Yet Another Take on the Hamburger

 | Nov 11, 2011 | 1:00 PM EST
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Back in September, I "excitedly" wrote about fast food underachiever Wendy's (WEN) latest attempt to get back in the game, namely the introduction of its revamped burger, called "Dave's Hot 'N Juicy".

I thought bringing Dave Thomas, the legendary founder of Wendy's back into the fold was a good idea. (Thomas helped to resuscitate the company on a couple of occasions and he was a big part of the company's golden years; unfortunately, he passed away in 2002.)

I tried this new burger, and while it was good, it was not all that different from the product that it replaced. I've always considered Wendy's to be a very good, fast-food restaurant, but in terms of meaningful change, how much can you really do with a burger? Not much, in my opinion; unless you make a drastic change, such as offering buffalo meat in place of beef. Now that's an idea that would garner attention and please the fast-food health police at the same time. (Buffalo meat, or bison is actually very tasty, and has much less fat, but is relatively expensive compared to beef.)

It's too early to tell whether Dave's Hot 'N Juicy will have a long-term, meaningful impact on business since it was rolled out near the end of last quarter. However, during Wednesday's third quarter earnings call, new CEO Emil Brolick, who has occupied that role for two months, painted a very positive picture of the product launch. Brolick stated that sales of the product have exceeded expectations, and have helped propel sales growth during the past five weeks to the best level the company has experienced since 2004. It's a nice start, but it's too early to declare victory. We've been down this road before with Wendy's.

Third-quarter results were mixed, in my view. While revenue rose 1.8% to $611.4 million, it was below the consensus estimate of $618 million. Earnings from continuing operations of $0.05 per share were a penny ahead of estimates. Same-store sales at North American company-owned restaurants grew 1.8%, not great, but a step in the right direction. Wendy's, which is now essentially free of Arby's, ended the quarter with about $1.36 billion in debt and $489 million in cash.

The company has continued to buy back stock, and has repurchased 30 million shares at an average price of $5.09 year to date through the beginning of October. In the past two years, the number of shares outstanding has decreased to about 396 million from 468 million.

Most interesting, from a marketing perspective, Wendy's is launching a new product line of mid-priced burgers, simply called "W". This product will be a 2.0-to-2.25 ounce burger, priced at $2.99, and will be positioned between the company's value burger options and "Dave's Hot N Juicy". Wendy's is hoping that consumers will "trade up" to the W from the $0.99 option. This move has me scratching my head. Will complicating the menu by adding a mid-priced burger really drive business? We'll see.

I've seen some positive developments at Wendy's over the past several months, but I remain a skeptical and somewhat frustrated shareholder.

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