We maintain our Neutral recommendation on the restaurateur
The Wendy's Co.
). While we prefer the company's multi-year turnaround plan to
improve its restaurant operating margins, reinvigorate brands and
expand internationally, there is still some time before the
turnaround process fully pays off.
Why the Reiteration?
Wendy's fourth-quarter 2012 earnings and revenues grew year over
year. While its earnings per share beat the Zacks Consensus
Estimate, revenues lagged the same.
Since 2011, Wendy's has been undergoing a transition. The company
completed the sale of Arby's restaurants so that it could focus
solely on building the Wendy's brand. Beginning 2013, Wendy's
targets continued growth in annual adjusted EBITDA on the back of
an innovative product pipeline, compelling advertising,
operational efficiency, reimaging of restaurants and unit
Wendy's benefited considerably from the reimaging program
undertaken in 2011. Its restaurant reimaging program is divided
into three tiers, depending upon the economics and trade area
profile of each unit. Following the considerable success achieved
through the reimaged restaurants in 2012, management plans to
speed up overhaul activity in 2013.
Wendy's is striving hard to expand its presence beyond the US.
Wendy's currently has limited presence in North America. It
believes that there is room for more than 8,000 restaurants
outside North America of which 40% can be opened in China, Brazil
However, higher food costs and macroeconomic pressure can act as
headwinds to its growth story. Beef represents almost 20% of
Wendy's total food cost. The company uses fresh ground beef, the
cost of which will likely remain a major concern throughout 2013.
Moreover, US consumers are burdened with higher gasoline prices,
an increase in payroll tax and delayed tax refund checks. These
external forces might restrict consumer discretionary spending
further, which in turn can put pressure on the company's sales.
Hence, at the current level, we remain cautious and prefer to
take a wait and see approach till we find some greater evidence
of an outperformance. Wendy's currently retains a Zacks Rank #3
Other Stocks to Consider
Some other restaurant industry stocks with a favorable Zacks Rank
Red Robin Gourmet Burgers Inc.
Burger King Worldwide Inc.
Cracker Barrel Old Country Store Inc.
). While Red Robin and Cracker Barrel carry a a Zacks Rank #1
(Strong Buy), Burger King carries a Zacks Rank #2 (Buy).
BURGER KING WWD (BKW): Free Stock Analysis
CRACKER BARREL (CBRL): Free Stock Analysis
RED ROBIN GOURM (RRGB): Free Stock Analysis
WENDYS CO/THE (WEN): Free Stock Analysis
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