Wendy’s sales fell again last quarter

The fast-food chain’s same-store sales fell 7.8% in the first quarter, but it also reached a deal for 1,000 locations in China.

Wendy’s same-store sales fell 7.8% in the first quarter, the company said on Friday, as struggles among low-income consumers and the chain’s shift away from breakfast proved too tough to overcome.

But international is a relative bright spot, though same-store sales outside the U.S. also declined, by 0.4%.

Still, the company reached a 1,000-unit deal with an unnamed restaurant operator to expand the brand in China, a potentially landmark deal for a chain eager to open restaurants internationally.

Wendy’s operates more than 1,400 locations outside the U.S., up 50% over the past five years.

But the company still has an issue in the U.S., where it is losing considerable market share to rivals McDonald’s and Burger King, which just reported same-store sales of 3.9% and 5.8%, respectively.

Same-store sales at the Dublin, Ohio-based chain were down at least 6.2% in each of the past four months, with the worst performance in February. That includes a 6.4% decline in April, during the company’s second quarter. The chain's domestic same-store sales have fallen for five straight quarters.

Wendy’s results were better than analysts expected, sending the company’s stock up around 4% in early morning trading on Friday.

The chain has struggled with low-income consumers, who have been cutting back on dining out at fast-food restaurants in recent years. Wendy’s has had more success with higher-income consumers.

But breakfast is also an issue. The morning daypart hurt Wendy’s same-store sales by 100 basis points, suggesting that the morning hours’ results are down well into the teens.

Consumers have cut back on breakfast, currently the weakest daypart in the fast-food sector right now. But Wendy’s has also given some operators the ability to stop service in the morning, which is a “large part” of why the company’s morning results have struggled.

“Breakfast remains an important daypart and growth opportunity for many restaurants in the system,” Ken Cook, Wendy’s interim CEO, told analysts. “Breakfast has been the most challenged daypart across the industry. That’s true both last year and this year, and we’re seeing the same thing.”

One big challenge for Wendy’s, and many other fast-food chains, is costs. Beef prices have soared, which has forced the brand and its operators to pay a higher rate for food. Commodity costs were up 4% in the quarter.

Restaurant-level margins at Wendy’s company stores declined 340 basis points to 11.4% of revenues.

That could be a challenge for many of the chain’s operators, whose profitability is even worse. Last year, for instance, U.S. franchisees’ net sales declined 6% and the average operator’s EBITDA margin, or earnings before interest, taxes, depreciation and amortization, was down 270 basis points to 9.3%.

Wendy’s does believe operations improvements can work, saying that restaurants with better operations and customer satisfaction scores generate higher sales and profitability than the rest of the system.

A quarter of the chain’s franchisees have implemented operations improvements and another quarter is in the process of implementing them.

The company is also in the process of working with operators to close about 350 restaurants. Those closures should be complete by the end of the second quarter, Cook said.

Wendy’s did not have an update on two major issues the chain is dealing with right now: A CEO search and its future as a public company.

Wendy’s has been without a permanent CEO for the better part of a year. And Nelson Peltz, the company’s former chairman and biggest shareholder, has said he may buy the company.