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Wendy’s 1

Running head: WENDY’S RESTAURANT FINAL PAPER

Wendy’s Restaurant

Raymond Jackson, George Stroud, Jeff Burch

Indiana Wesleyan University

Alan N. Kronika
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Wendy’s Restaurant

Overview and History of Wendy’s and its Product lines

The Wendy's chain of more than 6,600 fast-food restaurants

controls around 13 percent of the enormous beef patty that is

the U.S. quick-serve burger market, making it No. 3 in terms of

market share behind Burger King and McDonald's. On November 15,

1969, Dave Thomas opened his first Wendy’s Old Fashioned

Hamburgers Restaurant in downtown Columbus, Ohio. He wanted to

provide a product that would be served the way his customers

wanted. The idea of creating something new and different in the

restaurant business of high quality and fresh ingredients is

what Dave Thomas believed would separate his business from the

others. Quality was such an important factor to Dave Thomas

that he even included it on the logo. The concept of quality

continues to be the number one priority for each and every

Wendy’s.

How was Dave Thomas able to take a one store front

restaurant and turn it into an intentional corporation. With the

eventual success of the first Wendy’s restaurant, Dave began to

expand his operation. In August 1972, Wendy’s sold its first

franchise restaurant to L.S. Hartzog which was located in

Indianapolis, Indiana. To ensure the continual growth of the

Wendy’s brand, Wendy’s started the Wendy’s Management Institute


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(WMI) in December 1972 with the purpose of creating a training

facility to better assist managers, supervisors, and franchisees

with his or her management skills. An important moment in the

early stages of the Wendy’s franchise growth came on September

1976 when Wendy’s offered public stock with over one million

common shares selling for $28 per share on the NASDAQ Exchange.

Also, Wendy’s saw the opening of its 500th restaurant during that

year. After 10 years in the business, the 1500th Wendy’s opened

and they become the first national food chain to introduce a

salad bar. In May 1981, Wendy’s joins the prominent rosters of

public companies listed on the NYSE under the symbol name WEN.

The marketing advertisement campaign of “Where’s the Beef” in

1984 provided Wendy’s with its most successful year to date.

These moves and others helped to propel Wendy’s as a viable

company in the fast food industry.

Some of the Wendy’s signature eatables include Garden

Sensations salads, baked potatoes, Wendy's Old Fashioned

hamburgers and the Frosty which was perfect for dipping one's

Wendy's fries in. After the introduction of the salad bar, on

March 1992 Wendy’s again revolutionalized the industry by

introducing fresh salads to go. Wendy’s began creating fresh

salads that included chicken, deluxe garden, taco, caesar, and

side salad. In 1983, Wendy’s introduces the bake potato to its

menu and it was the first time a national food chain had done
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so. Six years later, Wendy’s incorporated some of its costumer

favorites under one low price of .99 with its super value menu.

Here costumers good get a bake potato, hamburger, fries, and

frosty for under a buck. The innovations of taking the different

food options has allowed for Wendy’s to better serve its loyal

costumers while attracting new ones.

Comments of Senior Management

According to the top officials at Wendy’s, the franchise is

doing very well. They have implemented a chain management system

to increase efficiencies and reduce costs. Wendy’s has hired

Clarabridge Text Analytics Solution to improve its customer

feedback program. They have also placed a key architect with the

implementation of Wendy’s success in a new role to identify and

capitalize on consumer trends. They are continuing to search for

more vertical integration, mergers, acquisitions and/or

investments. These measures and acquisitions will help to keep

the Wendy’s franchise able to streamline new revenue.

“In addition, controlling costs in the restaurant


business is critical in order to drive shareholder value.
With Corrigo, we will now have a service chain management
system in place to drive efficiencies and reduce costs at
each step of the facilities management process (QSR,
1/2000).”

