In 4Q17, Wendy’s (WEN) posted EBIT (earnings before interest and tax) of $70.6 million, which represents an EBIT margin of 22.8% compared to 19.5% in 4Q16. The expansion in its EBIT margin was driven by its system optimization initiative.
Despite pressure from the increase in beef and bacon prices for short-term and prior investments in chicken quality, the cost of sales as a percentage of total revenue fell from 45.5% to 41.3% due to refranchising of company-owned restaurants. G&A (general and administrative) expenses also fell from 19.7% to 16.8% due to a system optimization initiative, which lowered the unit count of company-owned restaurants. However, some of the expansion in the EBIT margin was offset by an increase in franchise rental expenses and D&A (depreciation and amortization) expenses. The franchise rental expense increased from 5.8% of total revenue to 7.5%, while D&A expenses increased from 19.7% to 16.8%.
In 2018, analysts are expecting Wendy’s to post an EBIT margin of 24.2% compared to 23% in 2017. The expansion is expected to be driven by growth in the franchise business, sales leverage from positive SSSG (same-store sales growth), and lower G&A expenses due to G&A savings initiatives.
Next, we’ll look at Wendy’s 4Q17 EPS (earnings per share).