Here's Why Investors Should Retain Wendy's (WEN) Stock Now

The Wendy's Company WEN is likely to benefit from solid comps growth, strategic pricing actions and Breakfast daypart offerings. This and the focus on digital initiatives bode well. However, high labor costs are a concern.

Let us discuss the factors that highlight why investors should retain the stock for the time being.

Growth Catalysts

Wendy’s continues to impress investors with robust global same-restaurant sales growth. During the fiscal fourth quarter, Same-restaurant sales at international restaurants (excluding Argentina) rose 4.3% year over year compared with 9.9% a year ago. Comps at global restaurants inched up 1.3% year over year compared with 6.4% in the prior-year quarter. Higher average checks, strategic pricing actions and product innovations primarily backed the upside. Given the emphasis on global expansion and menu innovation efforts, the company anticipates the momentum to continue in the upcoming periods. For the fiscal 2024, the company expects global same-restaurant sales growth to be in the 3-4% range.

Increased focus on digital initiatives bodes well. WEN intends to invest around $20 million to deploy digital menu boards to all U.S. company-operated restaurants by the end of 2025 and approximately $10 million over the next two years to enhance digital menu board capabilities globally. Expected benefits include improved order accuracy, enhanced crew experience and increased sales from upselling and consistent merchandising execution. Future enhancements such as dynamic pricing, AI-enabled menu changes and suggestive selling are scheduled for testing by early 2025. The company is optimistic and anticipates the new technology to enhance customer and crew experiences while improving the restaurant's economic model. It expects global digital sales to exceed $2 billion in 2024, a year earlier than initially anticipated.

Wendy’s focuses on Breakfast daypart Offerings to drive incremental sales. WEN expects there is significant growth potential in the breakfast business without the need for additional labor, thus improving the restaurants' economic model. The company introduced a breakfast burrito and is leveraging the Cinnabon brand to introduce Cinnabon Pull-Aparts, aiming to cater to consumer preferences and stimulate trial and repeat purchases, further bolstering the Breakfast business. It recognizes the importance of offering everyday value and responds by providing meal bundles, such as the two for $3 bundle.

To advance the breakfast segment, the company plans to invest around $55 million in advertising over the next two years, evenly distributed between the United States and Canada. The investment will reinforce initiatives and ensure a consistent presence across various media platforms, partnerships and activations aimed at promoting breakfast offerings.

Concerns

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Shares of Wendy’s have declined 14.1% in the past year against the Industry’s growth of 7.7%. The downside was mainly caused by commodity and wage inflation and a challenging macro environment.

During the fourth quarter of fiscal 2023, the company-operated restaurant margin came in at 13.5% compared with 15.1% in the prior-year quarter. The downside was due to higher commodity costs, declining customer counts and higher labor costs. Also, inflationary pressures in the U.K. market added to the negatives. The company expects these headwinds to persist for some time. For the fiscal 2024, the company anticipates labor inflation to be in the 3-5% range.

Zacks Rank & Key Picks

Wendy’s currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the Zacks Retail-Wholesale sector include:

Brinker International, Inc. EAT carries a Zacks Rank #2 (Buy). The company has a trailing four-quarter earnings surprise of 212.7% on average. Shares of EAT have surged 25.6% in the past year. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for EAT’s 2024 sales and EPS indicates 4.9% and 30.4% growth, respectively, from the year-ago period’s levels.

Texas Roadhouse, Inc. TXRH carries a Zacks Rank #2. It has a trailing four-quarter negative earnings surprise of 3.9%, on average. The stock has gained 44.5% in the past year.

The Zacks Consensus Estimate for TXRH’s 2024 sales and EPS suggests rises of 14.1% and 25.8%, respectively, from the year-ago period’s levels.

Shake Shack Inc. SHAK carries a Zacks Rank #2. It has a trailing four-quarter earnings surprise of 92.6%, on average. SHAK’s shares have surged 90.7% in the past year.

The Zacks Consensus Estimate for SHAK’s 2024 sales and EPS indicates 14.6% and 91.9% growth, respectively, from the year-ago period’s levels.

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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.

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