The Wendy's Company ( WEN Quick Quote WEN - Free Report) is likely to benefit from digital initiatives, solid comps growth and Breakfast daypart offerings. This and the focus on unit expansion efforts bode well. However, inflationary pressures and constrained traffic are a concern. Let us discuss the factors highlighting why investors should retain the stock for the time being. Growth Catalysts
Wendy’s has been focusing on digitalization to drive growth. During fourth-quarter fiscal 2022, the company had nearly 10% of its sales generated through digital channels in the United States and approximately 17% in international markets. 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. WEN emphasized on expanding its delivery and mobile order access and efficiency, fine-tuning user experience and developing a one-to-one marketing program to boost digital business and drive growth. in 2023, the company anticipates digital sales of approximately $1.5 billion.
The company continues to impress investors with robust global same-restaurant sales growth. During fourth-quarter fiscal 2022, global comps increased 6.4%. Comps in the United States witnessed growth of 5.9% 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 9.9% year over year. In 2022, the company’s global system-wide sales growth was 6.8%. The company expects 6-8% growth in global system-wide sales in fiscal 2023.
Wendy’s focuses on Breakfast daypart Offerings to drive incremental sales. During the fiscal fourth quarter, average weekly U.S. breakfast sales were up more than $3,000 per restaurant. It also registered a significant increase in restaurant average unit volumes (or AUV). Notably, the company is benefitting from the launch of French Toast Sticks. Also, it stated benefits from a $3 Croissant promotion. Wendy’s is optimistic on the back of its marketing efforts, high-quality offerings, repeat ordering and high customer satisfaction levels. For 2023, the company has set aside $2 million for investment in breakfast advertising.
Wendy’s is steadfast in expanding its presence globally. To promote new restaurant development, the company provided franchisees with certain incentive programs for qualifying new restaurants, including technical assistance fee waivers and reductions in royalty and national advertising payments. In 2022, the company opened 276 new restaurants.
The company’s international business is poised to be a growth driver in the days ahead. Moving into 2023, the company emphasized on a solid development pipeline locked under its groundbreaker development incentive, potential franchise candidates (more than 300) in recruiting pipeline and a new global design standard to support AUVs, reduce build costs and improve operating efficiency. The company reported development agreements in the Philippines and India. Also, it stated expansion in Ireland, Spain, Australia and Latin America in the pipeline. In 2023, the company anticipates net units to grow 2-3% on a year-over-year basis.
Concerns Image Source: Zacks Investment Research
Shares of Wendy’s have declined 6.1% in the past year against the
Industry’s growth of 8%. The downside was mainly caused by commodity and wage inflation, supply chain challenges and a challenging macro environment. Although the company reopened most of its restaurants, traffic is still low compared with pre-pandemic levels. The company intends to monitor the situation regularly to gauge the impacts of COVID-19. Wendy’s has been continuously shouldering increased expenses, which have been detrimental to margins. During the fiscal fourth quarter, the company’s total cost of sales came in at $194.7 million compared with $154.2 million reported in the prior-year quarter. The downside was primarily due to higher commodity and labor costs and increased investments (to support the entry into the U.K. market). However, this was partially offset by a higher average check. The company anticipates the inflationary pressures on labor and commodity price to continue for some time. 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 same space include Chuy's Holdings, Inc. ( CHUY Quick Quote CHUY - Free Report) , Arcos Dorados Holdings Inc. ( ARCO Quick Quote ARCO - Free Report) and Bloomin' Brands, Inc. ( BLMN Quick Quote BLMN - Free Report) . Chuy’s Holdings currently sports a Zacks Rank #1. CHUY has a trailing four-quarter earnings surprise of 19.1%, on average. Shares of CHUY have increased 27.4% in the past year. The Zacks Consensus Estimate for Chuy’s Holdings 2023 sales and EPS suggests growth of 10.8% and 19%, respectively, from the corresponding year-ago period’s levels. Arcos Dorados sports a Zacks Rank #1. ARCO has a long-term earnings growth of 11.6%. Shares of the company have declined 1.2% in the past year. The Zacks Consensus Estimate for Arcos Dorados’ 2024 sales and EPS suggests growth of 8% and 19.7%, respectively, from the year-ago period’s levels. Bloomin' Brands carries a Zacks Rank #2 (Buy). BLMN has a long-term earnings growth rate of 12.3%. The stock has gained 19.9% in the past year. The Zacks Consensus Estimate for Bloomin' Brands 2024 sales and EPS suggests growth of 2.1% and 4.4%, respectively, from the year-ago period’s reported levels.