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Wendy's (WEN) Banks on Unit Expansion & Sales Initiatives


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The Wendy's Company 's WEN sales initiatives like menu innovation and promotional offerings, increased investments in technology, reimaging of its restaurants and expansion of delivery service bode well. However, higher labor and commodity costs along with capital spending remain concerns. Let's delve deeper.

Hidden Catalysts

Wendy's consistent focus on global expansion of restaurants to drive long-term growth is encouraging. Also, the company remains on track to achieve its goal of 7,500 global restaurants by 2020. It has growth plans and intends to build partnerships in Argentina, the Philippines and Japan. 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 as well.

Furthermore, the advancement of Image Activation and the improvement in its restaurant economic model are enabling the company to make progress with its new unit development goals. Wendy's remains on track to achieve at least 70% Image Activation goal for 2020 as a 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. Notably, Wendy's achieved total net new development of 97 restaurants globally in 2017, mirroring 1.5% growth year over year. In the first and second quarter of 2018 it opened 33 and 36 restaurants, respectively, as part of the company's expansion endeavors.

Wendy's is also capitalizing on the benefits of technology. It is investing in areas like mobile payment, mobile ordering and customer self-order kiosks, which provide benefits such as consumer convenience, increased customer count, higher check and faster speed of service. We expect these measures to help the company maintain the trend of positive comps moving ahead. Additionally, menu innovation, promotional offers and bold new packaging will drive sales.

Concerns

Wendy's lower-than-expected earnings in three of the trailing four quarters have been a major concern for investors. In second-quarter 2018, Wendy's adjusted earnings of 14 cents lagged the Zacks Consensus Estimate of 16 cents by 12.5%.

Further, rise in cost might dent the company's margin in the coming quarters. In fact, Wendy's would incur additional capital expenditures in a bid to boost the re-imaging program. This, in turn, may lower free cash flow in the near term. Though the company has transitioned toward a franchise-based model that reduces capital expenditures, we believe it will take time to reap benefits. For 2018, Wendy's expects capital expenditures of approximately $75-$80 million.

The company, which shares space with BJ's Restaurants, Inc. BJRI , Carrols Restaurant Group, Inc. TAST and Darden Restaurants, Inc. DRI expects labor inflation of roughly 3-4% and commodity inflation around 1-2% for the current year. Wendy's would also have to improve its focus on cost savings and increase same-restaurant sales in order to cope up with these inflations.

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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: BJRI , DRI , WEN , TAST



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