Wendy’s Tries Breakfast…Again

In February, Wendy's (NASDAQ: WEN) CEO Todd Penegor pretty much wrote off the idea of going after the breakfast crowd. "Breakfast as you know we don't play on that day the extent that others want to spend a lot at the breakfast day part, if that creates some opportunities for us at lunch and dinner as we continue to be focused on that business we'll feel good about that."

Fast-forward seven months, and Wendy's has pulled a 180. The company announced on Monday that it plans to launch breakfast, currently served at just 300 restaurants, across the entire U.S. system in 2020. "Launching breakfast in our U.S. restaurants nationwide provides incredible growth opportunities," said Penegor.

If this all sounds familiar, that's because it is. The company tried a breakfast rollout in 2012, but it was a dud. By mid-2013, Wendy's had stopped offering breakfast at most locations. The fast-food chain was unable to break rival McDonald's iron grip on breakfast.

Wendy's new breakfast items.

Image source: Wendy's.

A better plan

This time around, Wendy's strategy looks like it has a better chance of success. Wendy's previous attempt at breakfast featured a basic menu that didn't differentiate it from the competition. Standard breakfast sandwiches just didn't get the job done.

Wendy's upcoming breakfast menu will play to its strengths. The menu will include the Breakfast Baconator, a morning version of its popular burger, as well as a Frosty-ccino, presumably combining coffee with its Frosty desserts.

At the very least, Wendy's breakfast menu will stand out. "We believe we have the right team and structure in place, and we put Wendy's fan favorites on our breakfast menu to set us apart from the competition," said Penegor.

Short-term pain

To support the company's breakfast plans, Wendy's and its franchisees plan to hire around 20,000 new crew members. Wendy's will also make up-front investments totaling $20 million. With the breakfast menu not available until 2020, sales in 2019 won't be affected. But Wendy's does expect the bottom line to take a hit.

Wendy's updated its full-year guidance along with its breakfast announcement to reflect these investments:

Metric New Guidance Old Guidance
Global systemwide sales Up 3% to 4% Up 3% to 4%
Adjusted EBITDA Flat to down 2% Up 2.5% to 4.5%
Adjusted earnings per share Down 3.5% to 6.5% Up 3.5% to 7%
Free cash flow Down 2.5% to 7% Flat to up 4%

Data source: Wendy's.

Wendy's also retracted its 2020 goals, which included global systemwide sales of $11.5 billion and free cash flow of $275 million. The company will update these goals and provide long-term guidance at its investor day event on Oct. 11.

Breakfast should help sales in 2020, although this foray into the morning daypart may be a response to weakening sales for lunch and dinner. Analysts at Guggenheim downgraded Wendy's stock to neutral after the breakfast announcement for that very reason: "While it could lead to longer term system sales, we view the day-part expansion as a sign of slowing momentum in the core lunch and dinner business."

Unique items give Wendy's revamped breakfast menu a better chance of success than its previous efforts, but the company still faces the daunting task of changing consumer behavior around breakfast. Wendy's needs to win over some of McDonald's breakfast customers to make this work. That won't be easy, even with a Breakfast Baconator in tow.

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