Wendy's/Arby's Group's WEN third-quarter top-line results fell short of expectations, but our thesis regarding the margin expansion potential of the postmerger firm remains intact. There is no change to our fair value estimate.

Restaurant margins (or sales less food, labor, and occupancy costs) for company-owned Wendy's restaurants increased 400 basis points to 15.2%, showing remarkable improvement in a chain that had struggled to generate profitability before the merger. Although much of the margin improvement stems from price increases and lower food commodity costs, we have generally been pleased by efforts to streamline labor and utilities expenses and lower food waste costs (which represented almost half of the 400-basis-point gain for the quarter). We still have some concerns about ongoing operating margin deleverage at the Arby's brand, and we have reduced our full-year consolidated operating margin assumptions as a result. However, the firm remains well on its way to meet its three-year target of $100 million of restaurant margin improvement at Wendy's and reduce general and administrative costs by $60 million through its shared service center and other information technology improvements. We also believe the establishment of a national supply-chain cooperative among Wendy's franchisees could eventually extend the firm's cost savings past its original targets.

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