Wendy's Sales Initiatives to Drive Growth, Costs a Concern
On Sep 19, 2014, we issued an updated research report on The Wendy's Company (WEN).
On Aug 7, 2014, Wendy's posted second quarter 2014 results and announced further plans under its ongoing system optimization initiative. Wendy’s second-quarter 2014 adjusted earnings of 9 cents per share were in line with the Zacks Consensus Estimate and up 12.5% year over year. The year-over-year rise reflects improved margins, a decline in interest expense and lower share count.
Total revenue in the quarter declined 19.5% year over year to $523.4 million. The downside reflects a reduction in the number of company-operated restaurants owing to the sale of restaurants as a part of the company’s system optimization initiative. After completing the sale of 418 company-owned restaurants in Mar 2014, Wendy's now plans to sell 135 i.e. 100% of the company-operated restaurants in Canada to new and existing franchisees as per its system optimization initiative.
Though the reduction in ownership will weigh on near-term revenues, we believe franchising a large chunk of its system will lower its general and administrative expenses and thereby boost earnings. Moreover, over the long-term, it would generate higher return on equity by lowering capital requirements. This would also boost free cash flow, thereby enhancing shareholder return.
Nevertheless, the top line beat the Zacks Consensus Estimate by 1.2%, possibly due to comps growth and sales initiatives undertaken by the company. The sales initiatives, which include menu innovation, international expansion and re-imaging of units are major drivers of revenues. Going forward, we expect these measures to boost revenues.
However, like other food and restaurant companies, rising food costs pose a major challenge to Wendy’s as well. Margins are expected to be negatively impacted by food costs, particularly higher-than-expected beef prices in the upcoming quarters. In fact, given the scenario, the company expects a 2% increase in commodity costs in 2014, double than its previous expectation. Moreover, incremental capital spending and a weak consumer spending environment remain concerns for the company.
Wendy's presently has a Zacks Rank #3 (Hold).
Other Stocks to Consider
Better-ranked stocks in the same industry include BJ's Restaurants, Inc. (BJRI), Chipotle Mexican Grill, Inc. (CMG) and Jamba, Inc. (JMBA). While Jamba sports a Zacks Rank #1 (Strong Buy), BJ's Restaurants and Chipotle Mexican Grill carry a Zacks Rank #2 (Buy).
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Read the Full Research Report on CMG
Read the Full Research Report on BJRI
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