The Wendy's Company WEN is likely to benefit from the strong digital ordering system, menu innovation, international expansion and franchising initiatives. The company is gradually reopening dining rooms after coronavirus-induced shutdowns. Also, its re-imaging of units, which has led to sales improvement over the last few quarters, is gaining momentum.
Shares of Wendy's have gained 48.7%, outperforming the industry’s 18.9% rally in the past three months. Moreover, an upward revision in earnings estimates for 2020 reflects analysts’ optimism in the company’s growth potential. Over the past 60 days, the Zacks Consensus Estimate for 2020 earnings has moved up 39.5% to 53 cents per share.
Factors Driving Growth
Wendy's has implemented several sales-building initiatives that have contributed to the company’s performance over the past few weeks. Recently, it provided an operational update — including same-restaurant sales — for the period ended May 31. Consequently, the company witnessed a meaningful improvement in the business.
As of May 3, same-restaurant sales at U.S., International and global segments were down 14%, 28.3% and 15.3%, respectively. Moreover, by May-end, the metric declined 1.9%, 15.7% and 3.3%, respectively. Quarter to date, same-restaurant sales at U.S., International and global segments were down 8.6%, 22.4% and 9.9%, respectively.
Notably, its increased focus on off-premise services and dining reopenings bode well. At May-end, the company operated 99% of total U.S. restaurants and carried out 81% of international operations. Notably, it intends to accelerate the reopening process in compliance with local and state mandates.
The company is investing in technology-driven initiatives like digital ordering to boost sales. It is also investing in areas like mobile payment, mobile ordering and customer self-order kiosks. On the mobile ordering front, Wendy’s is progressing rapidly to ensure that the facility can unravel additional prospects around convenience through delivery and curbside delivery, plus loyalty. We expect these measures to help the company maintain the trend of positive comps going forward.
Wendy’s is also benefiting from its transition to a franchised business model. Though the reduction in ownership has been weighing on revenues over the last few quarters, we believe franchising a large chunk of its system will lower Wendy’s general and administrative expenses, and thereby boost earnings.
Moving forward, the company plans to continue facilitating franchisee-to-franchisee restaurant transfers through the buy-and-flip strategy. This strategy ensures that restaurants are put in the hands of well-capitalized franchisees committed to long-term growth. Notably, this initiative is likely to unlock significant growth potential in the market.
Notably, the company remains on track to achieve at least 70% of the Image Activation goal, 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. The initiative includes menu innovation, promotional offers and bold new packaging intended for boosting sales. We expect the company’s solid menu pipeline, limited time offers, marketing initiatives, and increased emphasis on core and price value offerings to help it maintain the momentum.
Coming to expansion initiatives, the company is exploring growth opportunities in China and other key international markets. Wendy’s also announced that it will enter Europe by opening restaurants in the U.K. During first-quarter 2020, the company’s system-wide sales increased 1% year over year. It continued with restaurant expansion, opening 41 new restaurants across the globe in the quarter.
Zacks Rank & Other Key Picks
Wendy’s currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Other top-ranked stocks in the same space include Jack in the Box Inc. JACK, Wingstop Inc. WING and Domino's Pizza, Inc. DPZ. Jack in the Box and Wingstop sport a Zacks Rank #1, while Domino's carries a Zacks Rank #2.
Jack in the Box’s 2021 earnings are expected to rise 22.9%.
Wingstop has a three-five year earnings per share growth rate of 11%.
Domino's beat the Zacks Consensus Estimate in the last four quarters, delivering an earnings surprise of 12.7%, on average.
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