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Wendy's (WEN) Bets on Breakfast Daypart Offerings Amid High Debt

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The Wendy's Company WEN is benefiting from menu innovation, technological upgrades and international expansion. These initiatives along with focus on Breakfast daypart offerings are likely to drive growth. In the past three months, the company’s shares appreciated 14.3%, compared with the industry’s growth of 4.3%. However, high debt and coronavirus woes remain concerns. Let’s delve deeper.

Factors Driving Growth

Wendy’s is steadfast in expanding its presence globally. The company’s international business is thus poised to be a key catalyst in the future. Notably, it anticipates the count to increase to 1,500 restaurants internationally and double its sales to approximately $2 billion by 2024. These less saturated emerging markets offer the company enormous growth opportunities. They have significant growth potential due to their relatively low per-capita consumption.

Despite the pandemic scenario, the company opened approximately 150 restaurants in 2020. In first-quarter 2021, Wendy’s had 38 global restaurant openings with an increase of 10 net new unit. 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. In fact, the company is on track to open its first restaurant in the U.K. on Jun 2. Overall, it expects to open 250 new restaurants in 2021. Wendy's is anticipated to achieve its goal of having nearly 7,000 restaurants globally by the end of 2021. Moreover, the company projects global unit growth of more than 3% in 2022 and 8,000 global Wendy's restaurants by 2025-end.

Wendy’s continues to focus on Breakfast daypart Offerings to drive incremental sales. Ever since its launch on Mar 2, 2020 across the United States, the model has contributed 6.2%, 6.4% and 6.3% to U.S. systemwide same-restaurant sales during fiscal second, third and fourth quarter of 2020, respectively. During the fiscal fourth quarter, breakfast remained solid at approximately 7% of sales. In first-quarter 2021, breakfast accounted for nearly 7% of sales. It also contributed significantly to restaurant average unit volumes (or AUV). Notably, the company has been gaining from its marketing efforts, high-quality offerings, repeat ordering and high customer satisfaction levels. Going forward, the company remains bullish on this business model with plans to boost breakfast daypart sales by 30% in 2021.

Moreover, 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%. Wendy's first-quarter 2021 global comps growth surpassed its own expectations. Moreover, comps in the United States witnessed an increase of 13.5% compared with flat in the year-ago quarter.

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The coronavirus pandemic is expected to materially affect the company's operating and financial results for full-year 2021. It has been undertaking numerous measures to protect employees, customers and business partners. Although majority of the stores have re-opened after coronavirus-induced shutdown, traffic is still well below pre-outbreak level. Even though markets in the U.K., Canada and central Asia are catching up, complete recovery is likely to take time.

Maintaining liquidity has become a herculean task amid the coronavirus pandemic. As of Apr 4, 2021, the company’s long-term debt stood at approximately $2.2 billion (almost flat sequentially). It ended the fiscal first quarter with cash and cash equivalent of $316.5 million compared with $307 million in the previous quarter. Although cash and cash equivalent has increased sequentially, it might still be difficult to manage the 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 Dine Brands Global, Inc. DIN, Texas Roadhouse, Inc. TXRH and BJ's Restaurants, Inc. BJRI. Dine Brands and Texas Roadhouse sport a Zacks Rank #1, while BJ's Restaurants carries a Zacks Rank #2 (Buy).

Dine Brands’ 2021 earnings are expected to soar 269.3%.

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

BJ's Restaurants has a trailing four-quarter earnings surprise of 40.4%, on average.

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