A decision by
to end its operations in Japan made for some negative headlines, but there's still a lot of value in this fast-food play.
Many investors probably rolled their eyes and thought, "Here we go again" on Friday following the company's announcement that its franchise agreement with Japanese restaurateur
would not be renewed, effectively ending the company's presence in that country (for now, anyway). After all, being a Wendy's shareholder has been difficult in recent years, and there's been little good news -- or return, for that matter. The merger with Arby's has been confusing, and the company is among the few restaurant stocks that have not participated in this year's sector rally. In fact, while a basket of 26 publicly traded restaurants has returned an average of more than 23% year to date on a total return basis, Wendy's/Arby's is down more than 19% during that period, putting it 25th on the list.
While I was not jumping for joy following Friday's news, I believe this particular situation is overblown, won't have a major impact on the company and is not the death knell for Wendy's international prospects. The 71 franchised restaurants in Japan generated an estimated $70 million in annual revenue -- that's my estimate; exact figures are not available -- which translates into about $2.8 million in franchise revenue to Wendy's/Arby's (the figure reported on the company's income statement). By my estimate, the lost franchise revenue is about 1.7% of total 2008 company franchise revenue.
At the end of the third quarter this year, Wendy's/Arby's had a total of 10,347 restaurants (6,608 Wendy's and 3,739 Arby's, of which 7,787 are franchised: 5,213 Wendy's and 2,574 Arby's). International presence is still small at this point, with 848 restaurants (725 Wendy's, 123 Arby's), or just 8.2% of the total. The closure represents just under 10% of total Wendy' international restaurants (725) and 12% of all international franchises, but 20% off international franchises outside of Canada. And perhaps therein lays the basis for concern.
While I think Scott Rothbort is right that
Wendy's needs to succeed overseas, it's premature to write Wendy's/Arby's' international obituary. The company still views international expansion as a major growth driver -- it announced in a November management presentation that it hopes to eventually have 8,000 restaurants outside North America -- so it is important that they succeed here. I'm encouraged by the company's foray into the Middle East, where it recently signed a franchise agreement to build 135 restaurants in nine countries over the next 10 years. While the number of new restaurants is not all that significant (especially given the 10-year time frame), it puts Wendy's/Arby's into a part of the world that at times seemed unthinkable.
The bottom line is that this company has made a great deal of headway in a very difficult operating environment -- cutting expenses and actually generating a positive bottom line. While performance at Arby's continues to be a drag on the company, the Wendy's business has done an excellent job of cutting expenses and boosting restaurant margins. I still think Wendy's is one major ad campaign away from seeing a rebirth of sorts. Whether the current "You Know When It's Real" ad blitz is the one to get the job done remains to be seen; it seems to lack the punch of the old Dave Thomas ads, but we'll see.
In the meantime, I'm hanging on to my Wendy's/Arby's shares and may pick up some more if the current price weakness persists. Around $4 a share -- less than the cost of a Double with fries and a Coke -- you are getting about $2 a share in
real estate (my estimate) with a $2 long-dated call option that the No. 3 fast food chain can make a go of it.
At the time of publication, Heller was long WEN.
Jonathan Heller, CFA, is president of KEJ Financial Advisors, a fee-only financial planning he recently launched. Jon spent 17 years at Bloomberg Financial Markets in various roles, from 1989 until 2005. He ran Bloomberg's Equity Fundamental Research Department from 1994 until 1998, when he assumed responsibility for Bloomberg's Equity Data Research Department. In 2001, he joined Bloomberg's Publishing group as senior markets editor and writer for Bloomberg Personal Finance Magazine, and an associate editor and contributor for Bloomberg Markets Magazine. In 2005, he joined SEI Investments as director of investment communications within SEI's Investment Management Unit.
Jon is also the founder of the
, a site dedicated to deep-value investing. He has an undergraduate degree from Grove City College and an MBA from Rider University, where he has also served on the adjunct faculty; he is also a CFA charter holder.