Arby's to change stores, leadership

In the wake of the departure this week of Tom Garrett, president and CEO of Arby's Restaurant Group, analysts say Arby's must refurbish its restaurants to attract diners.

"There is a case to be made that there's a lot of sandwich shops, some of which do a better job than Arby's," said Sanford C. Bernstein analyst Sara Senatore. "They have some very old, stale restaurants."

Atlanta-based Wendy's/Arby's Group Inc., the third-largest quick-service restaurant company in the U.S., has been troubled by the underperformance of its Arby's wing. Arby's systemwide same-store sales in North America fell 9 percent in the third quarter ending Sept. 27. Profit margins at company-operated restaurants fell. The company said it would expand its $1 menu to counter aggressive discounts by competitors.

Historically, Arby's was more reluctant than its competitors to lower its prices or emphasize cheaper items, reasoning that it didn't want to leave money on the table. But when the recession bit into diners' wallets, the company saw that its higher prices were restraining its sales. In response, it launched promotions such as combo meals for $5.01.

The quality of Arby's food is not really the problem, industry observers say. The real issue is that "the food and experience don't match up," RBC Capital Markets analyst Larry Miller said.

The company recently said it would spend between $75 million and $100 million to remodel stores. Wendy's/Arby's had about $645 million in cash on hand at the end of September.

"Frankly, that's' probably what they should be spending their cash on," Senatore said. "Opening stores is not the answer. They have to fix their existing stores."

Analysts say McDonald's had a similar problem with dated restaurants and managed to fix it by plunging money into renovations. Now, investors will watch to see whether the changes at Arby's helps it push through the recession.

For now, Roland Smith, president and CEO of Wendy's/Arby's Group, is taking over Garrett's old job as president of Arby's. A search is under way for a permanent president to replace Garrett, 48, who was on the job only since September 2008.

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