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Wendy's Banks on Unit Expansion & Technology Amid High Costs

Zacks Equity Research

The Wendy's Company WEN relies on menu innovation, technological upgrades and international expansion to drive top-line growth. The company also expects its franchised business model to drive profits. However, rising expenses continue to hurt it.

Over the past year, shares of Wendy’s have gained 8.2%, underperforming the industry’s 34.3% rally.  However, the company’s continual unit expansion is poised to be a growth driver. It is trying to reach the global restaurant count of 7,500 by 2020. It expects global net new unit growth to be 1.5% in 2019.The company opened 159 restaurants in 2018as part of its expansion endeavors, with an increase of 77 net new units. This suggests roughly 1.2% global net new restaurant growth in 2018.

 



Growth Catalysts

Wendy’s is trying to reimage at least 70% of its restaurants as part of the brand transformation initiative. This program has gained traction in the recent past, leading to increased traffic and higher sales at its restaurants. At the end of 2018, 50% of the global system featured the brand’s new image. Interestingly, as a result of this re-imaging, customers have seen some bold designs and friendlier restaurant teams. At the end of the first quarter, 51% of the global system was image activated.

The company’s brand transformation initiative also includes menu innovation, promotional offers and bold new packaging for boosting sales. Meanwhile, the practice of offering customized sandwiches made on order and serving hamburgers made of never-frozen beef would continue to drive sales for Wendy’s. We expect that the company’s solid menu pipeline, limited time offers, marketing initiatives, and increased emphasis on core and price value offerings will maintain the trend.

The company is capitalizing on the benefits of technology. It is investing in areas like mobile payment, mobile ordering and customer self-order kiosks that provide benefits such as consumer convenience, increased customer count, higher check and faster speed of service. We expect these measures to help Wendy’s to maintain the trend of positive comps going forward.

Moving forward, the company plans to continue facilitating franchisee-to-franchisee restaurant transfers through its buy-and-flip strategy. This strategy ensures that restaurants are put in the hands of well-capitalized franchisees that are committed to long-term growth. In 2018, Wendy’s facilitated 96 Franchise Flips. In 2019, the company expects to complete 100-200 Franchise Flips.

Concerns

In order to compensate for high labor costs, Wendy’s is taking steps to realign and reinvest resources. Though these initiatives might benefit the company over the long term, these are expected to increase costs in the near term, thereby hurting margins. Furthermore, it expects labor inflation of roughly 3-4% and commodity inflation of around 1-2%. The company would also have to put more focus on cost savings and increasing same-restaurant sales to cope up with these inflations.

Zacks Rank & Stocks to Consider

Wendy’s currently carries a Zacks Rank #3 (Hold). A few better-ranked stocks in the restaurant space are Denny’s DENN, Papa John’s PZZA and Habit Restaurants HABT, each currently carrying a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings for Habit Restaurants and Papa John’s are expected to rise20% and 12.5%, respectively. Denny’s earnings for 2020 are likely to grow7.8%.

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