Here's Why You Should Retain Wendy's (WEN) in Your Portfolio
Wendy's (WEN) focus on digital initiatives and unit expansion bode well. However, a rise in commodity and labor costs is a concern.
The Wendy's Company WEN is likely to benefit from solid comps growth, digitization initiatives and Breakfast daypart offerings. This along with a focus on expansion efforts bodes well. However, a decline in traffic from pre-pandemic levels as well as a rise in commodity and labor costs remain a concern.
Let us delve into the factors highlighting why investors should hold on to the stock for the time being.
Wendy's continues to impress investors with robust global same-restaurant sales growth. After posting global same-restaurant sales growth of 4.3% and 4.7% in third- and fourth-quarter 2020, respectively, the company reported global restaurants comps sales improvement of 13% and 17.4% in first- and second-quarter fiscal 2021. During the fiscal third quarter, comps at Global restaurants increased 3.3% year over year. The improvement was driven by continued strength across its U.S. and international businesses. During the quarter, comps in the United States witnessed growth of 2.1% year over year.
Wendy’s has been capitalizing on the benefits of technology. It has been investing in 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. We expect these measures to help the company sustain the trend of positive comps in the days ahead.
Wendy’s focuses on Breakfast daypart Offerings to drive incremental sales. During the fiscal second quarter, breakfast sales improved 10% on a sequential basis. In third-quarter 2021, breakfast robust performance continued, contributing 7.5% to sales, primarily stemming from morning meal traffic share gains in the QSR burger category. The company has been benefiting from its marketing efforts, high-quality offerings, repeat ordering and high customer satisfaction levels. For 2022, the company anticipates a breakfast sales contribution of 10%.
Wendy’s is steadfast in expanding its presence globally. During second-quarter fiscal 2021, the company announced a development commitment by REEF to open and operate 700 delivery kitchens (over the next five years) across the United States, Canada and the U.K. The commitment builds upon the successful test of eight delivery kitchens in Canada (beginning in late 2020). With this commitment, REEF will become the first Wendy's franchisee in the U.K. Wendy's, along with REEF, expects to open approximately 50 delivery kitchens in 2021, with the rest expected to be launched by 2025. Also, the company announced 240 incremental new restaurant commitments in Canada and the United States through its Groundbreaker Incentive Program. Notably, commitments from REEF and Groundbreaker Incentive Program represent 70% of its new global restaurant pipeline through 2025. The company expects to open 8,500-9,000 global restaurants by 2025 end.
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Shares of Wendy’s have gained 7.7% so far this year compared with the industry’s 11.8% growth. The downside was caused by the coronavirus crisis. Although the majority of dining services are open, traffic is still low compared with pre-pandemic levels. Going forward, the company intends to monitor the situation on a regular basis to gauge the impacts of COVID-19.
The company has been continuously shouldering increased expenses, which have been detrimental to margins. During third-quarter fiscal 2021, the company-operated restaurant margin came in at 14.4% compared with 16.9% in the year-ago quarter. The downside was primarily due to higher labor rate, increase in commodity costs, a decline in traffic and lower advertising spending in the prior-year quarter. General and administrative expenses in the quarter were $62.8 million compared with $47.3 million in the prior-year quarter. This was primarily on account of higher incentive compensation and stock compensation accrual and technology costs.
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 Papa John's International, Inc. PZZA, Arcos Dorados Holdings Inc. ARCO and McDonald's Corporation MCD.
Papa John's currently carries a Zacks Rank #2 (Buy). The company benefits from its off-premise business model. Sales at off-premise business model have exceeded pre-pandemic levels. We believe that a boost in customer count coupled with targeted off-premise marketing is likely to drive the channel’s performance in the upcoming periods.
Papa John's reported better-than-expected earnings in three of the trailing four quarters, the average surprise being 27.2%. The company’s fiscal 2021 earnings is likely to witness growth of 142.1%. PZZA stock has gained 57.4% in the past year.
Arcos Dorados carries a Zacks Rank #2. ARCO has has a long-term earnings growth of 42.9%. Shares of the company have increased 11.5% so far this year.
The Zacks Consensus Estimate for Arcos Dorados current financial year sales and EPS suggests growth of 31% and 112.5%, respectively, from the year-ago period’s levels.
McDonald’s carries a Zacks Rank #2. A robust drive-thru presence and investments in delivery and digitization in the past few years have helped the company to tide over the pandemic. The company has a trailing four-quarter earnings surprise of 6.8%, on average.
The Zacks Consensus Estimate for McDonald's current financial year sales and EPS suggests growth of 20.9% and 55.7%, respectively, from the year-ago period’s levels. MCD has rallied 26.1% in the past year.
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McDonald's Corporation (MCD): Free Stock Analysis Report
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Arcos Dorados Holdings Inc. (ARCO): Free Stock Analysis Report
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