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On Jun 26, 2014, we issued an updated research report on The Wendy's Company (WEN - Analyst Report).

On May 8, this leading restaurateur posted first quarter 2014 results with earnings and revenues beating the Zacks Consensus Estimate. Adjusted earnings of 7 cents increased substantially year over year on better-than-expected revenues.

However, revenues declined 13.3% year over year to $523.2 million. The downside reflects a reduction in the number of company-operated restaurants as a result of the system optimization initiative. Per the initiative, the company has lowered its restaurant ownership from 22.0% to 15.0%, which has pressurized revenues in the quarter and is expected to continue in the near term.

Moreover, higher beef costs are expected to weigh on margins, mainly in the second and third quarter of the year. As a result, the company has lowered its expectation for company-operated restaurant margin for the year.

Though the reduction in ownership is currently weighing on revenues, we believe franchising a large chunk of its system will facilitate earnings and return on equity growth by lowering capital requirements over the long-term. Moreover, this will also add to the top line in the form of royalty and rental income. The franchised business model will help the company generate strong free cash flow, thereby helping it to maintain a healthy balance sheet.

Moreover, Wendy's has growth plans and partnerships in Argentina, the Philippines and Japan. Further, Wendy’s has long-term development agreements with franchisees in the Middle East, North Africa, Singapore, Turkey, Russia and the Eastern Caribbean region, Georgia, the Republic of Azerbaijan, Ecuador and Chile. Additionally, the company is exploring growth opportunities in China, Brazil and other key international markets. These less saturated developing markets offer the company enormous growth opportunities.

The burgeoning middle-class population with rising income levels has led to an increase in demand for convenience food and beverages like hamburgers, chicken sandwiches and nuggets, baked and French fries, and Frosty desserts. Moreover, over the long-term, we remain optimistic on the company’s sales initiatives, which include menu innovation, international expansion and re-imaging of units.

The company presently has a Zacks Rank #3 (Hold). Some better-ranked stocks in the restaurant sector include Red Robin Gourmet Burgers Inc. (RRGB - Analyst Report), Chipotle Mexican Grill, Inc. (CMG - Analyst Report) and Carrols Restaurant Group, Inc. (TAST - Snapshot Report). While Red Robin Gourmet sports a Zacks Rank #1 (Strong Buy), Chipotle Mexican Grill and Carrols Restaurant Group, hold a Zacks Rank #2 (Buy).

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