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Here's Why You Should Retain Wendy's (WEN) in Your Portfolio

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The Wendy's Company (WEN - Free Report) is likely to benefit from Breakfast daypart offerings, digitization initiatives and solid comps growth. This and focus on expansion efforts bodes well. However, a decline in traffic from pre-pandemic levels and a rise in commodity and labor costs are a concern.

Let us delve into the factors highlighting why investors should hold on to the stock for the time being.

Catalysts

Wendy’s focuses on Breakfast daypart Offerings to drive incremental sales. Wendy’s continues to focus on Breakfast daypart Offerings to drive incremental sales. In first-quarter 2022, breakfast contributed nearly 7% to sales. The company has been benefiting from its marketing efforts, high-quality offerings, repeat ordering and high customer satisfaction levels. In 2021, the company’s breakfast business surged 25%. It expects the breakfast business in the United States to accelerate in 2022 by roughly 10% to 20%. By the end of 2022, it anticipates average weekly U.S. breakfast sales to be $3,000-$3,500 per restaurant.

Wendy’s has been focusing on digitalization to drive growth. During first-quarter fiscal 2022, Wendy’s had nearly 10% of its sales coming through digital channels in the United States and 17% in Canada. This was driven by gains in delivery and mobile ordering sales and several successful promotions. Since the company launched Wendy's Rewards program app, downloads have increased. The company has been witnessing higher average checks.

Wendy's continues to impress investors with solid global same-restaurant sales growth. During first-quarter fiscal 2022, global comps increased 2.4% year over year. The improvement was driven by continued strength across its U.S. and international businesses. During the quarter, comps in the United States witnessed growth of 1.1% year over year. The upside was driven by growth in breakfast and digital businesses. Same-restaurant sales at International restaurants (excluding Venezuela and Argentina) rose 14.1% year over year. For 2022, the company expects global systemwide sales growth to be 6-8%.

Wendy’s is steadfast in expanding its presence globally. The company’s international business is poised to be a growth driver in the days ahead. During the three months ended April 3, 2022, the company and its franchisees added 67 net new restaurants across Wendy’s system. The company stated that it has a robust pipeline and is on track to achieve its target of 5-6% net unit growth in 2022. Given the solid development foundation, the company anticipates opening 8,500-9,000 systemwide restaurants by the 2025-end.

Concerns

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Shares of Wendy’s have declined 20.1% in the past year compared with the industry’s 19.4% fall. The downside was caused by the coronavirus crisis. The restaurant industry has been facing declining traffic for quite some time. Although most dining services are open, traffic is still low compared with pre-pandemic levels. Going forward, the company intends to monitor the situation regularly to gauge the impacts of COVID-19.

The company has been continuously shouldering increased expenses, which have been detrimental to margins. During the fiscal first quarter, the company-operated restaurant margin came in at 11.6% compared with 17% in the year-ago quarter. The downside was primarily due to a higher labor rate, increased commodity costs and decline in customer counts. General and administrative expenses in the quarter were $62.3 million, compared with $52.6 million in the prior-year quarter. This was primarily on account of higher salaries.

Zacks Rank & Key Picks

Wendy’s currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Some better-ranked stocks in the Zacks Retail-Wholesale sector are Dollar Tree Inc. (DLTR - Free Report) , BBQ Holdings, Inc. and Arcos Dorados Holdings Inc. (ARCO - Free Report) .

Dollar Tree sports a Zacks Rank #1. The company has a trailing four-quarter earnings surprise of 13.1%, on average. Shares of the company have gained 54.4% in the past year.

The Zacks Consensus Estimate for Dollar Tree’s 2022 sales and earnings per share (EPS) suggests growth of 6.7% and 40.5%, respectively, from the year-ago period’s levels.

BBQ Holdings carries a Zacks Rank #2 (Buy). BBQ Holdings has a long-term earnings growth of 14%. Shares of the company have decreased 42.5% in the past year.

The Zacks Consensus Estimate for BBQ Holdings’ 2022 sales and EPS suggests growth of 46.1% and 67.6%, respectively, from the year-ago period’s levels.

Arcos Dorados carries a Zacks Rank #2. Arcos Dorados has a long-term earnings growth of 34.4%. Shares of the company have risen 16.4% in the past year.

The Zacks Consensus Estimate for Arcos Dorados’ 2022 sales and EPS suggests growth of 16.6% and 83.3%, respectively, from the year-ago period’s levels.


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