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Wendy's (WEN) Banks on Solid Breakfast Business Amid High Costs

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·5 min read
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The Wendy's Company WEN continues to benefit from strong breakfast business, expansion efforts, robust comps at Global restaurants and technological upgrades. However, rise in labor rate and commodity costs remain headwinds. Let’s delve deeper.

Growth Drivers

Wendy’s continues to focus on Breakfast daypart Offerings to drive incremental sales. During the fiscal second quarter, breakfast sales improved 10% on a sequential basis. In the third quarter of 2021, breakfast sustained its robust performance and accounted for 7.5% of sales. This primarily stemmed from morning meal traffic share gains within the QSR burger category. The company has been gaining from its marketing efforts, high-quality offerings, repeat ordering and high customer satisfaction levels. During 2021, Wendy’s anticipates breakfast sales to improve approximately 20% to 30%. To this end, it has set aside $25 million to support the model’s marketing and advertising initiatives. For 2022, the company anticipates breakfast sales contribution of 10%.

Despite the pandemic, the company opened approximately 150 restaurants in 2020. In third-quarter fiscal 2021, Wendy’s had 48 global restaurant openings with an increase of 25 net new units. In June 2021, the company opened its first restaurant in the U.K. Ever since second-quarter 2021, it has opened several restaurants in the U.K. Wendy’s anticipates having 10 restaurants in the U.K. by the end of 2021. Going forward, the company is expected to achieve its goal of having nearly 7,000 restaurants globally by 2021-end. Given the solid development foundation, the company expects to open 8,500-9,000 global restaurants by 2025 end.

The company continues to impress investors with robust global same-restaurant sales growth. After posting global same-restaurant sales growth of 4.3% and 4.7% in third and fourth-quarter 2020, respectively, the company reported global restaurants comps sales improvement of 13% and 17.4% in first and second-quarter fiscal 2021, respectively. During the fiscal third quarter, comps at Global restaurants increased 3.3% year over year. The improvement was driven by continued strength across its U.S. and international businesses. During the quarter, comps in the United States witnessed growth of 2.1% year over year.

Wendy’s has been capitalizing on the benefits of technology. It has been 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 the company in sustaining the trend of positive comps in the days ahead.

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Zacks Investment Research

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High costs might hurt the company’s margin. During the fiscal third quarter, the company-operated restaurant margin was 14.4% compared with 16.9% in the year-ago quarter. The downside was primarily due to higher labor rate, increase in commodity costs, decline in traffic, and lower advertising spending in the prior-year quarter. General and administrative expenses in the quarter were $62.8 million, compared with $47.3 million in the prior-year quarter. This was primarily on account of higher incentive compensation, and stock compensation accrual and technology costs (related to the company's ERP implementation).

Shares of the Zacks Rank #3 (Hold) company have decreased 7.7% in the past three months, compared with the industry’s decline of 3.4%.

Key Restaurant Picks

Dave & Buster's Entertainment, Inc. PLAY, which has been benefiting from reopening initiatives, expanding vaccinations and excellent operational execution, sports a Zacks Rank #1 (Strong Buy). Going forward, the company expects the momentum to continue on the back of its strategic initiatives that include new menu, optimized marketing and technology investments.

Dave & Buster's has reported better-than-expected earnings in each of the trailing four quarters, the average surprise being 201.8%. The company’s fiscal 2021 earnings is likely to witness growth of 147.7%. PLAY stock has gained 7.4% in the past three months. You can see the complete list of today’s Zacks #1 Rank stocks here.

Papa John's International, Inc. PZZA, which flaunts a Zacks Rank #1, has been gaining from strong comparable sales in North America on account of solid customer retention and innovation strategies. The company is continually striving to eliminate barriers to expand in the existing international markets and identify new market opportunities.

Papa John's has reported better-than-expected earnings in the trailing three quarters. The Zacks Consensus Estimate for 2021 earnings has been revised upward to $3.34 from $3.14 in the past 30 days. PZZA stock has appreciated 36% in the past six year, compared with the industry’s growth of 3%.

McDonald's Corporation MCD has a Zacks Rank #2 (Buy) and a long-term earnings growth rate of 11.9%. Robust drive-thru presence and its investments in delivery and digitization over the past few years have aided the company in countering the pandemic. Robust digitalization will help the company in driving long-term growth and capturing market share.

McDonald's has reported better-than-expected earnings in each of the three quarters. The company’s 2021 earnings is likely to witness growth of 54.4%. MCD stock has gained 4.6% in the past three months.

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