Wendy's Rides on Franchising, Re-Imaging & Expansion Efforts

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The Wendy's Company 's WEN strong international presence, relentless expansion, initiatives related to re-imaging restaurants, product and technological innovation put it on growth trajectory.

The company recently posted better-than-expected results for the first quarter of 2018 . Adjusted earnings of 11 cents increased 37.5% year over year, primarily favored by the positive effect of lower tax rate related to share-based payments, along with the Tax Cuts and Jobs Act of 2017. Increased revenues also drove earnings of the company.

In the first quarter, Wendy's recorded year-over-year revenue growth after four consecutive quarters of revenue decline. Throughout 2017, the company's top line was under substantial pressure due to the system optimization initiative through franchising. Also, the company's surprise history has not been much impressive as it missed the consensus mark in two of the last four quarters, delivering a negative average earnings surprise of 1.99%.

However, backed by a solid brand presence, the company's shares have rallied 15.3%, outperforming the industry 's growth of 3.5%. Given its refranchising and reimaging initiatives to further strengthen the brand, the stock should continue to perform well in the quarters ahead.

Franchised Business Model to Boost Earnings

Wendy's is benefiting from its transition to a franchised business model. In 2017, the company had several first-time builders and doubled the number of franchisees building new restaurants compared with 2015. The company is expecting 1% growth in 2018. Though the reduction in ownership weighed on revenues throughout 2017, we believe that franchising a large chunk of its system will lower Wendy's general and administrative expenses, and thereby boost earnings. Moreover, over the long term, it would generate a higher return on equity by lowering capital requirements. This would also boost free cash flow, thereby enhancing shareholders' return. Also, in the first quarter of 2018, the company's top line gained from the Franchise flip that occurred in 2017.

Going forward, the company also plans to continue facilitating franchisee to franchisee restaurant transfers through its buy-and-flip strategy. This strategy ensures that restaurants are put in the hands of well-capitalized franchisees, committed to long-term growth. In 2017, Wendy's facilitated 540 Buy and Flip transactions, with 130 in the fourth quarter.

Re-Imaging Restaurants Likely to Improve Guest Experienc e

Wendy's remains on track to achieve at least 70% of its Image Activation goal for 2020 as part of its brand-transformation initiative. This program has gained traction in the recent past, leading to increased traffic and higher sales at its restaurants. At the end of 2017, 43% of the global system featured the brand's new image. Interestingly, as a result of this re-imaging, customers have seen some bold designs and friendlier restaurant teams. In 2017, Image Activation benefited North America same-restaurant sales by 70 basis points and the company expects a 60-basis point benefit in 2018.

Strong International Presence & Expansion Efforts Bode Well

Wendy's is steadfast in completing the goal of its global restaurant count reaching 7,500 by the year 2020. The company's international business is thus poised to be growth driver in the future. The company has growth plans and partnerships in Argentina, the Philippines and Japan. Further, Wendy's has long-term development agreements with franchisees in Singapore, the Middle East, North Africa, the Russian Federation, the Eastern Caribbean, Argentina, Japan, Georgia, the Republic of Azerbaijan, Ecuador and Chile.

Moreover, the advancement of Image Activation and improvement in its restaurant economic model are also enabling the company to make progress with its new unit development goals. The company achieved total net new development of 97 restaurants globally, in 2017, indicating growth of 1.5% year over year. Also, in the first quarter of 2018, the company opened 33 new restaurants as part of its expansion endeavors. Further, the company boasts a strong pipeline of projects that are expected to help it achieve its 2018 net new restaurant development growth goal of 2% globally.

Zacks Rank & Other Stocks to Consider

Wendy's carries a Zacks Rank #2 (Buy).

Other top-ranked stocks in the U.S. restaurant space include Wingstop WING , Brinker EAT and Denny's DENN . While Wingstop flaunts a Zacks Rank #1 (Strong Buy), Brinker and Denny's carry a Zacks Rank #2. You can see  the complete list of today's Zacks #1 Rank stocks here .

Wingstop, Brinker and Denny's earnings for 2018 are expected to improve 9.5%, 10% and 12.1%, respectively.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Business , Stocks
Referenced Symbols: DENN , WEN , WING , EAT

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