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Wendy’s Future Looks Promising

June 26, 2014 | About:
abirk

abirk

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To strive and prosper well in this competitive market, one must satisfy the needs of customers as well as its valued investors. This is because both are the life blood of a company. At the end of the day, investors expect a pocketful of return for their hard-earned money.

With a market cap of 3.517 billion, Wendy’s (WEN) is primarily engaged in the business of operating, developing and franchising a system of distinctive quick-service restaurants serving food. It is a quick-service restaurant company in the hamburger sandwich segment. To reduce its operating costs, the company franchises its restaurants. As of Dec. 29, the company had 6,558 restaurants, including franchisees.

Wendy’s Pretzel Bacon Cheeseburger

Along with its preliminary 2013 results, Wendy’s issues 2014 outlook and reaffirms long-term outlook. will report its first-quarter earnings on May 8. The company's coming off an unusually strong year thanks to the launch of the successful Pretzel Bacon Cheeseburger. It has been winning rave reviews from customers and the restaurant industry since debuting its 680-calorie Pretzel Bacon Cheeseburger last summer.

The description of the burger itself is enticing enough: "A delicious twist on our classic hot n juicy cheeseburger with a sweet & smoky honey mustard sauce, melted cheddar cheese and applewood smoked bacon all on a warm, soft pretzel bun."

The response to the new offering has been so positive that it was recently named "Best Limited-Time Offer" of 2014 by Nation's Restaurant News' (NRN) MenuMaster. Wendy's itself has proclaimed the Pretzel Bacon Cheeseburger as one of the greatest items in the history of the business.

After a six-month absence, Wendy's will bring back over the July 4th weekend both its wildly popular Pretzel Bacon Cheeseburger and its Pretzel Pub Chicken Sandwich. Above all else, pretzels — especially soft pretzels — sell. Proof: consumers inhaled more than 50 million pretzel sandwiches from Wendy's in 2013, driving 3% sales jumps in both the third and fourth quarters, says CEO Emil Brolick. For Wendy's, the intro also is a bid to boost sales during its already-busiest time of year and to regain its footing as an industry innovator.

The System Optimization initiative
Thus far, the biggest step the company has taken to drive its profits has come with the System Optimization initiative. With the program, which started in July 2013, Wendy's aimed to change its business to a franchise-based model. The company had a goal of reducing total system ownership from 22% to about 15%.

Wendy's completed its System Optimization initiative by selling 104 restaurants in Phoenix, Hawaii, Los Angeles/Palm Springs, and Albuquerque. The company sold 40 stores in the Phoenix region to Arizona Restaurant Company, 32 Los Angeles/Palm Springs outlets, 7 Hawaiian restaurants to Cotti Foods Hawaii, and 25 Albuquerque area restaurants to JAAB Restaurant Holdings. Under the program, Wendy's has sold 418 company-operated stores in 13 U.S. markets, primarily in the West.

The System Optimization initiative has done wonders for Wendy's. It has helped the company continuously reduce its costs, which explains why it is minting a lot of profit. The Image Activation initiative will also ensure that Wendy's restaurants are remodeled in a way that increases the company's brand image. On the whole, these two programs will further enhance the company's earnings in the years ahead.

Taking a Look at the Numbers

Wendy's saw an increase in customer traffic due to its "Image Activation" re-imaging program that was initiated in 2011. Renovations include the installation of multiple flat-screen televisions, WiFi, fireplaces, lounge seating, and digital menus. 200 of its company-owned and franchised locations were remodeled as of last year. In 2014, the company expects another 200 more restaurants to undergo the remodeling, split evenly between company-owned and franchised. With the continuation of the Image Activation program, Wendy's 2014 CapEx is around $280-$290 million.

Future Outlook

Wendy’s has mostly reiterated the 2014 outlook. The company projects 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.

Average same-restaurant sales growth is expected to be in the range of 2.5% to 3.5% at company-operated restaurants. Further, the company expects a reduction in interest expense of approximately $15 million, resulting from the 2013 debt restructuring.

Capital expenditures are expected in the range of $280 to $290 million, including approximately $215 million for company-operated Image Activation restaurants.

To End

Wendy’s strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures, compelling growth in net income, good cash flow from operations and solid stock price performance.

In this competitive fast-food industry, Wendy’s is moving very strategically. It can be seen as the company is focusing on menu innovation combined with cost reductions through the divestment of company-owned locations. This strategy will stabilize its cash flow in the medium run and improve its top line and margins in the long run. Therefore, brighter days are ahead for Wendy’s as well as for its valued investors.


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