If you are an investor hungry for gains, The Wendy's Company (WEN, Financial) may be able to fill your appetite. Founded in 1969, Wendy’s is a quick-service hamburger company that, in 2011, became the second largest burger chain in terms of sales in the United States. It has a market capitalization of $3.029 billion. The company's stock has outperformed that of its major competitor McDonald's (MCD, Financial).
Wendy’s Performance
On May 8, 2014, this Dublin, Ohio- based company’s first-quarter 2014 adjusted earnings of 7 cents per share recorded a substantial year-over-year growth. The improved earnings reflect better-than-expected revenues. A chart has been provided below to show Wendy’s Q1 2014 compared to Q1 2013.
The 2014 same-restaurant sales increase resulted primarily from successful product promotions and increased customer traffic at Image Activation restaurants. Company-operated same-restaurant sales improved more than 500 basis points during the second half of the quarter compared to the first half, as the impact of severe weather conditions lessened. The increase in general and administrative expense was due to the higher equity compensation expense and consulting fees related to the company’s international growth strategy, partly offset by cost savings related to the company’s system optimization initiative.
From the above chart, it can be seen that net income has increased by $44.2 million, despite the impact of a $33.1 million year-over-year increase in income tax expense. First-quarter 2014 net income benefited from an $8.0 million year-over-year reduction in interest expense as a result of the company’s 2013 debt restructuring. The company has an ending cash balance of $384.7 million. Another chart has been provided below to show Wendy’s performance in North America.
The difference between company-operated and franchise same-restaurant sales in North America is mainly due to a higher number of Image Activation company-operated restaurants in operation. North America company-operated restaurant margin saw an increase of 30 basis points compared to 12.8 percent last year. This is mainly due to the result of same-restaurant sales growth.
Wendy’s performance in North America is slightly better than Burger King Worldwide’s (BKW, Financial) 0.1% increase, and much better than McDonald’s 1.7% decline.
Positive Outlook
Wendy’s expects its adjusted earnings to be within 34–36 cents per share in 2014, up from the 2013 levels. Management expects adjusted EBITDA in the range of $390.0 to $400.0 million, representing an increase of 6.0% to 9.0% year over year. The quick-service hamburger company expects its same-restaurant sales growth in the range of 2.5% to 3.5% at company-operated restaurants. Further, it expects a reduction in interest expense of approximately $15 million, resulting from the 2013 debt restructuring.
Wendy’s capital expenditures will be in the range of $280 to $290 million, including approximately $215 million for company-operated Image Activation restaurants. Wendy’s expects company-operated restaurant margin in a range of 16.3% to 16.8%, versus 16.8% to 17.0%, due to the revised outlook for an expected rise in commodity costs, with higher-than-expected beef costs, primarily in the second and third quarters. Further, Wendy's recently announced a $275 million stock buyback plan. A chart from the company website has been provided below to show Wendy’s outlook.
Image Activation Campaign
Wendy's image activation campaign started in 2011. By the end of 2015, Wendy's plans to remodel half of its 600 company-owned stores. The company’s renovations include flat-screen televisions, WiFi, fireplaces, lounge seating, and digital menus. Wendy’s is constantly innovating new techniques to satisfy its customers, one of which is the mobile payment system. Further, it has been said that Wendy’s is winning by copying Chipotle Mexican Grill’s (CMG, Financial) strategy. A chart has been provided below to show the company’s accelerating image activation franchise adoption.
Charts from company website
Challenges
The fast food industry is labor intensive, and headwinds include an immigration reform requiring stricter proof of eligibility to work. However, Wendy's plans to counter these negatives by improving efficiencies, and closing unprofitable locations. Most companies in the fast food industry increase prices as a last resort, and it will not be a surprise if we see synchronized price increases. All this brings uncertainty, which makes investing in fast food retailers riskier.
On a Concluding Note
From the company’s Image Activation campaign to the new menu items, it is evident that Wendy's focuses on good quality, innovative menu, and customer experience. The campaign, combined with a shareholder-friendly management, should generate significant stock appreciation in the future despite cost pressures. So far the company has done a good job, and I am pretty bullish that in the coming year it is not going to disappoint its valued investors, as well as customers.
