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Wendy’s Profit Growth Isn’t Enough

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Revenue and margin trends

According to the following chart, Wendy’s (WEN) revenue growth has been negative. This is mainly because Wendy’s business has been moving from company-owned restaurants to the franchisee-owned restaurants.

Wendy’s profit growth—gross margin and EBITDA (earnings before interest, tax, depreciation, and amortization) margin—showed positive trends. This shows that the savings in operational costs and labor costs, that have been transferred to the franchisees, more than offset the loss of revenue.

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Debt burden

In the above chart, you can see that Wendy’s DE (debt-to-equity) ratio is showing an increasing trend. The DE ratio is the ratio of borrowed funds to owned funds. A high DE ratio means high debt financing. Recently, Wendy’s announced a leveraged buyback plan. This indicates that the trend might continue. In February 2015, Moody’s—the credit rating agency—downgraded Wendy’s because of its high debt burden.

To learn more about the restaurant industry in the US, read An in-depth overview of the US restaurant industry.

Operating margin comparison

The above graph compares the trends in the operating margin of Wendy’s owned restaurants with that of its peers. The comparison is from 2010 to 2014. In simple terms, the operating margin is the operating profit as a percentage of revenue.

In the above graph, we’ve calculated the operating profit from company-owned restaurants. It’s the revenue from company-owned restaurants less the restaurants’ operating costs. Wendy’s operating margin showed an upward trend. It was mainly due to the decline in its revenue on account of its franchising model. Chipotle’s (CMG) operating margin grew consistently. The bigger and older players like McDonald’s (MCD) and Yum! Brands (YUM) are seeing a fall in their operating margins.

Investors can access companies in the fast food restaurant industry through ETFs like the Consumer Discretionary Select Sector SPDR ETF (XLY). It holds 1.50% of Yum! Brands’ (YUM) stock.

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