030716 Wendy's June Sales Fall

Chicago - Wendy's International Inc. said that higher state taxes will cause second-quarter earnings to decline, and it warned its full-year profit would be lower than expected.

Shares of Wendy's, the No. 3 U.S. hamburger chain, were little changed, up slightly even though the company also said that June sales were soft.

Analysts attributed some of the monthly sales weakness to pressure from larger rival McDonald's Corp., which recently introduced a line of entree-sized salads that competes with Wendy's own salad Garden Sensations salad offerings.

June sales at Wendy's company-owned hamburger restaurants open more than a year fell 1.9%, in part due to difficult comparisons, the company said. In the same period a year earlier, those sales were up 7.3%.

"The lackluster performance in June marks the seventh consecutive month of negative same-store sales for the burger brand," wrote Salomon Smith Barney analyst Mark Kalinowski in a research note Monday. "When comparisons ease later this year, especially so in (the fourth quarter), Wendy's same-store sales should bounce back nicely."

Lehman Brothers analyst Mitchell Speiser, who rates Wendy's shares "overweight," cautioned that continued market share losses to McDonald's would likely keep Wendy's near-term results weak.

Solid performance from the company's Tim Hortons doughnut shops, which saw June same-store sales rise 4.6% in their predominantly Canadian locations, will help offset some Wendy's weakness, he said.

OHIO FRANCHISE COMPANIES HIT WITH HIGHER TAX

Wendy's, based in Dublin, Ohio, said its effective tax rate in the second quarter will be 39.5% due to "unexpected changes" in state tax laws. The first-quarter rate was 36%. The rate in the second half of the year is forecast at 36.8%.

Ohio has increased the rate at which it taxes franchise companies such as Wendy's, company spokesman Denny Lynch said. The change is retroactive to Jan. 1, he said.

The company sees second-quarter earnings of 53 cents a share, down from 54 cents a year earlier, with higher taxes cutting profit by 3 cents a share. Analysts on average had forecast profit of 56 cents a share.

Wendy's said it expects to earn $1.97 a share to $2.03 a share in 2003, down from its prior forecast of $2.02 to $2.08. Analysts on average had forecast $2.02 a share.

June same-store sales at franchised U.S. Wendy's restaurants fell 2%.

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