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Wendy's (WEN) Banks on Expansion Efforts, Traffic Dismal

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The Wendy's Company WEN is poised to benefit from unit expansion, reimaging efforts, digitization, Breakfast daypart offerings and menu innovation initiatives. However, dismal traffic due to the coronavirus pandemic along with high debt levels 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 remains steadfast in expanding its presence globally. Despite the pandemic, the company opened approximately 150 restaurants in 2020. Going forward, it is planning to expand into Europe and is likely to open restaurants in the U.K. in the first half of 2021. Overall, the company expects to open 250 new restaurants in 2021. Moreover, the company anticipates global unit growth of more than 3% in 2022 and 8,000 global Wendy's restaurants by 2025-end. Markedly, with a strong pipeline of locations along with a talent team in place, the company is optimistic about opportunities in international markets.

In terms of non-traditional development, the company initiated the opening of star kitchens globally. It is also testing Dark Kitchens. With some modular designs in the pipeline, the company has increased its focus on smaller and efficient prototypes that is likely to pave path for future growth opportunities.

Meanwhile, Wendy’s 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 like consumer convenience, increased customer count, higher check and faster speed of service. On the mobile ordering front, Wendy’s is progressing rapidly to ensure that the facility can explore additional prospects through mobile grab-and-go and curbside delivery, plus loyalty. In fact, delivery continues to be a major initiative by the company. In order to support the digital and delivery business, the company also launched a new drive-thru-only design and a new traditional freestanding solution. Nonetheless, we expect these measures to help the company maintain positive comps going forward.

Moreover, the company continues to focus on Breakfast daypart offerings to drive incremental sales. During the fiscal fourth quarter, breakfast offerings remained solid at approximately 7% of sales. It also drove meaningful increase to restaurant average unit volumes (or AUV). Notably, the company is benefitting from its marketing efforts, high-quality offerings, repeat ordering as well as high customer satisfaction levels. Going forward, the company is bullish on this business model with plans to boost breakfast daypart sales by 30% in 2021. Also, it has set aside $15 million to support the models marketing and advertising initiatives.

The company’s brand transformation initiative also includes menu innovation, promotional offers and bold new packaging, intended for driving sales. In terms of menu additions, the company relaunched Classic Chicken Sandwich during the fiscal fourth quarter. Owing to this, the company witnessed incremental sales in the Made to Crave line-up by 10%. Apart from this, the company launched the Pretzel Pub Cheeseburger. Going forward, it has Jalapeno Popper chicken sandwich and salads in the pipeline. We expect the company’s solid menu pipeline, limited time offers (LTO), marketing initiatives and increased emphasis on core and price value offerings, to maintain the trend.

Concerns

Shares of Wendy’s have declined 2.5% so far this year against the Industry’s growth of 8.4%. The Dismal performance can be primarily attributed to the coronavirus pandemic. Although the company has reopened majority of its restaurants, it is likely to witness dismal traffic due to the social-distancing protocols. The company is undertaking numerous measures to protect employees, customers and business partners. Even though markets in India and the Philippines are catching up, complete recovery is likely to take time.



Moreover, the company’s high debt level is a concern. At the end of Jan 3, 2021, the company’s long-term debt stood at $2.2 billion, almost flat compared with the Sep 27, 2020 level. Notably, the company’s debt-to-capitalization was 83.4% compared with 84.1% at the end of third-quarter fiscal 2020. However, the company ended fourth-quarter fiscal 2020 with cash and cash equivalent of $307 million compared with $313.2 million in the previous quarter, which may not be enough to manage high-debt level.

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 same space include Chuy's Holdings, Inc. CHUY, Darden Restaurants, Inc. DRI and Arcos Dorados Holdings Inc. ARCO. Chuy's Holdings sports a Zacks Rank #1, while Darden and Arcos Dorados carry a Zacks Rank #2 (Buy).

Chuy's Holdings has a trailing four-quarter earnings surprise of 126.5%, on average.

Darden has a three-five year earnings per share growth rate of 10%.

Arcos Dorados 2021 earnings are expected to surge 126%.

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