Beef costs eat into Wendy's profit

NEW YORK - Wendy's (WEN) says higher beef costs are eating into its profit.

The hamburger chain on Thursday reported a lower-than-expect profit for its third quarter, noting that beef costs were "much higher than our initial projections." It also said it expects the "record high" costs to continue. A day earlier, Burger King's biggest U.S. franchisees, Carrols Restaurant Group, said its beef cost were up 32 percent from the year-ago quarter.

McDonald's and Chipotle have also said they faced higher beef prices in the quarter and that they expect the pressure to continue.

During an earnings call last month, Chipotle Chief Financial Officer John Hartung chalked up the cost increase to "strong demand and tight supply." He said the elevated costs are expected to continue as livestock producers "rebuild their herds after two years of drought conditions."

Fast-food companies can deal with higher ingredient costs in a variety of ways, without necessarily passing on all the costs to customers. Arby's CEO Paul Brown, for instance, has said the company can promote other items, such as chicken sandwiches. Wendy's also promoted its pulled pork sandwiches in the most recent quarter, although the company didn't cite beef costs as the reason for doing so.

Alex Macedo, president of Burger King's North American region, also said this week the company is working with franchisees to reduce overall restaurant costs to offset the higher beef costs. And Wendy's said Thursday it plans take actions to reduce costs by $30 million, primarily through the "realignment" of its U.S. field operations and savings at its restaurant support center in Dublin, Ohio.

It's not just beef costs that are pressuring Wendy's profit margins, however. The company is redesigning its restaurants as part of a push to recast itself as a more premium fast-food chain, akin to Panera. The closure of restaurants during the renovations hurts overall sales and profitability. But Wendy's has stressed the new restaurant designs ultimately help boost sales.

For the quarter, The Wendy's Co. said sales rose 2 percent at company-owned locations, and 0.5 percent at franchise-owned locations. It attributed the difference to the higher number of company-owned restaurants that have the new look.

Looking ahead to next year, Wendy's also expects profit to be pressured by minimum wage increases and the implementation of the Affordable Care Act, which requires large employers to provide insurance to full-time workers.

For the quarter, it earned $22.8 million, or 6 cents per share. Excluding one-time items, it earned 8 cents per share, which was a penny shy of Wall Street expectations, according to Zacks Investment Research.

Revenue of $512.5 million also fell short of the $516.7 million analysts expected.

Wendy's said it still expects full-year earnings in the range of 34 cents to 36 cents per share.