Wendy's Completes System Optimization Initiative


Leading quick-service restaurant chain, The Wendy's Company (WEN) completed its System Optimization initiative with the recent sale of 104 restaurants in four U.S. markets – Phoenix, Los Angeles/Palm Springs, Hawaii, and Albuquerque.

The recent sale of 104 restaurants involves the sale of 40 outlets in the Phoenix region to Arizona Restaurant Company, LLC, 32 Los Angeles/Palm Springs area restaurants and seven Hawaii outlets to Cotti Foods Hawaii, Inc., and 25 Albuquerque area restaurants to JAAB Restaurant Holdings, LLC.

The System Optimization initiative was started in Jul 2013 for transitioning into a franchise-based model. It aimed at optimizing the restaurant portfolio by concentrating ownership geographically and reducing total system ownership from 22.0% to approximately 15.0%. As per the System Optimization initiative, Wendy's sold 418 company-operated restaurants concentrated in 13 U.S. markets, mainly in the West.

This initiative also includes expansion, closure of underperforming units, and several other growth initiatives. Under the System Optimization program, the company is also working on the image activation of these outlets. The company intends to reimage about 180 restaurants in Wendy's contemporary Image Activation restaurant design and also has development plans for about 100 new restaurants. Operators with a proven track record and conforming to the company’s reimaging program are being chosen for this transition.

This franchise-based business model helps in generating earnings and return on equity growth by lowering capital requirements. Moreover, it adds to the top line in the form of royalty and rental income. It also helps the company to generate strong free cash flow, thereby maintain a healthy balance sheet. Alongside, free cash flow allows reinvestment for increasing brand recognition and enhancing shareholder return. With the business mix trending more toward franchised units, the company is likely to be less affected by inflation compared to its peers.

With the completion of the System Optimization initiative, this Zacks Rank #1 (Strong Buy) stock will now operate about 1,000 restaurants in the United States and Canada.

Last month, Wendy’s posted mixed fourth-quarter results with earnings beating the Zacks Consensus Estimate while revenues missing the mark. Despite a sluggish sales scenario, the decent performance on the earnings front signals that the restaurateur is successfully transitioning itself and working on its cost structure. Menu innovation, re-imaging of units, net domestic unit growth and international expansion set a more bullish tone for Wendy’s in the near future.

Some other stocks worth considering in the restaurant industry include Ignite Restaurant Group, Inc. (IRG), Buffalo Wild Wings Inc. (BWLD) and Burger King Worldwide, Inc. (BKW). While Ignite Restaurant holds a Zacks Rank #1, Buffalo Wild Wings and Burger King carry a Zacks Rank #2 (Buy).

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