On Apr 3, we issued an updated research report on the world's third-largest quick-service hamburger company The Wendy's Company WEN.
Over the past few quarters, the U.S. restaurant space has not been too enticing for investors. Consumer behavior has been volatile and their willingness to spend on eating out diminished due to higher costs. Consequently, same-store sales growth had been dull in a difficult sales environment. However, Wendy’s seems to be apparently immune to the present conditions.
Notably, the fourth quarter of 2016 marked the 16th consecutive quarter of positive same-store sales growth for the company, indicating long-term strength and significance of the brand. We expect the company’s solid menu pipeline, limited time offers (LTO), marketing initiatives and increased investments in technology-driven initiatives to maintain the trend, going forward.
Moreover, Wendy’s shares have outperformed the Zacks categorized Retail-Restaurants industry over the past one year. The stock surged 25.1%, as against the industry’s fall of 3.1% during the same time period.
Upward estimate revisions further raise optimism regarding the stock’s prospects. The Zacks Consensus Estimate for 2017 and 2018 earnings moved north by 4.5% and 7.5%, respectively, over the last 60 days.
Key Growth Drivers
Wendy’s international business is poised to drive growth, in the future. Notably, the company has growth plans and partnerships in Argentina, the Philippines and Japan. It also has long-term development agreements with franchisees in various countries. Additionally, the company is exploring growth opportunities in China, Brazil and other key international markets. Also, 2016 marked the first year of positive net new restaurant opening since 2010, which is a great impetus for the company’s expansion goals. In fact, Wendy’s seems to remain on track to reach the objective of its 7,500 global restaurant count by 2020.
Meanwhile, per the system optimization program, the company has already achieved its goal of reducing company-operated restaurant ownership to approximately 5% of the total system, by the end of 2016. Though the reduction in ownership has been weighing on revenues over the past few quarters, we believe franchising a large chunk of its system is expected to lower Wendy’s general and administrative expenses, thereby boost earnings, 2017 onward.
Also, Wendy’s remains on track to achieve its Image Activation goals for 2020 as part of the brand transformation initiative. Hereby, the company plans to remodel at least 70% of Wendy's North America restaurants
Risks
Higher labor costs due to the implementation of affordable Care Act, commonly known as Obamacare, continue to have an adverse impact on restaurant operators like Darden Restaurants Inc. DRI, Brinker International Inc. EAT, Domino's Pizza, Inc. DPZ and many others, including Wendy’s.
Moreover, Wendy’s would incur additional capital expenditure in the coming years in a bid to boost the re-imaging program. This might lead to lower free cash flow in the near term.
Additionally, a soft consumer spending environment in the U.S. restaurant space raises concern as it may hamper comps growth of this Zacks Rank #3 (Hold) company, moving ahead. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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