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Wendy's Sets Its Own Course

The company sticks with its Tim Hortons spinoff plans and talks up moves to boost its performance.
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Updated from 10:42 a.m. EST


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rejected the ideas of an activist stakeholder Monday and presented its own plans to reverse a downtrend in its performance.

The fast-food chain told Wall Street analysts that it will proceed with its plan to hold an initial public offering for its Tim Hortons doughnut chain in late March, and then spin off the chain within nine to 18 months after the IPO.

Nelson Peltz, a billionaire investor whose Trian fund recently acquired about 5.5% of Wendy's, in December called for the complete spinoff of Tim Hortons as soon as possible.

Peltz, known for his success in turning around the Snapple and Arby's brands, is expected to wage an ongoing battle against any resistance to his proposals. Wendy's defended its spinoff plan by saying it and Tim Hortons are committed to a "seamless transition" and that registration restrictions could be problematic.

"Based on our analysis of the current facts, we believe the earliest a tax-free spinoff could occur is the end of 2006," said Wendy's chief financial officer, Kerrii Anderson, in a statement. "If the spin occurred sooner, we could incur tax costs. We have analyzed the tax impact of an immediate spin, and we believe any potential increase in valuation would not offset the associated costs to shareholders."

In addition to its plans for Tim Hortons, Wendy's management team has been put on the defensive on its overall business strategy after the company reported its

worst sales performance in 18 years on Friday. In the fourth quarter, Wendy's total sales dipped to $977 million for the period from last year's $978 million, and same-store sales, or sales at stores open at least a year, at its namesake chain declined. For all of 2005, the company's same-store sales dropped 3.7%.

Meanwhile, Peltz noted in his December regulatory filing that Wendy's company-owned stores have recorded average profit margins of about 10%, compared with the industry standard of about 20%. Also, the company has spent $1.3 billion on the business over the last six years while its operating income has declined. Its five-year president and chief operating officer, Tom Mueller, left last fall.

To remedy the situation, Wendy's announced a series of initiatives Monday designed to boost same-store sales by 3% annually in 2006 and thereafter. The company said it hopes to cut costs by around $50 million starting this year and to bolster the pretax bottom line by $100 million or more by the end of 2008. It also aims to raise its profit margins by 500 basis points.

Wendy's expects 2006 operating income to rise 10% to 13% from what it reported in 2005, helped by a 2% to 3% decrease in beef prices. The No. 3 U.S. hamburger chain also said it expects revenue to rise 7% to 8% from $3.8 billion in 2005.

In an effort to improve results, the company plans to test breakfast items in 2006, with a full introduction in 2007. It will offer deli sandwiches and other new menu items in the next year. Wendy's also said it will boost margins through the systemwide rollout of a double-sided grill, adopting a store automation program and improving service.

As for capital spending plans, Wendy's expects to spend around $325 million from $360 million last year, and to open 150 stores in North America, down from 192 last year. The company will open around 190 Tim Hortons stores in North America, about the same as last year.

Whatever its plans, Wendy's has seen better days. It has been short of an effective marketing message since its founder and longtime public face, Dave Thomas, died in 2002. Last year, a Nevada couple put a human finger in a bowl of Wendy's chili in a much-publicized attempt to bilk the company in court. The couple eventually pleaded guilty to fraud charges but Wendy's still lost millions in sales.

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Meanwhile, fast-food competitors like



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Yum! Brands

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Burger King

have moved in on Wendy's turf.

Despite all the negatives, its shares rose 42% last year as activist shareholder groups beat the drums for change. In July, the company bowed under pressure from Pershing Square Capital, a hedge fund run by Bill Ackman -- the investor who recently made headlines with his call for structural changes at McDonald's. Wendy's agreed to raise its dividend, expand its share repurchasing plan, sell off underperforming real estate and spin off Tim Hortons.

In Trian's filing, Peltz called the company's plans for a partial spinoff of Tim Hortons "an attempt to avoid shining the spotlight on the poor financial performance of Wendy's business" that "would perpetuate a highly inefficient and costly conglomerate structure." He estimates that Wendy's shares could be worth between $77 and $89 if its plans are implemented, and that Tim Horton's is worth between $32 and $38 a share as a stand-alone company.

Morningstar analyst Carl Sibilski says Trian's desire to complete the deal sooner rather than later may be motivated by current market conditions that appear receptive to such IPO deals. In January, shares of McDonald's spinoff

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doubled in its first day of trading.

"Hedge funds are often biased towards short-term performance, so it may be that they want to get the thing done and have a sure thing in the short-term rather than get stuck in something where they'd have to wait years to get the full value out of it," he says.

A representative from Trian wasn't immediately available to comment.

Shares of Wendy's recently were down 37 cents to $57.80.