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Why Wendy’s EBIT Margin Expanded in 2Q17

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WEN’s 2Q17 performance

For 2Q17, Wendy’s (WEN) posted EBIT (earnings before interest and tax) of $84.8 million, which represents an EBIT margin of 26.5%. WEN posted an EBIT margin of 19.1% in 2Q16. Analysts were expecting the company to post an EBIT margin of 25.9%.

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Factors that led to expansion of WEN’s EBIT margins

Increased revenues from franchised restaurants, sales leverage, and a lower cost of sales have led to the expansion of the company’s EBIT margin. Due to refranchising, the revenue from franchised restaurants has increased. The margins on revenues from franchised restaurants will be higher than revenues from company-owned restaurants.

In 2Q17, the cost of sales fell from 52.9% to 40.4% due to refranchising. G&A (general and administrative) expenses fell $9.8 million, but as a percentage of total revenue, it remained constant at 16.0%. WEN’s G&A expenses fell due to savings from system optimization, lower professional fees, and lower incentive compensation accruals.

Some of the expansion in the EBIT margin was offset by the rise in labor expenses, commodity prices, and increase in D&A (depreciation and amortization) expenses. The increase in investments on higher chicken quality increased the company’s commodity expenses. The increase in investments on technological advancements boosted D&A expenses from 8.0% in 2Q16 to 9.8% in 2Q17.

Peer comparisons and outlook

For 2Q17, Jack in the Box (JACK), Restaurant Brands International (QSR), and McDonald’s (MCD) have posted EBIT margins of 15.5%, 42.1%, and 34.1%, respectively.

For the next four quarters, analysts are expecting Wendy’s to post an EBIT margin of 24.3%, compared with 21.6% in the corresponding quarters of the previous year. The sale leverage from positive same-store sales growth and refranchising are expected to drive WEN’s EBIT margin going forward.

Now let’s look at Wendy’s 2Q17 EPS.

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