October 30, 2020

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Wendy’s (WEN) Banks on Digital Initiatives, Traffic Dismal (revised)

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The Wendy’s Company WEN is likely to benefit from digitization, menu innovation, balanced marketing approach...

The Wendy’s Company WEN is likely to benefit from digitization, menu innovation, balanced marketing approach and unit expansion. In the past six months, shares of the company have rallied 73.9% compared with the Zacks Retail – Restaurants industry’s 50.3% growth. However, traffic challenges due to the coronavirus pandemic along with high debt levels and labor expenses remains a concern.

Let us delve into factors highlighting why investors should hold on to the stock for the time being.

Catalysts

Wendy’s is capitalizing on the benefits of technology. It is investing in areas like mobile payment, mobile ordering and customer self-order kiosks that provide benefits such as consumer convenience, increased customer count, higher check and faster speed of service. In addition to improving overall customer convenience, these are likely to drive additional output during peak hours as well as provide labor leverage. We expect these measures to help the company maintain positive comps going forward.

On the mobile ordering front, Wendy’s is working to ensure that the facility can tap additional prospects around convenience – through mobile grab-and-go and curbside delivery, plus loyalty. In fact, delivery continues to be a major initiative by the company.

The company boosted its delivery channel by collaborating with Grubhub in the month of February and Postmates in the month of March 2020. During the second quarter of 2020, the company added Uber Eats, making it accessible by all major delivery providers in the United States. Moreover, the company launched its loyalty program in July to boost customer frequency.

The company’s brand transformation initiative also includes menu innovation, promotional offers and bold new packaging, intended for driving sales. Meanwhile, the practice of offering customized sandwiches made on order and serving hamburgers made of never-frozen beef would continue to drive sales for the company. We expect the company’s solid menu pipeline, limited time offers (LTO), marketing initiatives and increased emphasis on core and price value offerings to maintain the trend.

Moreover, the company will transition to 100% cage-free eggs for its breakfast items served at U.S. locations by 2020. The company also intends to eliminate the use of gestation stalls from its pork supply chain by 2022. These efforts will make the company popular among health-conscious diners. All in all, Wendy’s expects that its balanced marketing approach, new restaurant development and reimaging of restaurants to act as key catalysts.

Meanwhile, Wendy’s continues to focus on expansion initiatives to fortify brand presence and drive revenues. The company has growth plans and partnerships in Argentina, the Philippines and Japan. Further, it has long-term development agreements with franchisees in the Middle East, North Africa, the Eastern Caribbean, Argentina, Japan, Georgia, the Republic of Azerbaijan, Ecuador and Chile. Additionally, the company is exploring opportunities in other key international markets.

During the second quarter of 2020, Wendy’s had 22 global restaurant openings with an increase of one net new unit. Despite the pandemic, the company has made significant progress with respect to restaurant openings in the United Kingdom, with plans of rollout in the first half of 2021.

Markedly, with a strong pipeline of locations along with a talent team in place, the company is optimistic about opportunities in international markets.

Concerns

The coronavirus outbreak has rattled the Retail – Restaurants industry, and Wendy’s has also not been spared. Although the company has reopened majority of its restaurants, it is likely to witness dismal traffic due to the social-distancing protocols.

Notably, the company’s systemwide same-restaurant sales were substantially affected by the pandemic during the fiscal second quarter. Global system-wide sales — including company-operated and franchise restaurants — were $2.6 million in the reported quarter, down 6.4% from the prior-year quarter. U.S. system-wide sales were $2.4 million in the quarter, down 4% year over year. Moreover, system-wide sales in the International segment amounted to $0.2 million in the quarter, down 26.9% from the prior-year quarter level.

Moreover, the company’s high debt level remains a concern. At the end of Jun 28, 2020, the company’s long-term debt stood at $2.2 billion, almost flat with the March-end level. Notably, the company’s debt-to-capitalization was 88.7% compared with 89.4% at March-end. However, the company ended second-quarter fiscal 2020 with cash and cash equivalent of $338 million compared with $385.5 million at the end of first-quarter fiscal 2020, which may not be enough to manage the high debt level.

Additionally, the company has been continuously shouldering increased expenses, which have been detrimental to margins. For the third quarter of fiscal 2020, the company expects commodity inflation in the range of high-mid to high single digits. For fiscal 2020, commodity inflation is expected at 3%, while labor inflation is projected at 4%.

Zacks Rank & Key Picks

Wendy’s currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Some better-ranked stocks in the same space include Brinker International, Inc. EAT, Darden Restaurants, Inc. DRI and El Pollo Loco Holdings, Inc. LOCO. Brinker sports a Zacks Rank #1, while Darden and El Pollo Loco carry a Zacks Rank #2 (Buy).

Brinker has a three-five year earnings per share growth rate of 11.4%.

Darden has a trailing four-quarter earnings surprise of 8.1%, on average.

El Pollo Loco fiscal 2021 earnings are expected to rise 7.9%.

(NOTE: We are reissuing this article to correct several inaccuracies. The original version, published September 14, 2020, is no longer to be relied upon.)

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