Wendy's/Arby's Group Inc. will raise prices to help offset rising costs for ingredients such as beef and said it is making progress on the planned sale of Arby's, sending its shares up 4.5 percent.
The third-biggest U.S. fast-food restaurant operator depends on fresh beef at Wendy's and roast beef at Arby's. It now expects beef costs to rise 20 percent this year, compared with its previous call for an increase of 10 to 15 percent, Chief Financial Officer Stephen Hare said on a conference call with analysts Tuesday.
It also sees overall commodity costs — including beef, bacon, fryer oil, dairy and distribution costs — rising 5 percent to 6 percent, compared with a previous estimate of 2 percent to 3 percent.
Wendy's/Arby's plans to use selective price increases and the promotion of more profitable items to help offset those higher costs, Hare said.
Chief Executive Roland Smith told analysts the company continues to make "substantial" progress on the sale of Arby's. He said the field of qualified bidders had narrowed and management is pushing to close a deal as soon as possible.
During the first quarter, Arby's had stronger sales than Wendy's, which caused some indigestion on Wall Street.
North American sales at Wendy's restaurants open at least 15 months were flat. The company cited higher sales taxes in two Canadian provinces.
Same-restaurant sales at all Arby's North America units were up 5.5 percent as turnaround efforts took hold.
Bernstein Research analyst Sara Senatore called the first-quarter results "modestly disappointing as top-line improvement at Arby's was again offset by sequentially flat comps at Wendy's, the brand on which the future of the company now depends thanks to the intended Arby's sale."
Wendy's/Arby's reported its first-quarter net loss narrowed to $1.4 million, or nil per share. Excluding one-time items, its profit in the latest quarter was 1 cent per share, missing the average Wall Street forecast by a penny, according to Thomson Reuters I/B/E/S.
The company lowered its full-year adjusted earnings forecast to between $330 million and $340 million — down from $345 million to $355 million previously — citing higher commodity costs.
Many U.S. restaurant chains are grappling with higher costs for ingredients such as beef, bacon, cheese and produce. Analysts say strong brands such as fast-food market leader McDonald's Corpare in the best position to raise prices.
Walter Stackow, senior research analyst at Manning & Napier, said the "road to improvement will not be a straight line" at Wendy's, which is betting on new breakfast items and revamped salads, fries and bigger burgers to drive growth.
"Over the short run, however, the environment is going to remain challenging and (Wendy's) will struggle with managing the impact of a volatile commodities input cost environment," said Stackow, whose firm recently sold its Wendy's/Arby's stake.
Wendy's/Arby's shares were up 22 cents at $5.04 in midday trading on the New York Stock Exchange.
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