Web Exclusive | January 2011 | By Barney Wolf

Arby’s Sale Had Warning Signs

Analysts say the brand has suffered over the last decade, but still estimate a purchase price of at least $335 million.

Roast beef sandwich chain Arbys is up for sale.
image used with permission.

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Just two years after getting hitched, Wendy’s and Arby’s may be breaking up. But few analysts are surprised.

Wendy’s/Arby’s Group Inc., the Atlanta-based company that owns the two quick-service restaurant brands, said last week that it is seeking “strategic alternatives” for Arby’s, including a possible sale of the struggling roast beef sandwich chain.

“The reality is that the Wendy’s brand, given its relative size and scope, is the key driver of shareholder return,” chairman Nelson Peltz said bluntly in a statement.

Peltz, an investor who brought the two chains together, said Wendy’s/Arby’s would be best served by focusing its management and financial assets on growing Wendy’s, the No. 3 burger chain with some 6,500 restaurants in more than 20 countries.

Financial analysts who track the company say Arby’s could draw anywhere from $335 million to more than $600 million. The most likely buyer, they say, would be a private-equity company looking to turn around the chain in order to sell it after a few years.

Wendy’s/Arby’s did not disclose whether it had been contacted by a potential buyer, and “there’s no timetable for the review” of alternatives, says spokesman Bob Bertini.

The announcement about Arby’s came just two days after competitor Yum Brands Inc. announced it would sell two of its brands, Long John Silver’s and A&W All-American restaurants, to focus on its other concepts, KFC, Pizza Hut, and Taco Bell.

Restaurant industry acquisition activity picked up last year, led by 3G Capital’s $3.9 billion purchase of Burger King and Apollo Management LP’s purchase of CKE Restaurants for $1 billion.

Arby's is the nation's second-biggest quick-service sandwich chain with nearly 3,700 units and $1 billion in sales last year, less than half the $2.4 billion recorded by Wendy's.

The parent company reported yesterday that it lost $4.3 million in 2010 after earning $3.5 million the previous year. Sales at Arby’s stores open more than a year declined 5.8 percent from 2009, while same-store sales at Wendy’s were off a slight 0.6 percent. And while margins at company-operated Arby’s restaurants slid to 11.6 percent last year from 13.4 percent a year earlier, Wendy’s restaurant margins were virtually flat at 14.8 percent.

“Wendy’s is by far the more successful of the two chains,” says Joscelyn MacKay, a financial analyst and credit specialist at Morningstar Inc., a Chicago-based investment research firm. “Arby’s has been destroying the company’s shareholder value.”

Arby’s, which Peltz acquired in 1993 as part of a larger deal, suffered double-digit-percentage same-store sales declines the first two years after it merged with Wendy’s in a $2.3 billion all-stock deal that closed in fall 2008.

Peltz owns about one-fourth of Wendy’s/Arby’s shares through his investment firm Trian Fund Management.

The problems at Arby’s, however, are chronic and go back much further than the Wendy’s deal, says Vicki Bryan, a Chicago-based bond analyst with Gimme Credit LLC. She points to an unfocused and expensive menu, poor marketing, and inconsistent store performance.

“There has been no material improvement, in our view, in Arby’s operations and management for more than a decade, during which time the value of the brand eroded considerably,” Bryan said in an e-mail to QSR.

Analysts say the economic downturn hit Arby’s harder than most quick serves because of the chain’s relatively pricy sandwiches and lack of a $1 menu. Diners turned to less expensive alternatives during the recession, forcing Arby’s to build a value menu.

“The reality is that the Wendy’s brand, given its relative size and scope, is the key driver of shareholder return.”

Management “couldn’t just take a few of their products and put them on the value menu, because those items weren’t there,” MacKay says. “They had to create a whole new menu, and that took time—too much time.”

Weak sales during the past three years “have led to significant margin and profit deterioration” at the sandwich chain, said Chris O’Cull, a financial analyst at Atlanta-based investment firm SunTrust Robinson Humphrey, in a report to clients. O’Cull estimated that earnings before costs dropped by two-thirds during that period.

Arby’s not only responded by initiating its $1 menu last year but also by lowering other prices and making some management changes. Bryan says the steps may have been taken to spruce up the chain for a sale.

Still, the moves appear to be showing some traction. Arby’s same-store sales jumped 3.1 percent during the final three months of the year over 2009’s final quarter, the first year-over-year increase in years, said Deustche Bank analyst Jason West.

“One could argue that [Wendy’s/Arby’s] is selling the Arby’s brand at a cyclical trough,” which could help improve its sales value, West said in a report to clients.

O’Cull said in his report that Arby’s is in the early stages of a brand recovery. He said the steps taken so far “can be successful in conjunction with a more robust national media strategy.”

That, however, will be costly and time consuming, analysts say, giving Wendy’s/Arby’s one more reason to sell the chain.

