Wednesday, October 5, 2005

Could Katrina and Rita zap Wendy's again?

Watch financial analysts give Wendy’s a drubbing for attributing its less-than-stellar quarterly results in large part to Hurricanes Katrina and Rita.

The quick-service company reported this morning that same-store sales at its namesake brand fell by 5% at company units and by at least 5.5% at franchised stores during the quarter ended Oct. 2. In explaining why sales had slipped, management stressed that the chain had lost more than 2,676 store days (number of stores times the number of days they were shut), and that 47 affected units had yet to re-open.

What’s more, headquarters said in releasing preliminary results, corporate revenues were lowered by the loss of royalties from the franchised stores. Yet rents and payroll expenses didn’t abate, and the concern contributed to relief efforts in the Gulf area. All told, said management, the hurricanes has likely trimmed earnings by two cents a share.

If that discouraging news had been released in a vacuum, investors might have been more accepting. But almost simultaneously investors were learning that same-store sales had increased domestically by 2% at Taco Bell, Pizza Hut, KFC and the other brands of franchising giant Yum! Brands during the quarter ended Sept. 3. And P.F. Chang’s disclosed that comp sales were up 2.8% in the third quarter at its Pei Wei Asian Diner concept, which, like Wendy’s Baja Fresh, competes in the fast-casual market. Baja’s same-store sales declined 4.1%.

To make matters worse, skepticism about the effects of Katrina had been stoked in the days and weeks beforehand by earnings alerts from companies competing outside of foodservice. Avon and Estee Lauder, for instance, warned investors that Katrina had adversely affected cosmetic sales. In an inspired piece of analysis, Associated Press business columnist Rachel Beck noted that a similar explanation than lower-than-expected earnings had been posited by mattress maker Tempur-Pedic International and ATM manufacturer Diebold. She dubbed the phenomenon the blame-it-on-the-rain excuse.

In Wendy’s instance, stores were really closed, if not destroyed. And, as it noted, gas prices have risen to a level that pilots typically announce on commercial flights as “our cruising altitude.” Most dismaying of all, it will likely be faulted rather than appreciated by investors for continuing to pay staffers who lost work because of Katrina and Rita, and for contributing to the relief efforts. That kind of good will pays dividends of a far different sort, and not merely on a quarterly basis.


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