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Wendy's transformation push starts to take hold

By Candice Choi

Associated Press

Published: Thursday, Aug. 9 2012 11:20 a.m. MDT

FILE - This undated file photo provided by Wendy's Co. shows the interior of a remodeled restaurant. The Wendy's Co.’s push to transform itself as a higher-end hamburger chain is showing early signs of taking hold. The Dublin, Ohio-based fast food company says a key sales figure rose 3.2 percent in the second quarter, helped by remodeled restaurants, new menu items such the Spicy Guacamole Chicken Club sandwich and a new TV ad campaign.

Wendy's Co., File, Associated Press

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NEW YORK — The Wendy's Co.'s push to transform itself as a higher-end hamburger chain is showing early signs of taking hold.

The Dublin, Ohio-based fast food company says a key sales figure rose 3.2 percent in the second quarter, helped by renovated restaurants, new menu items such the Spicy Guacamole Chicken Club sandwich and a new TV ad campaign.

Sales at restaurants open at least 15 months is a key gauge because it strips out the impact of newly opened and closed locations.

Wendy's said the boost was driven by increased spending per visit, which is in line with its long-term goal of enticing customers to pay more for higher-quality food. But executives noted in a conference call with investors that the company still has a long road ahead. The turnaround efforts also come at a time when competition is intensifying and the economy remains weak.

To cast itself as a more premium fast-food chain, Wendy's is investing heavily to give its restaurants a fresher look. In the next three years, half of its company-owned locations will be remodeled with an airy new style that features leather chairs, flat-screen TVs and metallic highlights.

CEO Emil Brolick said the renovations — which will cost $80 million this year — are critical because they "enhance all dimensions of the Wendy's experience." He noted that restaurants that were renovated last year enjoyed a 25 percent increase in sales.

To justify its higher prices and build loyalty, Wendy's is also working to improve customer service. Additionally, Brolick noted the chain will need to offer a steady pipeline of compelling limited-time offers to keep customers coming back.

After years of lackluster sales and eroding market share, Wendy's hired Brolick last September and has since been on a mission to revive its business. The push hit an early snag in the first quarter, when the company said its "You Know When It's Real" marketing didn't resonate as strongly as its competitors and sales came in weaker than expected. The company vowed at the time to make adjustments.

In the latest quarter, Wendy's said its new two-pronged ad campaign helped drive sales. The TV ads feature a young, red-headed woman referred to internally at the company as "Red," who encourages customers to discover the surprisingly high-quality foods at Wendy's.

Other ads featuring the real Wendy Thomas, the daughter of founder Dave Thomas, are intended to underscore the company's roots and run less frequently.

Citing its second-quarter sales performance, Wendy's stood by its outlook for the year, with adjusted earnings before interest, taxes, depreciation and amortization costs, or EBITDA, from continuing operations to range from $320 million to $335 million. Wendy's said it still targets an average adjusted EBITDA growth rate in the high-single-digit to low double-digit range starting next year.

The company said it expects beef costs to ease for the rest of the year, as a result of the drought that has pushed up grain prices and prompted farmers to sell off cattle they can no longer afford to feed.

After that, however, Wendy's expects beef costs to rebound and continue pressuring margins. Beef and chicken each make up about 20 percent of the company's commodity costs.

For the quarter, Wendy's said it lost money because of costs to refinance its debt and impairment charges related to the consolidation of its restaurant support business.

For the three months ended July 1, Wendy's says it lost $5.5 million, or a penny per share. That compares with a profit of $11.3 million, or 3 cents per share, a year ago.

Excluding one-time items, Wendy's earned 5 cents per share, in line with expectations.

Revenue rose to $645.9 million, up 4 percent from a year ago but shy of the $647.9 million analysts expected.

The profit margin of company-operated restaurants during the quarter improved to 14.1 percent, from 13.9 percent, as a result of higher sales and selling more profitable items. The increase was offset by higher labor costs, the result of its efforts to improve customer service.

Wendy's shares were flat at $4.54 in early afternoon trading. The company has more than 6,500 restaurants, mostly in North America.

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