Comments

As mentioned in the article, Arby's has never had it together, and yes, with the downturn in the economy, then, and only then, did their marketing and menu start showing some signs of the times with less expensive "fast food" dining. That, and the fact that they were all over the place with their menu items, and marketfresh sandwiches, etc...with higher prices than most of the "fast food" chains, I am amazed that they saw much improvement in their stock.Wendy's on the other hand has always been consistent with their menu and marketing. Only lately, they opted for "daughter Wendy" (or who ever she is) into their advertising, which in my opinion was a bad move. Overweight, not very attractive and the commercials wouldn't move a burger if you paid someone. But yet, their marketing/advertising people kept this new campaign going, and I think that those commercials might have hurt them a little as well.What I don't understand is why doesn't all the chains get more "real" and really market themselves to their clients. The average person buying "fast food" isn't always looking for price, but consistency in a menu. Adding specials or deals on a weekly basis is good to, and of course holiday menus and specials. I hope that who ever purchases Arby's, they start doing some "real" marketing. Market "up" their croissant type "pies" too, which are fabulous, work on their consistency & weekly specials! Maybe try adding some Baked Potatoes too with shredded Roast Beef & Cheese!

As mentioned in the article, Arby's has never had it together and yes, with the downturn in the economy, then, and only then, did their marketing and menu start showing some signs of the times with less expensive "fast food" dining. That, and the fact that they were all over the place with their menu items, and marketfresh sandwiches, etc...with higher prices than most of the "fast food" chains, I am amazed that they saw much improvement in their stock.Wendy's on the other hand has always been consistent with their menu and marketing. Only lately, they opted for "daughter Wendy" (or who ever she is) into their advertising, which in my opinion was a bad move. Overweight, not very attractive and the commercials wouldn't move a burger if you paid someone. But yet, their marketing/advertising people kept this new campaign going, and I think that those commercials might have hurt them a little as well.What I don't understand is why doesn't all the chains get more "real" and really market themselves to their clients. The average person buying "fast food" isn't always looking for price, but consistency in a menu. Adding specials or deals on a weekly basis is good to, and of course holiday menus and specials. I hope that who ever purchases Arby's, they start doing some "real" marketing. Market "up" their croissant type "pies" which are fabulous, work on their consistency & weekly specials! Maybe try adding some Baked Potatoes too with shredded Roast Beef & Cheese!

I have worked both sides of the fence with Arby's and yes, management has not made a dent with alot of their decisions and long tenured egos! It has taken them over two years + to get rid of those high priced field leaders that only cared how big their bonus was going to be! They need to go back to the basics and truly listen to those franchisees, the ones that have their "skin" in the game for a long time and those that invested their "personal life" towards the brand! I see the exact same thing happening to the CiCi's Pizza brand; the only difference is one is on the stock exchange!- but both corporate structures operate with a good ole boy mentality no better than the average franchisee!

I agree with your comment also. I remember working for the company hoping the next time around I would see a bonus. I worked with a manager directly one position above myself who tried whatever she could to help get a bonus and none of her cheats worked. The constant visits from the District Manager hinted to us that we were not trusted and that we apparently did not know what we were doing although he called us a " Top Operation " And the Regional manager coming around all arrogant, egotistical, and smug, coming through the drive thru to see if we could get an order right. Afterwards, he comes in and waves an Arby's sauce packet in my face in the middle of a lunch rush saying " ONLY ONE PACK PER SANDWICH!" full lobby and all. That's what they pay him the big salary for. What a bunch of jerks!

I had worked for Arby's for many years in a leadership position and I can honestly say, the reason that they did not have consistancy in their restaurants is because of how their region leaders treat their supervisors and employees. It seemed to be all about them. They were more worried about having dog and pony show tours with company leaders than actually running the business and they took out some of their great people to keep their good old boys image. They recently dumped the CEO, VPO and COO and hired women to take their place but it was too little too late and at the region levels of the company, men hold all the positions and those men happen to have little regard for the people who work for them. Really, they cover up problems to make themselves money instead of fixing problems and create budgets to allow themselves bigger bonuses while the company slides down hill. Reminds me of the banking industry break down. The best thing Arby's can do is to change leadership at the region levels from region leader to region vice presidents of operations. That is where the real difference can take place. After all, they are really the ones running the business into the ground and should be the ones to pay for it.

I agree WHOLEHEARTEDLY!!! It was a dog and pony show, and when the regional supervisor was around, he treated the employees like dirt in front of an audience. I also received the same treatment when I worked for the company. I attended the big meetings at various locations for the salaried managers and they seemed to give awards for just about everything imaginable. Frivolous award ceremonies is what I called them, we clapped until we had blood splashing from our palms. I would rather they just remain ignorant and arrogant, let them crash and burn. I left due to some unfortunate life events and the District manager played the "You're Dead To Me Game" I could not get a verifiable reference when I needed one and it hurt my finding a job for quite a few months. I would like to see Arby's go away.

I just wanted to comment on a commercial posted today on Google by which we felt offended because it read that only legal residents and over 18 could be part of their commercial.

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