In an unusually gloomy report yesterday, Smith Barney restaurant research analyst Mark Kalinowski downgraded Wendy’s (NYSE: WEN) stock to “sell” as he predicts a surprisingly sluggish fourth quarter for the chain.

Early in the year Wendy’s reported almost 10 percent same store sales increases at company stores but those numbers have slowly eroded to -1.4 percent in September. Kalinowski says that sources indicate that same store sales may be down 5-6 percent in the fourth quarter, making it the worst quarterly comparison in at least ten years.

In late September, Wendy’s adjusted 2004 EPS estimates downward 3 percent to $2.25 to $2.30. Kalinowski, who had lowered his estimate to $2.27, has lowered it once again to $2.24 in anticipation of the company cutting estimates as well when third quarter results are published Thursday.

Kalinoski does not cite any specific problems but expresses concern over plans to repeat promotions of products in the fourth quarter. The company cited the rough hurricane season as the only reason for the September sales decrease which does not explain sales problems going forward. The decrease in September same store sales came out rather unexpectedly given the doable 3.5 percent increase in September 2003. Comparisons only get tougher over the next few months.

“Over the next 3-6 months, we see Wendy’s domestic sales being pressured by a vibrant McDonald’s, a resurgent Burger King, and tough year-over-year comparisons,” Kalinowski notes.

Earlier in the year Kalinowski predicted that 2004 may be the year Wendy’s surpasses number two quick-serve Burger King. In 2003, systemwide sales at Burger King was $7.9 billion compared to Wendy’s $7.48 billion. About the only way Wendy’s might not pass Burger King was the possibility of a “perfect storm”: Burger King improving and Wendy’s struggling. Storm clouds are indeed on the horizon.