"A customer's experience in the restaurant industry is


unique in that it can be affected by everything from
cleanliness to the speed of service to the taste of the
meal itself," said Glen Brandeburg, Wendy's senior vice
president of operations integration, innovation and
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training, in a news release. "We are dedicated to providing


outstanding customer service in every restaurant, every
day. With the growing number of ways customers can
communicate with us, we were looking for a solution that
would speed our analysis, detect emerging issues and
pinpoint troubled areas of our business at the store,
regional or corporate level. Clarabridge provides a
solution to do just that. Jonathan brings a depth of
experience in the M&A area that will be invaluable as we
continue to identify business opportunities for the
corporation over the next several years,'' said chairman
and chief executive officer Jack Schuessler. "He completed
nine transactions since 1998 and has worked on several
other business opportunities for the Windsor Group and GTE.
We are very pleased to have Jonathan join our senior
management team. Kathie is one of the key architects of
Wendy's success over the past several years,'' said
Schuessler. "She has led the evolution of Wendy's menu and
new product development, spearheaded our programs to
enhance Wendy's quality position with consumers, and
significantly improved our supply chain effectiveness. In
her expanded role, she will work with Jonathan and our M&A
team to develop new business ventures and to identify
opportunities to enhance the Wendy's brand. Kathie is an
expert in the restaurant and food industry. She brings
tremendous depth to our efforts to identify and capitalize
on consumer trends,'' Schuessler said. (QSRweb.com, 3/2010)

"We are developing multiple financial options to


execute our strategic initiatives,'' said Executive Vice
President and Chief Financial Officer Kerrii Anderson. "For
example, earlier this year we announced a joint venture
between our Tim Hortons subsidiary and IAWS-Cuisine de
France. We are investing about $35 million in the JV to
build a baking facility in Canada with Cuisine de France to
supply our Tim Hortons stores with French baguettes and
breads. Other initiatives could include vertical
integration, mergers, acquisitions or investments. We want
to have the ability to move quickly on opportunities. “We
continue to post positive sales increases at Wendy's and
Tim Hortons against strong comparisons a year ago,'' said
Anderson. "We feel good about our performance considering
that the restaurant industry is feeling some impact from
tough economic conditions. (QSR, 9/2002)''
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Overview of Nearest Competitors

Wendy’s is No. 3 in terms of market share behind Yum

Industries (owners of Taco Bell, KFC, Pizza Hut, Long Johns

Silver’s, A&W, and others) and McDonald's. Wendy’s biggest

competitors are Burger King, Starbucks, Subway, and McDonalds.

McDonalds is by far the largest fast food chain and when you

compare McDonalds v. Wendy’s there are a few factors that can

show why McDonalds is more successful. McDonalds turn their

inventory every 3 to 4 days where Wendy’s turns theirs every 9

to 10 days. The inadequacies of Wendy’s inefficiency can make

dramatic impact on their bottom line. Shorter cash on hand means

less advertisement, less stores, and it makes it harder to buy

back shares. When investors look at Wendy’s and see their money

tied up in inventory, this can slow down the growth of the

organization.

Economic forecast for the industry

The US fast food industry has steadily become one of the

leading economic industries in the United States, despite the

global financial turmoil. The US fast food industry grew at a

rate of around 4% year-on-year in 2009, and has been witnessing

consistent growth of industry over the past few years. A major

reason for this could stem from research that shows the fast

food industry is growing at a higher rate than the restaurant

industry due to comparative cost advantage and the increasing


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youthful population. Leading fast food industry companies are

increasing their spending on promotional activities to expand

business which will continue to boost the nation’s fast-food

industry. Forecaster’s research shows the US fast food industry

is expected to see a continued growth rate in the near future

helped by Americans busy lifestyle that encourages them to visit

fast food joints. The industry holds promising growth prospects

for both existing and new companies within the industry. The

baseline for the optimistic future outlook of the US fast food

industry is the rise in number of product varieties offered by

fast food businesses. These businesses have started going for

international expansion have began offering promotional deals

and discounted combo purchases in order to bring in revenue

Even with the promising forecast for the US fast food

industry the Wendy’s/Arby’s group has struggled as of late. In

2010 the Wendy’s/Arby’s group experienced a 11.5 percent drop in

first quarter earnings, and although it slightly improved it

still saw a 7.4 percent drop in the second quarter. These have

been among the weakest results reported by a large fast-food

chain corporation. These struggles in the market can stem from

the struggles that both Wendy’s and Arby’s were experiencing

before their merger in 2008. The Wendy’s/Arby’s group is still

working to catch up to its competition who is offering low

dollar value meals which is driving in customers. Wendy’s has


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fared better in earnings since it started to promote its $2.99

value meal along with its $1 value menu.

