Wendy's Needs to Be Re-Heated

Wendy's (NYSE: WEN) reported third quarter earnings this morning that fell short of short of Wall Street estimates. Shares may need to be reheated at these levels.

The company reported third quarter earnings of 5 cents per share excluding items on revenues of $611.4 million in revenues. Wall Street was looking for earnings of 4 cents per share on $618.23 million in revenues. Including the sale of the Arby's chain to private equity Roark Capital Group for $130 million in cash, the company lost 1 cent per share.

As a result of the mixed earnings, shares are off 3% as of the time of this article.

Emil Brolick, President and CEO said, "We generated transaction growth, which contributed to a 1.8% same-store sales increase at Wendy's(R) North America Company-operated restaurants, during the third quarter of 2011. Wendy's remains on track to produce positive transactions for the year.

Brolick was also positive on the launch of a new product, Dave's Hot 'N Juicy cheeseburger. "Looking to the fourth quarter, the very successful October launch of Dave's Hot 'N Juicy(TM) cheeseburger product line has exceeded our expectations and will re-establish our leadership in the premium-quality hamburger category," Brolick went on to say.

On the conference call, the company talked about the importance of remodeling stores. It said it is currently evaluating prototypes for store remodels. As the Dublin, Ohio-based company tries to compete with McDonald's (NYSE: MCD), Burger King and Yum Brands (NYSE: YUM), it has reshaped its menu with new ingredients. It is trying to appeal to a more health conscious consumer, with new salads, hamburgers and other healthier offerings. Wendy's is also moving into breakfast initiatives nationwide, but this plan is taking longer than investors had hoped. Wendy's is also tying to expand to higher margin products, like drinks and snacks to help it compete against the other fast food chains, and drive higher same-store-sales.

The problem with the Wendy's story is that Wendy's has seemingly been in transition forever. Brolick took over the CEO job from Roland Smith in September, and needs to clearly outlay to consumers what Wendy's is about, and who it caters to. The company has not clearly gotten its message out to consumers, and that is shown in the stagnant share price.

The move into breakfast foods, which have a higher margin, may help boost the company's stock. However, Wendy's shares are not on the value menu, trading at 24 times expected 2012 earnings. Perhaps the breakfast initiative will finally take off, and shares will move as it takes off.

Otherwise, shareholders will be left asking "Where's the beef?" For now at least, it looks like there is little meat to this story. I say hold the pickles, and move on.