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Wendy’s feels the heat from record-high beef costs

A triple cheeseburger combo is arranged for a photograph inA triple cheeseburger combo is arranged for a photograph in
A triple cheeseburger combo in a Wendy's restaurant in Colorado.Photograph by Matthew Staver — Bloomberg via Getty Images

Wendy’s (WEN) reported third-quarter revenue tumbled 20% from the sale of company-operated restaurants to franchisees, while the restaurant operator also warned of record-high beef costs and some future pressure from wage inflation. Here’s what else you need to know about the burger company’s latest earnings report.

What you need to know: After a solid earnings report from rival Burger King (BKW) and a disappointing performance from McDonald’s (MCD), Wendy’s lands in the middle of those two competitors. Wendy’s company-operated same-restaurant sales increased 2% for the quarter, worse than the 2.4% increase that Burger King reported by better than the 3.3% decline at McDonald’s. Wendy’s growth however, underperformed analysts’ expectations: they had estimated a 2.4% increase, according to a survey by Consensus Metrix.

All three chains are facing pressure in the U.S. market where consumers are spending more of their money at fast-casual chains like Chipotle (CMG) and Panera (PNRA), chains that offer menus that consumers perceive to be healthier. The industry is also challenged by the fact that low-income consumers, which spend more at fast-food chains, are still facing poor job prospects and weak wage growth.

The big number: Wendy’s revenue tumbled to $512.5 million from $640.8 million a year ago, a decline Wendy’s had anticipated as it lost revenue from the sale of company-operated restaurants to franchisees. Adjusted per-share earnings were unchanged at 8 cents a share. Both of those figures narrowly missed Wall Street’s expectations.

What you might have missed: President and Chief Executive Emil Brolick said Wendy’s was faced with higher beef costs than initial projected, while some temporary restaurant closures during the quarter also hurt revenue and profitability. The performance of an October promotion that focused on some barbecue-flavored offerings was “in line with our expectations,” Brolick said, however Wendy’s lost some momentum late in the third quarter and is still facing some challenges in the current quarter. The company is responding by spending more to advertise the company’s “Right Price Right Size” menu.

The company also anticipates some pressures on the cost side, warning it expects the “record-high beef costs we are currently facing will continue.” The food index for beef and veal has risen nearly 17% since January through September, according to the Labor Department, so Wendy’s isn’t alone in facing such high beef expenses. Another challenge? Wage inflation and the implementation of the Affordable Care Act.