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Wendy's (WEN) Strong on Efforts: Will the Stock Revive?

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The year 2020 was a nightmarish one for most of the industries and restaurant industry has been no exception to the trend. Moreover, The Wendy's Company (WEN - Free Report) that is housed in the restaurant industry was also affected by the coronavirus pandemic. Shares of the company have declined 3% in the past year compared with the industry’s rally of 8.8%. Although, things are looking brighter for the company in 2021, there are some headwinds that might hurt the company’s performance.

Growth Triggers

Wendy’s is steadfast in expanding its presence globally. The company’s international business is thus poised to be a growth driver in the future. Notably, the company anticipates the count to increase to 1,500 restaurants internationally and double its sales to approximately $2 billion by 2024. Markedly, with a strong pipeline of locations along with a talent team in place, the company is optimistic toward growth opportunities in international markets. It is planning to expand into Europe and is in likely to open restaurants in the U.K. in the first half of 2021.

Despite the coronavirus pandemic, the company delivered highest global same-restaurant sales growth number in more than 15 years in third-quarter 2020. Comps at Global restaurants improved 6.1% compared with 4.4% growth in the prior-year quarter driven by strength of breakfast daypart. Moreover, comps in the United States witnessed an increase of 7% compared with 4.5% growth in the year-ago quarter. The uptrend continues in October, as the U.S. same-restaurant sales rose 6.6% year over year. Canada and Puerto Rico, which comprise about 75% of the company’s sales are witnessing sales growth. The company is operating 95% of its restaurants.

Margin, an important financial metric that gives an indication about the company’s health, has accelerated in third-quarter 2020. Company-operated restaurant margin was 16.9% in the reported quarter compared with 16.2% in the year-ago quarter. The increase can primarily be attributed to higher average check and lower-than-expected local advertising spend.

Moreover, Wendy’s is capitalizing on the benefits of technology. It is investing in areas like mobile payment, mobile ordering and customer self-order kiosks that provide benefits such as consumer convenience, increased customer count, higher check and faster speed of service. We expect these measures to help the company maintain the trend of positive comps going forward. Ever since, the company launched Wendy's Rewards program app downloads have increased 15%. The company is also witnessing average checks. In Canada, digital sales penetration doubled from the previous year.

 

Hurdles to Cross

The coronavirus pandemic is expected to materially affect the company's operating and financial results. Although, majority of the stores have re-opened after coronavirus-led shutdown traffic are still below pre-outbreak level. Even though markets in Canada, Puerto Rico and New Zealand are catching up, complete recovery is likely to take time.

Moreover, maintaining liquidity has become a herculean task for all companies during the coronavirus pandemic. At the end of Sep 27, 2020, the company’s long-term debt stood at $2.2 billion, almost flat with Jun 28, 2020 level. Notably, the company’s debt-to-capitalization was 84.1% compared with 85.6% at the end of second-quarter 2020. However, the company ended third-quarter fiscal 2020 with cash and cash equivalent of $313.2 million compared with $338 million at the end of second-quarter fiscal 2020, which may not be enough to manage the high-debt level.

Zacks Rank & Key Picks

Wendy's currently has a Zacks Rank #3 (Hold). Some better-ranked stocks worth considering in the same space include Arcos Dorados Holdings Inc. (ARCO - Free Report) , Restaurant Brands International Inc. (QSR - Free Report) and Yum! Brands, Inc. (YUM - Free Report) . All these stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Shares of Arcos Dorados have gained 16.9% in the past three months compared with the industry’s growth of 4.2%.

Restaurant Brands and Yum! Brands have an impressive long-term earnings growth rate of 8.8% and 12.3%, respectively.

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