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Wendy's Gains 11.9% in 1 Year: Should You Hold the Stock?

The Wendy's Company WEN relies on international expansion, menu innovation, technological initiatives and re-imaging of units to drive incremental revenues. However, increased expenses have been weighing on the company for some time now.

Nonetheless, backed by impressive earnings in four out of the trailing seven quarters, the company’s shares have gained 11.9% over the past year, outperforming the industry’s rally of 6.7%.


Expansion Efforts and Other Sales-Building Initiatives

Wendy’s is trying to take its global restaurant count to 7,500 by 2020. It has growth plans and partnerships in Argentina, the Philippines and Japan.

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Significantly, Wendy’s achieved total net new development of 97 restaurants internationally in 2017, mirroring 1.5% year-over-year growth. In the first nine months of 2018, the company opened 109 restaurants as part of its expansion endeavors. Further, it boasts a strong pipeline of projects, which are expected to help it achieve net new restaurant development growth goal of 1.5% for 2018, worldwide.

Wendy’s remains on track to achieve at least 70% Image Activation goal for 2020 as part of its brand transformation initiative. This program has gained traction in the recent past, leading to an increased traffic and higher sales at its restaurants. At the end of 2017, 43% of the global system featured the brand’s new image. Interestingly, as a result of this re-imaging, customers saw some bold designs and friendlier restaurant teams.

Focus on Franchising Bodes Well

Wendy’s is benefiting from its transition into a franchised business model. In 2017, the company had several first-time builders and doubled the number of franchises from 2015 by building new restaurants. Though the reduction in ownership has been weighing on the company’s revenues over the past few quarters, we believe it will lower its general and administrative expenses, thus boosting earnings in turn.

The company plans to continue facilitating franchisee-to-franchisee restaurant transfers through its buy-and-flip strategy. Such a move ensures that restaurants are in the safe hands of well-capitalized franchisees, which are committed to long-term growth. For 2018, the company expects to complete nearly 130 Franchise Flips.

Concerns

In order to drive growth, Wendy’s is taking initiatives to re-align and re-invest its resources. Though these initiatives are expected to benefit Wendy’s over the long term, the same is likely to increase costs in the near term, denting margins in turn. Furthermore, the company anticipates labor inflation of roughly 3-4% and commodity inflation of around 1-2% in 2018.

Wendy’s is also likely to incur an additional capital expenditure in the coming years in a bid to boost the re-imaging program. This might lower its free cash flow in the near term. Though the company has transitioned into a franchise-based model that requires lesser capital expenditure, it is likely to take some time to reap benefits. In fact, the company expects a capex of approximately $75-$80 million in 2018.

Zacks Rank & Stocks to Consider

Wendy’s currently carries a Zacks Rank #3 (Hold). Some better-ranked restaurant stocks are BJ’s Restaurants BJRI, Darden DRI and Dunkin’ Brands DNKN, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Earnings for BJ’s Restaurants, Darden and Dunkin’ Brands for the current year are projected to increase by 66.7%, 16.8% and 16.9%, respectively.

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Darden Restaurants, Inc. (DRI) : Free Stock Analysis Report
 
The Wendy's Company (WEN) : Free Stock Analysis Report
 
Dunkin' Brands Group, Inc. (DNKN) : Free Stock Analysis Report
 
BJ's Restaurants, Inc. (BJRI) : Free Stock Analysis Report
 
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