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Wendy's (WEN) Banks on Unit Expansion Efforts, Costs High

The Wendy's Company WEN is likely to benefit from unit expansion efforts, digitization, and Breakfast daypart offerings. Also, focus on international business development bode well. However, inflationary pressures are a concern.

Let’s delve deeper.

Growth Catalysts

Wendy’s is steadfast in expanding its presence globally. To promote new restaurant development, the company provided franchisees with certain incentive programs for qualifying new restaurants, including technical assistance fee waivers and reductions in royalty and national advertising payments. During the six months ended Jul 3, 2022, the company and its franchisees added 91 net new restaurants across the Wendy’s system.

The company’s international business is poised to be a growth driver in the days ahead. During the second quarter of fiscal 2022, the company revealed that its development plans are on track and the long-term opportunity in the U.K. remains fast. Also, it re-evaluated the development commitment by REEF Kitchens and anticipates that REEF will open 100 to 150 delivery kitchens (primarily in Canada and the U.K.) by 2025-end. The company stated that it has a robust pipeline and is on track to achieve its target of 3-4% net unit growth in 2022.

Wendy’s has been focusing on digitalization to drive growth. During second-quarter fiscal 2022, the company had nearly 9% of its sales through digital channels in the United States and approximately 15% in international markets. This was driven by gains in delivery and mobile ordering sales and several successful promotions. Since the company launched Wendy's Rewards program app, downloads have increased. The company has been witnessing higher average checks.

Wendy’s focuses on Breakfast daypart Offerings to drive incremental sales. Wendy’s continues to focus on Breakfast daypart Offerings to drive incremental sales. During the fiscal second quarter of 2022, the company launched its breakfast offerings in Canada and reported solid performance with respect to the same. Also, it reported strong breakfast performance in the United States. The company benefits from its marketing efforts (buck biscuit promotion and awareness messaging), high-quality offerings, repeat ordering and high customer satisfaction levels. The company expects the breakfast business in the United States to accelerate in 2022 by roughly 10%. By the end of 2022, it anticipates average weekly U.S. breakfast sales to be roughly $3,000 per restaurant. It remains optimistic on the back of promotions and the launch of new French Toast Sticks.

Concerns

Wendy’s has been continuously shouldering increased expenses, which have been detrimental to margins. During the fiscal second quarter, the company-operated restaurant margin came in at 14.5% compared with 20.3% reported in the year-ago quarter. The downside was primarily due to higher commodity and labor costs, a decline in customer counts and increased investments (to support the entry into the United Kingdom market).

Wendy’s, which shares space with Cracker Barrel Old Country Store, Inc. CBRL, Darden Restaurants, Inc. DRI and Dave & Buster's Entertainment, Inc. PLAY in the Zacks Retail - Restaurants industry, has been affected by the coronavirus crisis. Although most dining services are open, traffic is still low compared with pre-pandemic levels. The company intends to monitor the situation regularly to gauge the impacts of COVID-19.

A Brief Review of the Other Stocks

Cracker Barrel has been benefitting from menu innovation, marketing strategies, seasonal promotions and cost-cutting efforts. Also, increased focus on the off-premise business model bodes well. For fiscal 2022, the company plans to drive off-premise sales through awareness building, advertising and partnerships with third-party delivery companies. It expects to attract new customers and drive sustained growth in its off-premise business through its virtual brand, Chicken and Biscuits.

Darden is gaining from business model enhancements and menu simplifications. This and a focus on technological enhancements in online ordering, the introduction of To Go capacity management and Curbside I'm Here notification bodes well.  Even though capacity restrictions continue to ease, off-premise sales remained strong during first-quarter fiscal 2023. In first-quarter fiscal 2023, off-premise sales contributed more than 24% to total sales at Olive Garden, 14% at LongHorn and 13% at Cheddar's Scratch Kitchen.

Dave & Buster's is benefiting from a higher mix of amusements and a leaner operating model. The company expects the momentum to continue on the back of its strategic initiatives, including a new menu, optimized marketing and technology investments.


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