Wendy's in Neutral Lane

We maintain our Neutral rating on The Wendy’s Co. (WEN - Analyst Report). While we are optimistic on the company’s strong breakfast initiative, unit growth and remodeling program, negative impact from commodity inflation as well as a high transaction cost regarding the closing of Atlanta support center compel us to remain on the sidelines.

We see the company’s focus on breakfast line-up as one of its key growth drivers. It remains all geared up to leverage the solid trend in breakfast and is continuously making tangible progress toward further expansion. In 2012, Wendy’s plans to get bigger with breakfast in new markets of the north and northeast where competition for breakfast day part remains strong. Management is also testing 24-hour operations in a number of breakfast locations.

2011 was a transitional year for Wendy’s. The company generated positive transactions in 2011 after 2002. Wendy’s plans to achieve 4% same-store sales growth in international markets in 2012 and 2% to 3% growth at Wendy’s North America company-operated restaurants.

The limited presence in the international markets provides Wendy's with ample scope for further expansion. The company is slated to build 20 new restaurants in 2012 all of which will be based on a new model. Franchisees are going to open 40 units in 2012 and the company will set up 55 units outside the United States.

In terms of headwinds, commodity inflation remains a threat. Management expects its commodity basket to increase by 115 to 145 basis points in 2012, which approximates to a 4% to 5% increase. Beef costs have soared around 10% over each of the last three years and will continue to be a tension in 2012.

Additionally, a high transaction cost regarding the closing of Atlanta support center and consolidating the same with Dublin will also be incurred in 2012. Although the company competes with the likes of McDonald’s Corp. (MCD - Analyst Report) and Yum! Brands Inc. (YUM - Analyst Report), in terms of scale, Wendy’s is still lagging.

Consequently, we have a Zacks #4 Rank (short-term Sell recommendation) on the shares.