Wendy’s been a pioneer in the industry with their

introduction of garden fresh salads in 2002, and has always

promoted the use of their fresh ingredients as a selling point.

These selling points are not working the way they once did which

is prompting Wendy’s to relaunch its breakfast lineup across the

United States scheduled for late July 2011. Analysts say

breakfast is estimated to generate about $6 billion annually or

25 percent of McDonald's U.S. sales each year and if Wendy’s is

able to tap into that market it would be a great boost to the

Wendy’s/Arby’s group.

International markets and forecasts

Wendy’s international is currently located in 25 countries

worldwide. Like the US fast food industry, the global fast food

market is also seeing positive gains on the economic front.

Forecasters have predicted an increase in the global fast food

market to a value of $125.4 billion for 2011. This is an

increase of 22.2% since 2006 and shows an upward trend moving

forward for potential investors. With inflation sometimes an

increase in total value can be misleading, but the fast food

market is also forecasted to have a volume of 86.4 billion

transactions in 2011 which would be an increase of 7.6% since

2006. Sales to quick service restaurants account for 67.4% of


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the international fast food markets value. Wendy’s however does

not take part in the global fast food industry as well as others

have, such as McDonalds has over the years. Wendy’s used to have

a restrain base in Europe but has since pulled out and focused

more on the Caribbean’s islands and the eastern part of Asia.

Potential investors should be aware that Wendy’s does not soar

in the international market as well as other fast food companies

do when they are deciding what to invest in. They must also know

that the Americans do account for 63.1% of the global fast food

market making it the most lucrative of the global markets, which

Wendy’s sits as the 3rd largest fast food company in.

Weighted Average Cost of Capital

How do investors determine the weighted average cost of

capital? It is a calculation of a firm's cost of capital in

which each category of capital is proportionately weighted. All

capital sources common stock, preferred stock, bonds and any

other long term debt are al included in a WACC calculation. If

everything is the same, the WACC of a firm should increase as

long as the beta and rate of return on equity increases. Wendy’s

assets are financed by either debt or equity. Company’s such as

Wendy’s utilizes this information to figure out how much

interest the company will pay for each dollar it finances.

Company directors make use of the WACC in determining the


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economic plausibility of expanding the company, or to acquire

other entities. The risk class determines whether the Weighted

Average Cost of Capital can be used by the firm when assessing

projects. The formula used in determining a company’s WACC is

E/V *Re + D/V * Rd*(1-TC)

Re = cost of equity
Rd = cost of debt
E = market value of the firm's equity
D = market value of the firm's debt
V = E + D
E/V = percentage of financing that is equity
D/V = percentage of financing that is debt
Tc = corporate tax rate

Wendy’s Weighted Average Cost of Capital was found by using the

valuepro web site. Here it showed that Wendy’s WACC was 6.79%

which could be used to determine the viability of the company is

it decides to invest in future resources.

Characteristics of common stock

On September 29, 2008, Triarc and Wendy’s completed their

previously announced merger in an all-stock transaction in which

Wendy’s share holders received 4.25 shares of Wendy’s/Arby’s

Class A common stock for each Wendy’s common share owned. In

the merger, approximately 377,000.000 shares of Wendy’s/Arby’s

Class A common stock were issued to Wendy’s shareholders. The

merger value of approximately $2.5 billion for financial

reporting purposes is based on the 4.25 conversion factor of the


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Wendy’s outstanding shares as well as previously issued

restricted stock awards both at value of $6.57 per share which

represents the average closing market price of Triarc Class A

common stock two days before and after the merger announcement

date of April 24, 2008. Wendy’s shareholders held approximately

80% in the aggregate, of Wendy’s/Arby’s outstanding common stock

immediately following the Wendy’s Merger. In addition,

effective on the date of the Wendy’s Merger, Class B common

stock was converted into Class A common stock. In connection

with the May 28, 2009 amendment and restatement of the

Certificate of Incorporation, Class A common stock was

redestinated as common stock (http://seekingalpha.com).

