Wendy's Exploring Possible Sale, Posts Lower Profit

Wendy's International, which has been working to turn around its chain of hamburger restaurants, said on Wednesday it was reviewing strategic options to boost shareholder value, including a possible sale of the company.

The announcement, which sent Wendy's shares higher, came as the company said its burger chain, No. 3 in the United States, reported a profit in the most recent quarter after posting an operating loss in the same period a year ago.

Wendy's, which is significantly smaller than rivals McDonald's and Burger King , has been remodeling restaurants, selling outlets to franchisees and tweaking its menu as it works to to revitalize sales and profits at its more than 6,600 restaurants.

But one analyst said some investors doubted whether those moves would ultimately translate into higher operating profit, adding that many thought Wendy's might consider going private.

"Most of the Street is skeptical about their ability to realize that operating profit," said Larry Miller, restaurant analyst at RBC Capital Markets. "That's why the privatization thing has been bantered around."

Wendy's said first-quarter net income was $14.9 million, or 15 cents a share, compared with $51.2 million, or 45 cents a share, a year ago. Last year's profit included the results of two chains Wendy's recently sold, Tim Hortons and Baja Fresh Mexican Grill.

Income from continuing operations, which excludes the divested chains, was $14.5 million, or 15 cents a share, compared with a loss from continuing operations of $5.9 million, or 5 cents a share, last year.

Wall Street analysts, on average, had expected earnings of 13 cents a share, according to Reuters Estimates.

Private Equity Target?

Wendy's has suffered in recent years as McDonald's and Burger King turned around their businesses, stealing market share from their smaller competitor.

Experts said that made the brand a perfect fit for private equity firms, which typically buy companies, increase their borrowings and improve operations, then sell them at a profit.

"With everything that's been happening in the sector, you have to say 'Where does Wendy's go?'" said Howard Davidowitz of New York-based retail consulting firm Davidowitz & Associates. "This is something that private equity is going to be interested in. This is a powerhouse brand."

Last year, billionaire investor Nelson Peltz, who questioned Wendy's strategy, placed three nominees on the company's board, and sped up a spin-off of its Tim Hortons coffeehouse chain. Peltz's deal with Wendy's also led to the sale of its Baja Fresh chain to an investment group.

Peltz's Trian Fund Management owned 8.3% of the company as of March 5, according to Wendy's proxy filing.

Wendy's annual meeting of shareholders is scheduled for Thursday, in Ohio.

Wendy's said there was no specific timeline to complete the review, which would include alternatives such as changes to its capital structure and revisions to its strategic plan.

"A number of stakeholders have offered suggestions about strategies to improve performance," Chairman James Pickett said in a statement. The review committee is made up of independent directors and will be led by Pickett, Wendy's said.

In pursuing strategic alternatives, Wendy's joins a growing list of restaurant companies looking outward to enhance shareholder value amid weakened consumer spending.

Casual dining company Applebee's is also reviewing strategic alternatives, and several others, such as Outback Steakhouse parent OSI Restaurant Partners Inc. and Lone Star Steakhouse & Saloon, have agreed to be acquired by private equity firms.

Wendy's, which is based in Dublin, Ohio, said sales at its company-owned U.S. hamburger restaurants open at least 15 months rose 3.8% during the quarter, while same-store sales rose 3.7% at franchised outlets.

Sales in recent months have benefited from new menu items such as a 99 cent spicy chicken sandwich and deli-style sandwiches, but the company said on Wednesday that rising costs on produce and chicken would result in higher-than-expected food expenses for the rest of the year.

Meanwhile, Wendy's backed its 2007 earnings estimate of $1.26 per share to $1.32 per share.