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Why Did Wendy’s Lower Its 2017 Earnings Guidance?

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Part 5
Why Did Wendy’s Lower Its 2017 Earnings Guidance? PART 5 OF 8

Why Did Wendy’s Margins Expand in 3Q17?

3Q17 performance

In 3Q17, Wendy’s (WEN) posted an adjusted EBIT (earnings before interest and tax) of $65.43 million, which represents EBIT margins of 21.1%. Wendy’s posted EBIT margins of 19.4% in 3Q16.

Why Did Wendy&#8217;s Margins Expand in 3Q17?

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The expansion in Wendy’s adjusted EBIT margins was driven by increased revenue from franchised restaurants and lower G&A (general and administrative) expenses. However, some of the expansions in the EBIT margins were offset by company-owned restaurants’ lower restaurant margins, the rise in franchise rental expenses, and the rise in D&A (depreciation and administrative) expenses.

G&A expenses fell from 27.3% of the total revenue in 3Q16 to 17.2%. The decline was primarily due to lower professional services expenses and cost savings from system optimization initiatives.

During the quarter, company-owned restaurants’ restaurant margins fell 1.7% due to the rise in food and paper costs and labor expenses. Compared to 3Q16, food and paper costs rose 2.3% due to higher beef and bacon costs. Labor expenses rose 0.3%. However, some of the increase in the cost of sales was offset by lower occupancy, advertising, and other operating expenses.

The D&A expenses rose from 8.1% of the total revenue to 10.1% due to increased technological investments.

Peer comparisons

McDonald’s (MCD) and Restaurants Brands International (QSR) posted EBIT margins of 40.7% and 42.6%, respectively. Analysts expect Jack in the Box (JACK) to post EBIT margins of 16.0% during the same period.

Outlook

For the next four quarters, analysts expect Wendy’s to post EBIT margins of 24.6%—compared to 22.2% in the same four quarters the previous year.

In the next part, we’ll discuss Wendy’s 3Q17 earnings per share.

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