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Why Wendy’s Earnings Margin Expanded in 4Q17

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Feb. 27 2018, Updated 9:02 a.m. ET

4Q17 performance

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%.

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Peer comparisons

During the same period, McDonald’s (MCD), Jack in the Box (JACK), and Restaurant Brands International (QSR) posted EBIT margins of 40.1%, 22.5%, and 45%, respectively.

Outlook

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).

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