On Jun 26, 2014, we issued an updated research report on
The Wendy's Company
On May 8, this leading restaurateur posted first quarter 2014
results with earnings and revenues beating the Zacks Consensus
Estimate. Adjusted earnings of 7 cents increased substantially year
over year on better-than-expected revenues.
However, revenues declined 13.3% year over year to $523.2 million.
The downside reflects a reduction in the number of company-operated
restaurants as a result of the system optimization initiative. Per
the initiative, the company has lowered its restaurant ownership
from 22.0% to 15.0%, which has pressurized revenues in the quarter
and is expected to continue in the near term.
Moreover, higher beef costs are expected to weigh on margins,
mainly in the second and third quarter of the year. As a result,
the company has lowered its expectation for company-operated
restaurant margin for the year.
Though the reduction in ownership is currently weighing on
revenues, we believe franchising a large chunk of its system will
facilitate earnings and return on equity growth by lowering capital
requirements over the long-term. Moreover, this will also add to
the top line in the form of royalty and rental income. The
franchised business model will help the company generate strong
free cash flow, thereby helping it to maintain a healthy balance
Moreover, Wendy's has growth plans and partnerships in Argentina,
the Philippines and Japan. Further, Wendy's has long-term
development agreements with franchisees in the Middle East, North
Africa, Singapore, Turkey, Russia and the Eastern Caribbean region,
Georgia, the Republic of Azerbaijan, Ecuador and Chile.
Additionally, the company is exploring growth opportunities in
China, Brazil and other key international markets. These less
saturated developing markets offer the company enormous growth
The burgeoning middle-class population with rising income levels
has led to an increase in demand for convenience food and beverages
like hamburgers, chicken sandwiches and nuggets, baked and French
fries, and Frosty desserts. Moreover, over the long-term, we remain
optimistic on the company's sales initiatives, which include menu
innovation, international expansion and re-imaging of units.
The company presently has a Zacks Rank #3 (Hold). Some
better-ranked stocks in the restaurant sector include Red Robin
Gourmet Burgers Inc. (RRGB), Chipotle Mexican Grill, Inc. (CMG) and
Carrols Restaurant Group, Inc. (TAST). While Red Robin Gourmet
sports a Zacks Rank #1 (Strong Buy), Chipotle Mexican Grill and
Carrols Restaurant Group, hold a Zacks Rank #2 (Buy).
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