Long-Term Assets Affect the Amount of Profit

Filmmaker Morgan Spurlock undergoes one of the countless tests he subjected himself to while filming his first feature, “Super Size Me. ” During the film, which examines the obesity epidemic overcoming America, Spurlock took the fast track to becoming an obese American and ate nothing but McDonald’s for 30 days straight – with dramatic results. Events reported in the media, such as incidents involving food-borne illnesses or food tampering, whether or not accurate, can cause damage to the Company’s reputation and swiftly affect sales and profitability.

Incidents like these are very detrimental to a company because it is so damaging to the company’s brand name and reputation. The affect on sales is immediately felt, even if the incident is are accurate or not, the risk is very real. Company Overview Wendy’s A fast food chain based in Dublin, Ohio founded by Dave Thomas and Robert Barney, in 1969. It was named after Dave’s daughter, Melinda, who had the nickname, “Wendy”.

There are 6,600 restaurants worldwide. Wendy’s is famous for its chili, frosty, and square hamburgers.

One of their most famous campaigns featured actress Clara Peller in”Where’s the Beef? ” This phrase entered into American Pop Culture. (Interesting note: Clara Peller was fired from Wendy’s because she did a Prego commercial saying she “finally found” the beef. ) Clara was replaced by the founder Dave Thomas as their spokesman until his death in 2002. Internationally Wendy’s has 718 stores located from Aruba, Guam, Japan, to the United Kingdom. Competition has forced them out of certain areas.

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They did own Tim Horton’s and Baja Fresh until their sales in 2005, 2006.

The Company intends to expand into the breakfast day part, where competitive conditions are challenging, the Wendy’s brand is not well known and markets may prove difficult to penetrate. They plan to expand breakfast to more than 50% of its restaurants by late 2008. As a result of the foregoing, breakfast sales and profits there from may take longer to reach expected levels or may never do so. 8 McDonald’s McDonald’s was founded by Raymond Albert Kroc in 1955 with brothers Dick and Mac McDonald. Ray mortgaged everything moved west to sell multi-mixers at the age of 54

In 1965 McDonald’s had its initial public offering. A hundred shares of stock valued at $2,250 would have been worth $3. 3 million on December 31, 2006. McDonald’s operates approximately 550,000 restaurants in the U. S. generating $365 billion in annual sales and employs 465,000 people. They also operate in more than 100 countries worldwide. McDonalds owned Chipotle and Donato’s pizza until they were sold in 2004, 2005. They currently operate Boston Market. McDonald’s serves breakfast, lunch and dinner and has even created niche menu items like gourmet coffee to compete with Starbucks.

McDonald’s has an aggressive strategy they call the, “Plan to Win”. It outlines how to grow the company, generate revenues, and keep McDonald’s an industry leader. Let’s take a look at some numbers. Ratios Capital Solvency Total Debt Ratio: Total Liabilities/Total Assets This is a ratio that is good measure to compare companies without getting too complicated, a “feel” for the companies. As an investor it helps me determine a company’s level of risk. Compared to the industry both companies have a better debt ratio, however, I did notice one trend (see common size balance sheet, below).

Wendy’s assets have been declining because of financing and restructuring. In 2005 and 2006 they sold off Tim Horton’s and Baja Fresh. Long term assets, Good will, property and Equipment have all decreased. In reality, almost all their assets have decreased since 2002. The only things that did not decrease were cash and accounts receivable, which make sense due to sale of Tim Horton’s and Baja Fresh. Since Wendy’s is trying to find a buyer I’d say the company is trying to trim off all the “fat” from the company by closing unprofitable stores and selling it’s interests to look more attractive.

Wendy’s better hope they find a buyer because they are not setting themselves up for the long run. McDonald’s, on the other hand, is very consistent. Liabilities have steadily been decreasing relative to assets causing their ratio to go lower. McDonald’s has better managed their assets and liabilities and continued growth. Total Debt to Equity ratio- Total Liabilities/Shareholder’s Equity This ratio is important to an investor because it reveals the extent to which management is willing to fund its operations with debt, rather than using equity.

A higher ratio also means there is more risk of loans not being paid and then investors might have to put more money into the company themselves. Wendy’s total liabilities have been increasing relative to equity. McDonald’s liabilities have been decreasing relative to equity. Each company places in the middle to upper quartile against the industry. During 2006 Wendy’s announced a restructuring program to eliminate approximately $100 million of costs, including $80 million from its reported continuing operations. Although some of the savings from this effort were realized in 2006, most of the savings will be realized in 2007.

9 Wendy’s is trying to increase shareholder’s equity by doing a buyback: The Company repurchased 26. 2 million shares in 2006 for $1. 0 billion, including 22. 4 million shares for $804. 4 million in a modified “Dutch Auction” tender offer in the fourth quarter. 10 McDonald’s is, again, very consistent. This is what I want to see. While this ratio is not very alarming in that both are doing fairly well, the bigger question is if Wendy’s is doing the buyback to improve financial ratios like P/E or Earnings Per Share to look more attractive to a buyer. If they are then the buyback is detrimental to shareholders in the long run.

Liquidity Current Ratio This is considered to be the standard measurement of a business’ financial health. Is a company able to meet its current obligations by measuring if it has enough assets to cover its liabilities? Both companies place in between the lower and middle quartile against the industry. At first glance it looks as though Wendy’s is doing a good job. Current Assets are increasing relative to current liabilities; however, we know this was due to the sale of Baja Fresh and Tim Horton’s. Current Assets are great due to the sacrifice of long term assets.