The number three U.S. fast-food chain made 5 cents a share ex

special charges in third quarter, down 17% from a year ago but a

penny over views. Sales fell 4.7% to $861.2 mil vs. the $882.6

mil analysts expected. Wendy’s said demand for value menu items

fell off when it cut back on advertising. Wendy’s reported a

1.7% drop in the same metric. The firm expects 2010 EBITDA at

the lower end of its previous forecast of a 3%-5% decline

(Business Daily, 2010).

Wendy’s formed a special committee to explore a sale and

other strategies after billionaire investor Nelson Peltz and

former shareholder William Ackman urged the company to boost it

stock price. Wendy’s hired JPMorgan Chase & Co. and Lehman
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Brother Holdings Inc. to evaluate potential strategies.

Earnings will be $1.09 to $1.23 a share, compared with a

previous fore cast of as much as $1.32, Wendy’s said. Analysts

estimated $1.28; the average of 14 projections compiled by

Bloomberg Wendy’s suspended its forecasts for 2008 and 2009.

Shares of the company fell $1.47, or 3.7 percent, to $38.26 in

New York Stock Exchange composite trading, the biggest drop

since February. They have climbed 17 percent since the chain

said April 25 that it might consider a sale

(http://www.bloomberg.com). Wendy’s recently announced that its

board of directors increased the company’s stock repurchase

authorization by $75 million to a total of $325 million. Since

the board of directors initiated the stock repurchase program in

August 2009, the company has repurchased 47 million shares of

its common stock for approximately $223.1 million, at an average

price of $4.73 per share. Wendy’s/Arby’s have approximately

$102 million available for stock repurchases under the board’s

authorization. The increase in stock authorization is

encouraging for the share holders as it is likely to increase

shareholder’s value (http://dailymarkers.com).

Characteristics of bonds

The perceived risk of owning Wendy’s bonds rose. Credit-

default swaps based on $10 million of Wendy’s bonds jumped

$8,000 to a record $198,000 today, according to prices compiled


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by London based CMA Datavision. An increase in the five-year

contracts suggests deterioration in the perception of credit

quality. Acquirers, particularly leveraged buyout first, often

finance acquisitions with debt and place it on the target

company’s books, leading to rating cuts. Credit-default swaps

were conceived to protect bondholders against default and pay

the buyer face value in exchange for the underlying securities

should the company fail to adhere to its debt agreements

(http://www.bloomberg.com). A buyout of Wendy’s/Arby’s Group

may cause weakness in the company’s bonds, if an acquisition

uses the addition of new debt in an attempt to spark gains in

the company’s stalled share price. The cost to insure Wendy’s

legacy debt with credit default swaps rose to 215 basis points,

or $215,000 per year to insure $10 million for five years, from

160 basis points before the news, according to Markit Intraday.

Holders of some of Wendy’s bonds are “at risk if this leveraged

buyout goes through,” Vicki Bryan, analyst at credit research

firm Gimme Credit, said in a note. Wendy’s 10 percent bonds due

2016 have provisions that would require the debt to be bought

back in an acquisition. Other bonds, however, don’t have the

same protections and would likely be subordinated to any new

debt taken on to fund an acquisition, she said. The company’s

debt had risen to around $1.5 billion as of April 210, from

around $750 million in March 2008, just before Nelson Peltz


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bought the company. Wendy’s refinanced its near-term debt with

new term loan, which is likely to aid it in generating excess

cash net of its debt obligations (http://www.reuters.com).

Tightened credit conditions and economic pressures have

negatively impacted Wendy’s, including the ability of the

company to meet their commitments under development, rental and

license agreements.

