We maintain our Neutral recommendation on the restaurateur The Wendy’s Co. (WEN). While we prefer the company’s multi-year turnaround plan to improve its restaurant operating margins, reinvigorate brands and expand internationally, there is still some time before the turnaround process fully pays off.
Why the Reiteration?
Wendy’s fourth-quarter 2012 earnings and revenues grew year over year. While its earnings per share beat the Zacks Consensus Estimate, revenues lagged the same.
Since 2011, Wendy’s has been undergoing a transition. The company completed the sale of Arby’s restaurants so that it could focus solely on building the Wendy’s brand. Beginning 2013, Wendy’s targets continued growth in annual adjusted EBITDA on the back of an innovative product pipeline, compelling advertising, operational efficiency, reimaging of restaurants and unit expansion.
Wendy’s benefited considerably from the reimaging program undertaken in 2011. Its restaurant reimaging program is divided into three tiers, depending upon the economics and trade area profile of each unit. Following the considerable success achieved through the reimaged restaurants in 2012, management plans to speed up overhaul activity in 2013.
Wendy’s is striving hard to expand its presence beyond the US. Wendy’s currently has limited presence in North America. It believes that there is room for more than 8,000 restaurants outside North America of which 40% can be opened in China, Brazil and Japan.
However, higher food costs and macroeconomic pressure can act as headwinds to its growth story. Beef represents almost 20% of Wendy’s total food cost. The company uses fresh ground beef, the cost of which will likely remain a major concern throughout 2013.
Moreover, US consumers are burdened with higher gasoline prices, an increase in payroll tax and delayed tax refund checks. These external forces might restrict consumer discretionary spending further, which in turn can put pressure on the company’s sales.
Hence, at the current level, we remain cautious and prefer to take a wait and see approach till we find some greater evidence of an outperformance. Wendy’s currently retains a Zacks Rank #3 (Hold).
Other Stocks to Consider
Some other restaurant industry stocks with a favorable Zacks Rank include Red Robin Gourmet Burgers Inc. (RRGB), Burger King Worldwide Inc. (BKW) and Cracker Barrel Old Country Store Inc. (CBRL). While Red Robin and Cracker Barrel carry a a Zacks Rank #1 (Strong Buy), Burger King carries a Zacks Rank #2 (Buy).
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