) is undergoing the most radical transformation in its 40-plus
years as a company. Bold new initiatives announced in the past 10
months are more audacious than many recent QSR turnarounds - yet
the market is not listening. Such company-wide changes have
potential to recast the long-term growth trajectory for
shareholders and franchisees who are willing to look beyond the
next few quarters. In the following article, I will continue my
discussion on "A Long-Term Value Case for Wendy's."
As I will explain in Part III (due in the next few days),
patient shareholders don't need to wait indefinitely. Rather, Mr.
Market merely needs to begin discounting some of the catalysts
described below. As I hope to make clear in the following articles,
a recalibration of investor expectations is no longer a question of
"if," but "when."
Part I Recap
of this series, I highlighted the recent historical context and
Wendy's competitive positioning within an evolving dining out of
home ecosystem. As mentioned in Part I, Wendy's lost its way after
the death of co-founder Dave Thomas in 2002. M&A distractions
and marketing boondoggles diverted attention from core operations.
Shareholders paid the price. I concluded by explaining how, despite
numerous missteps, the Wendy's brand remains resilient with end
consumers. The following discussion will highlight the recent
revitalization efforts and spotlight the growing list of catalysts
for unlocking value.
Part II: Reaccelerating the Wendy's Flywheel
In his best-selling book titled
Good to Great
, author Jim Collins uses the flywheel analogy to capture the
dynamic of change in an established business such as Wendy's.
Collins says the following:
Now picture a huge, heavy flywheel. It's a massive, metal disk
mounted horizontally on an axle. It's about 100 feet in diameter,
10 feet thick, and it weights about 25 tons. That flywheel is
your company. Your job is to get that flywheel to move as fast as
possible, because momentum-mass times velocity-is what will
generate superior economic results over time.
As if writing with Wendy's shareholders in mind, Collins
Right now, the flywheel is at a standstill. To get it moving,
you make a tremendous effort. You push with all your might, and
finally you get the flywheel to inch forward...You keep pushing
steadily. It makes three turns, four turns, five, six. With each
turn, it moves faster, and then -- at some point, you can't say
exactly when--you break through. The momentum of the heavy wheel
kicks in your favor.
To use the Collins analogy, the flywheel remains in good order.
However, requiting the growth and excitement of Jim Near requires
"tremendous effort" to move this flywheel back into high gear.
Concentrated investment across the Wendy's eco-system must precede
the realized benefits of renewed momentum and shareholder wealth
creation. The following is a high-level overview of initiatives
designed to re-energize the business.
Management shake up and new top-notch team
in place as of 6/12
with a highly motivated activist investor (Trian Group) pushing for
change. Trian Co-founder Nelson Peltz has a solid corporate
turnaround track record. According to Peltz, "what we try to do is
find a business, a good business that is not living up to its
potential." Trian works with management to craft a winning
strategy. However, unlike many activist shops, Trian focuses on
improving company-operating leverage. As Peltz says "if you find a
dollar on the balance sheet, it's worth a dollar, and we're not
going to walk past a dollar. But if you find a dollar on the income
statement, it's worth ten, fifteen or twenty dollars depending on
the multiple that the stock trades at." As the Wendy's lead
director, Peltz has focused on the less sexy and longer-term
operational improvements. Hiring great people is the first step.
Recently they added:
- CEO Emil Brolick in late 2011. Emil has a winning track
record as former COO of YUM. Interestingly, his career started at
Wendy's as a key player in the 1980s Jim Near turnaround.
- Chief Marketing Officer Craig Bahner from P&G in March of
- HR officer Scott Weisberg in May '12 from MEMC and General
- SVP of Operations John Peters promoted in April '12 as
long-time Wendy's veteran and former head of the western
. On June 6, 2012, management announces they will upgrade 50% of
company owned stores by 2015. Results in early Image Activation
stores are off the charts…sales are up +25% and sustained thus far.
Also, 50% of sales are now coming from the dining room (positively
correlated with higher average guest check). They are seeing sales
increase across all day-parts (including breakfast). Image
Activation goes far beyond remodeling stores. They are:
- Rebuilding human resource assets from the ground up,
re-interviewing all store employees, re-hiring general managers
and district managers.
- Significantly improving customer service across the entire
restaurant network through better analytics and
- Delivering "bold and innovative design" of stores, logos and
marketing. Aim is deliver the "wow" factor rather mere
- Re-building a new coherent marketing campaign for the first
time in 8 years. Introduction of "Red" spokesperson and Wendy
Thomas. The new CMO from P&G with extensive consumer product
experience is directing the efforts.
