Wendy's International Inc. (WEN) Wednesday reported a less-than-expected drop in December same-store sales and said a legal verdict would add to its loss in the fourth quarter.

Sales at company-owned Wendy's restaurants open at least 15 months fell 2.1 percent last month, less than the 3 to 5 percent decline four Wall Street analysts had been expecting.

At Wendy's franchised hamburger restaurants, same-store sales were down 2 to 2.3 percent for the month.

Same-store sales, a key retail measure, jumped 9.8 percent at Wendy's Tim Hortons bakery chain in the United States, and rose 6.5 percent to 6.6 percent in Canada.

Separately, the No. 3 U.S. burger chain said it would increase its legal reserves by 3 cents a share while it appeals the verdict of a lawsuit involving a dispute with a party that had tried to buy franchised Wendy's restaurants in 1992.

Including that increased reserve and a previously announced impairment charge of $175 million to $190 million for its struggling Baja Fresh (search) Mexican-style chain, Wendy's now expects a loss of $1.06 to $1.26 a share in the fourth quarter.

Excluding the impairment charge, the company expects profit of 43 cents to 46 cents a share, down from its previous estimate of 46 cents to 50 cents. Analysts on average forecast 49 cents a share, according to Reuters Estimates.

Also on Wednesday, Smith Barney analyst Mark Kalinowski raised his rating on Wendy's shares to "hold" from "sell," saying he had underestimated the company's ability to address issues including high chicken costs, difficulties at Baja Fresh, and flagging sales at its flagship burger chain.

"Since our downgrade to a 'Sell' rating, several of the issues above have been at least partially addressed," Kalinowski wrote in a note to clients.

Wendy's, which has faced stepped-up competition from rivals McDonald's Corp. (MCD) and Burger King Corp. (search) in the last year, in recent weeks has pulled an unpopular advertising campaign off the air and rolled out a new program to allow customers to forego French fries for other side dishes as it seeks to win back customers.

Wendy's shares were down 29 cents, or less than 1 percent, at $38.66 Wednesday on the New York Stock Exchange.