Key financial ratios

Wendy’s faces stiff competition in the overall fast food

industry, as McDonald’s holds a dominating 18% share of the

market with Wendy’s and Burger King holding shares of

approximately 2% each. In recent years Wendy’s has been lagging

behind McDonald’s and Burger King in same stores sales growth,

and indicator of how established franchises are faring. In

addition to traditional hamburger-based fast food restaurants,

Wendy’s must compete with chains such as Subway, Yum! Brands and

Jack in the Box. The table below is Wendy’s financial ratios

compared to the number one competitor, McDonald.

Wendy’s McDonald’s
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The competition among fast-casual restaurants is expected to

remain fierce with respect to price, service, location and

concept in order to drive traffic, which may adversely affect

Wendy’s/Arby’s Group restaurant operating margins and profits.

Wendy’s/Arby’s anticipate commodity inflation of 2% to 3% in the

second half of 2010. Thus, a rise in commodity prices will

negatively impact the margins of the company. The company

expects Wendy’s margin to expand year over year in 2010, but

decreased it to 70 to 90 basis points as compared with its

previous guidance of 90 to 110 basis points

(http://research.investingminds.com).

Conclusion
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After reviewing the facts, we recommend a person should

invest in the company. There are strategic growth opportunities

at Wendy’s and Arby’s brands, including international

development under dual-brand restaurants. Dual brand units,

combining Wendy’s and Arby’s under one roof, can generate higher

sales volumes and better return on investment, and provide a

development opportunity in high cost real estate markets in the

U.S. Wendy’s/Arby’s Group remains on track to achieve adjusted

EBITDA growth in the mid-teens range in fiscal 2011 through

improvement of company-operated restaurant margins at the Wendy

s brand and achieving G&A savings target of $60 million on an

annualized basis. Moreover, the cash position of the company is

solid, as of the end of the quarter Wendy’s/Arby’s has cash and

cash equivalents of $508.4 million. As a result, the company

continues to pay down debt and return value to share holders

through share repurchase and dividend. The company’s goal is to

create superior and sustainable value for stockholders. As

strong cash flow generators, in addition to investing in organic

growth opportunities. Wendy’s believe in the importance of

returning capital to its stockholders. Wendy’s Board of

Directors has authorized a 33% increase in the quarterly cash

dividend. This move further demonstrates a commitment to

delivering stockholder value as well as implementing longer-term

initiatives.
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References

QSR. (January 1, 2000). Wendy’s Appoints Schuessler CEO.


Retrieved on November 20, 2010 from
http://maintenancetalk.com/blog.php/cmmsblog/comments/wendy
s_to_drive_operational_excellence_in_facilities_management/

QSR. (September 6, 2002). Wendy’s announces initiatives, August


sales. Retrieved on November 21, 2010 from
http://www.qsrmagazine.com/news/wendys-announces-
initiatives-august-sales

QSRweb.com. (3/22/10) Wendy’s selects Clarabridge CEM text


analytics solution. Retrieved on November 20, 2010 from
http://www.qsrweb.com/article/95858/Wendy-s-selects-
Clarabridge-CEM-text-analytics-solution

(n.d). Wendy’s/Arby’s Group,Inc. Retrieved from Datamoni


Authority database.

Wendy’s/Arby’s misses guidance.(November 1,2010), Business


Daily. Investors Business Daily. Retrieved from Ebscohost.

(n.d).Wendy’s/Arby’s Group, Inc Company description.Seeking


Alpha. Retrieved from http://seekingalpha.com.

Zacks Investment Research.(June 2, 2010).Wendy’s/Arby’s Raises


Stock Buyback. Retreived from http://www.dailymarkets.com.

Josh Fineman.(June 18, 2007). Wendy’s Cuts Annual Profit


Forecast, Will Study Sale. Bloomberg. Retrieved from
http://bloomberg.com.

Karen Brettell. (June 11, 2010). US CREDIT-Wendy’s debt could


weaken on possible acquisition. Reuters. Retrieved from
http://reuters.com.

(n.d). Wendy’s International. Retrieved November 19, 2010 from


http://research.investingminds.com.
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