An important leading indicator for Image Activation progress is
franchisee buy-in. These entrepreneurs are the heartbeat of
Wendy's. No significant corporate initiative will take root without
franchisee backing. Anecdotal evidence suggests some of these key
constituents support Image Activation. In late July 2012, the CEO
of an 89 unit Wendy's franchise said:
The Image Activation program-the modernization of Wendy's
restaurants-along with new restaurant acquisitions remain the
focus of our 150 restaurant growth plan. We are allocating
substantial resources toward Wendy's capital improvements and new
store development, which we believe will ultimately accelerate
sales growth as the Wendy's system transitions to a modern
image…we are optimistic about the long-term growth and
modernization prospects being developed by the Wendy's brand. The
Wendy's opportunities for Meritage include revitalization of the
core premium products, facility modernization-Image Activation,
new store acquisitions, development and re-focused marketing
initiatives. -- Robert E. Schermer Jr., Meritage CEO
Meritage (MHGU.PK) is doubling down on its investment by
purchasing additional Wendy's stores. It plans on adding 5 to 10
new units in 2012 with a goal of owning 140 units longer term (vs.
89 in July).
In addition, WendPartners, a 331 unit franchisee and GE recently
announced a $16.1m sale-leaseback to "free up capital to reinvest
in our business", according to franchise Lewis Topper. Clearly,
something is in the works when major franchisees are taking these
As seen in the June 28th IR day, ROI on the initial Image
Activation stores is compelling-especially for well-capitalized
franchisees. Assuming a 70% LTV ratio, 30% equity contribution and
a 7% interest rate, ROI on a typical 14-unit franchise with a
gradual four-year upgrade is 18% with the levered ROE of 48%.
Menu extension and day-part expansion
. Innovative menu pipeline and upgraded packaging in conjunction
with Image Activation could reignite historic sales growth. Every
$0.10 increase in average customer check results in a 1.5% sales
lift per restaurant - no small potatoes when replicated across
. With a mere 355 international stores today, management
conservatively expects an additional 350 units by 2016. At present
they have 1,000 new international stores under development with
line of sight to 8,000 units over the long-term. Keep in mind, the
average unit volume (AUV) and profit contribution per unit is
meaningfully higher than typical U.S. restaurants.
Wendy's offers a treasure trove of resource conversion
opportunities for an activist investor and or Private Equity
((PE)). For example, 1,417 company-owned stores could be gradually
re-franchised like BKC. Real estate assets could be spun off or
sold. As I will explain in Part III, this business has great curb
appeal as an LBO, merger or acquisition target. There's a reason
private equity loves QSR chains.
- A well-established QSR chain generates copious amounts of
cash flow. This allows for leverage, financial engineering, or
- The market frequently undervalues this type of franchise
network due to lack of appreciation for the unique financial
characteristics. PE has the privilege of reframing a franchise in
terms of what can be done with this long-term annuity like
In the case of Wendy's, Trian Group is the lead candidate given
their 27% equity position. However, near-term takeover efforts are
hampered by Section 203 of Delaware General Corporate law, which
blocks business combinations for a period of three years after
acquiring 15% or more of the company. Trian Group effectively faces
a poison pill from Delaware law.
Though Peltz and company cannot incrementally acquire more than
32.5% ownership, they are permitted to bid provided they buy
control of 50% at once. The WEN board of directors recently
approved amendments that allow shareholders of 20% or more voting
power to call special meetings - an important symbolic move that
went largely unnoticed by the market at the last annual
Though a near-term takeover/resource conversion event is not
expected, this possibility is on the table. There are many levers
to pull at Wendy's and Trian bleeds green. As I will explain in
Part III, this silent takeover is a major risk for some
In spite of management missteps since the death of Dave Thomas
in 2002, the Wendy's brand remains alive in the hearts and minds of
American consumers. In Part II, I have just provided a glimpse into
a few key catalysts. As mentioned above, the Wendy's board, at the
behest of Trian Group, has taken bold steps to radically redirect
the future growth trajectory for shareholders and franchisees.
Efforts to re-engage the flywheel are beginning to bear fruit as
seen in the recent SSS comps, marketing campaigns, and franchisee
support. In the next article (Part III), I well examine NAV (net
asset value) and quantify the potential upside for long-term
I am long [[WEN]]. I wrote this article myself, and it expresses my
own opinions. I am not receiving compensation for it. I have no
business relationship with any company whose stock is mentioned in
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