Shares of Wendy’s WEN were down as much as 11% in intraday trading today, and closed down over 2% on Monday after the company announced they are ramping up spending on their breakfast line for a nationwide release sometime in 2020. The burger chain is planning on spending $20 million to add more menu items and longer hours at its 5,813 domestic restaurants. Wendy’s said it and its franchises will hire 20,000 workers to help roll out the expanded offerings.
As a result of the company entering the breakfast wars with the likes of McDonald’s MCD, Burger King, and Taco Bell YUM, they lowered their financial guidance for fiscal 2019. The company announced that it now expects adjusted earnings per share to decline by 3.5% to 6.5% from its previous forecast of growth between 3.5% to 7.0%. The lowered guidance sent the company’s shares falling for the past two days, bringing its year-to-date return down to 24.8%.
Breakfast items have become an increasingly competitive part of the day for major fast food companies. McDonald’s has pointed towards the breakfast competition as an area of concern. The company reported that guest growth in breakfast has begun to recover, but the progress has remained slow. The breakfast market for fast food chains has become saturated, making it harder to gain a large market share in the industry.
Investors Hesitant on the Move
The saturated field has made Wendy’s shareholders uneasy as they believe it will be difficult for the company to successfully integrate themselves in a field where consumers are typically loyal to their preferred breakfast spots. Burger King, for example, has struggled to compete with McDonald’s for breakfast sales and announced this year that it would be spending more on marketing for its breakfast lineup. Burger King also started a coffee subscription program for $5 a month and launched the BK Café to better compete with rival fast food chains.
Wendy’s currently sells breakfast items at about 300 of its restaurants after earlier efforts to expand the breakfast menu nationwide were abandoned. The company scrapped a 2012 push to release the breakfast items at more restaurants after about a year. Stiff competition from McDonald’s and Starbucks SBUX were seen as problems at the time.
Guggenheim analysts were not particularly in love with Wendy’s newest breakfast initiative, as they downgraded their rating on the company’s stock to neutral from buy. Guggenheim said the company’s entrance into breakfast was a “potentially risky” way to increase top-line growth. They went on to comment that management reduced their 2019 outlook on the company to account for the $20 million up front investment in their breakfast release.
Wendy’s is entering a saturated market where they will have to compete with some heavy hitters for market share. Additionally, Wendy’s will have to figure out a way to pry breakfast consumers from their preferred fast food chains.
However, Wendy’s is confident that their breakfast baconator, chicken biscuit sandwich, and Frosty-ccino will help their breakfast menu standout from the rest. Wendy’s is making a large bet in a field where the payoff can potentially be lucrative and offset the short-term losses, but market saturation and item integration will be headwinds for Wendy’s latest initiative. Wendy’s sits at a Zacks Rank #3 (Hold) at the moment.
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