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Here's Why You Should Retain Wendy's (WEN) in Your Portfolio

·5 min read

The Wendy's Company WEN is likely to benefit from solid comps growth, digitization initiatives and expansion efforts. This and focus on Breakfast daypart offerings bodes well. However, a rise in commodity and labor costs is a concern.

Let us delve into the factors highlighting why investors should hold on to the stock for the time being.

Catalysts

Wendy's continues to impress investors with solid global same-restaurant sales growth. During second-quarter fiscal 2022, global comps increased 3.7% year over year. The improvement was driven by continued strength across its U.S. and international businesses. During the quarter under discussion, comps in the United States witnessed growth of 2.3% year over year. The upside was driven by growth in breakfast and digital businesses. Same-restaurant sales at International restaurants (excluding Venezuela and Argentina) rose 15.2% year over year. For 2022, the company anticipates global system-wide sales growth to be 6-8%.

Wendy’s has been focusing on digitalization to drive growth. During second-quarter fiscal 2022, the company had nearly 9% of its sales through digital channels in the United States and approximately 15% in international markets. This was driven by gains in delivery and mobile ordering sales and several successful promotions. Since the company launched Wendy's Rewards program app, downloads have increased. The company has been witnessing higher average checks.

Wendy’s focuses on Breakfast daypart Offerings to drive incremental sales. Wendy’s continues to focus on Breakfast daypart Offerings to drive incremental sales. During the fiscal second quarter of 2022, the company launched its breakfast offerings in Canada and reported solid performance with respect to the same. Also, it reported strong breakfast performance in the United States. The company has been benefiting from its marketing efforts (buck biscuit promotion and awareness messaging), high-quality offerings, repeat ordering and high customer satisfaction levels. The company expects the breakfast business in the United States to accelerate in 2022 by roughly 10%. By the end of 2022, it anticipates average weekly U.S. breakfast sales to be roughly $3,000 per restaurant. It remains optimistic on the back of promotions and the launch of new French Toast Sticks. For 2022, the company has set aside $16 million with respect to its global investment in breakfast advertising.

Wendy’s is steadfast in expanding its presence globally. The company’s international business is poised to be a growth driver in the days ahead. During the three months ended Jul 3, 2022, the company and its franchisees added 140 net new restaurants across Wendy’s system. The company stated that it has a robust pipeline and is on track to achieve its target of 3-4% net unit growth in 2022. Given the solid development foundation, the company anticipates opening 8,000-8,500 systemwide restaurants by the 2025-end. The company emphasized on a new global restaurant design to boost its operating efficiency. The design integrates digital access and focuses on optimized layouts to enhance convenience, speed and accuracy. Moreover, the initiative lowers build costs (by almost 10%), thereby paving a path for improved returns.

Concerns

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Zacks Investment Research


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Shares of Wendy’s have declined 18.6% so far this year compared with the industry’s 14.1% fall. The downside was caused by the coronavirus crisis. The restaurant industry has been facing declining traffic for quite some time. Although most dining services are open, traffic is still low compared with pre-pandemic levels. Going forward, the company intends to monitor the situation regularly to gauge the impacts of COVID-19.

The company has been continuously shouldering increased expenses, which have been detrimental to margins. During the fiscal second quarter, the company-operated restaurant margin came in at 14.5% compared with 20.3% reported in the year-ago quarter. The downside was primarily due to higher commodity and labor costs, a decline in customer counts and increased investments (to support the entry into the United Kingdom market). However, this was partially offset by a higher average check.

Zacks Rank & Key Picks

Wendy’s currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Some better-ranked stocks in the Zacks Retail-Wholesale sector are Tecnoglass Inc. TGLS, Cracker Barrel Old Country Store, Inc. CBRL and Arcos Dorados Holdings Inc. ARCO.

Tecnoglass sports a Zacks Rank #1. The company has a trailing four-quarter earnings surprise of 24.4%, on average. Shares of the company have declined 1.3% in the past year.

The Zacks Consensus Estimate for Tecnoglass 2022 sales and earnings per share (EPS) suggests growth of 28.2% and 47.7%, respectively, from the year-ago period’s levels.

Cracker Barrel carries a Zacks Rank #2 (Buy). Cracker Barrel has a long-term earnings growth of 6.9%. Shares of the company have decreased 24% in the past year.

The Zacks Consensus Estimate for Cracker Barrel’s 2022 sales and EPS suggests growth of 16.3% and 15.4%, respectively, from the year-ago period’s levels.

Arcos Dorados carries a Zacks Rank #2. Arcos Dorados has a long-term earnings growth of 34.4%. Shares of the company have risen 31.3% in the past year.

The Zacks Consensus Estimate for Arcos Dorados’ 2022 sales and EPS suggests growth of 27.1% and 104.2%, respectively, from the year-ago period’s levels.


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