Jammaz Group to open over next decade
• Dual-branded stores– 3 test stores to open in Atlanta in early 2010
• New brand under consideration– $565 million bond offering in June
Wendy’s/Arby’s International Presence
Comps• Current EV/EBITDA: 7x CY10
– discount to its group at 8x
EBITDA Increase• 2Q09: EBITDA of $117.2M Exceeded
consensus est. of $110M– Result of better than expected Wendy’s
margin gains• Future EBITDA increase resulting from
– Decreased labor costs from synergies – Central purchasing unit
Potential RisksRISKS MITIGANTS
Competition Turnaround, dual branding, value rebranding, management team
Turnaround fails Already ahead of schedule,management team
Commodity volatility impacts input costs
WEN engages in hedging through forward contracts
Vegetarianism/PETA PETA campaign focused mostly on McDonalds
Increases in minimum wage Will affect entire industry, so overall market share should not be affected
Q
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