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Robert Stephens, CFA
Robert Stephens, CFA
Articles (217) 

Why Wendy’s Could Have Stock Price Growth Potential

The company has a solid strategy

March 18, 2019 | About:

The Wendy's Co. (NASDAQ:WEN) is making significant changes to its business as it aims to enhance its competitive position. The fast-food restaurant chain is investing heavily in digital growth, while seeking to improve the customer experience through a major menu upgrade. The company is also increasing its mobile ordering availability, while international expansion is set to become an increasingly important consideration for the business.

Although risks such as increasing competition and rising labor costs could inhibit its future performance, the stock has improving financial forecasts. Along with a low valuation, it could deliver stronger performance after a 4% decline over the last year caused it to underperform the S&P 500.

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Innovation

An increasingly innovative menu could improve customer engagement and enhance the company’s competitive advantage. The introduction of the Made to Crave hamburger line in February, which features three new sandwiches, represents the most significant change to its premium menu in over 10 years. In addition, the company is supporting franchisees to a greater extent by providing customers with a wider range of promotions. This is aimed at increasing footfall, with there being the potential for cross-selling opportunities.

Mobile ordering is being rolled out in Wendy's U.S. restaurants. The service is expected to be available across the country by the end of the year. Its current delivery footprint is 60% of North America. This figure is expected to reach 80% by the end of 2019 as its partnerships with delivery services DoorDash and Skip The Dishes become more widely advertised. Ultimately, Wendy's is aiming to build one-to-one relationships with customers through mobile ordering, which could enhance its economic moat through a stronger degree of customer loyalty.

Digital growth

As part of its digital growth strategy, Wendy’s plans to invest $25 million to build a stronger foundation across its digital platforms. This includes investments in digital scanners, which are expected to increase throughput in its restaurants, as well as better access to consumer insights. This could improve the relevance of its promotions and offers. The company will also focus on increasing the personalization opportunities available to customers on its digital platform.

Wendy’s app is also expected to be a significant area of investment. The restaurant operator plans to improve the customer experience via the app through improving its navigation and making it more user-friendly. This could broaden its appeal to a wider range of consumers. Mobile offers are expected to drive further app downloads and increase the number of monthly active users. This could make it easier for the company to communicate directly with customers as well as offer greater scope for customization.

Risks

The growth in the number of premium hamburger chains across the U.S. could threaten Wendy’s future expansion. Additionally, U.S. wage growth reached a nine-year high in the latter part of 2018, which contributed to a 60 basis point decline in Wendy's restaurant margins in the most recent quarter. Although this has been partly offset by pricing actions, the increasing level of competition within what is already a saturated industry may provide less scope for further price increases in the future.

In response to a competitive environment, Wendy's is seeking to improve the customer experience by investing in improved systems and better employee training. It will also improve restaurant speed and throughput in order to bolster its competitive advantage versus peers.

Wendy’s will also utilize its experience from operating in North America when seeking to expand internationally. This includes areas such as franchisee recruitment, restaurant development and system optimization. With international sales rising 13% in the last quarter, growth outside of North America could catalyze the fast-food chain's overall performance in the future.

Outlook

Wendy’s is forecasted to record a 23% growth in earnings per share in the next financial year. Since the stock trades with a price-earnings ratio of 9, it appears to offer growth at a reasonable price.

The changes it is making to its strategy could enhance its long-term earnings growth outlook. Investments in digital opportunities alongside greater innovation and mobile ordering could enhance its position within a competitive marketplace.

Although risks such as increasing wages and a saturated market could threaten its prospects, the stock's valuation suggests investors may have already factored in the challenges faced by the company. After underperforming the S&P 500 over the last year, Wendy's could deliver improving stock performance.

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