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Will Franchising Help Wendy's to Get Back on Growth Track?

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The Wendy's Company’s (WEN - Free Report) topline is currently under pressure due to the system optimization initiative through franchising. However, initiatives like menu innovation, technological upgrades, international expansion and re-imaging of units are somewhat offsetting the pressure.

In the fourth quarter of 2017, Wendy's earnings missed the Zacks Consensus Estimate but improved 37.5% year over year. Also, revenues lagged the consensus mark and marginally declined year over year.

Additionally, the company’s surprise history has not been much impressive as it missed the consensus mark in two of the last four quarters, delivering a negative average earnings surprise of 1.4%. For the fourth quarter, the Zacks Consensus Estimate moved down 16.7% to 10 cents over the past 30 days.

However, in the past six months, shares of Wendy's have rallied 13.2%, significantly outperforming the 4.4% gain of the industry it belongs to.

System Optimization Putting Pressure on the Top Line

Wendy’s has been witnessing year-over-year decline in revenues over the last few quarters. The downside can be attributed to reduced number of company-operated restaurants, resulting from its system optimization initiative. Although the initiative was completed in fourth-quarter 2016, the company experienced a slump in revenues in all the four quarters of 2017.

Notably, Wendy’s sold 310, 327, 255 and 244 company-owned restaurants to franchisees in 2016, 2015, 2014 and 2013, respectively, which included the sale of all its company-owned restaurants in Canada.

The Wendy's Company Revenue (Quarterly)

Franchising Should Put Revenues Back to Growth Trajectory

As Wendy’s continues to transition to a franchisee-based model, franchise royalty revenues are rising and somewhat offsetting fewer sales at company-operated restaurants. Going ahead, this trend will help the company to get back to revenue growth trajectory.

This apart, a number of sales boosting initiatives such as menu innovation, marketing and core and price value offerings are in place. Also, Wendy’s 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. Moreover, the advancement of Image Activation and the improvement in its restaurant economic model are enabling the company to progress with its new unit development goals. We expect these measures to have a positive impact on its top line going forward.

Zacks Rank & Other Stocks to Consider

Wendy's carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the industry are DineEquity (DIN - Free Report) , BJ's Restaurants (BJRI - Free Report) and Carrols Restaurant Group (TAST - Free Report) .While DineEquity sports a Zacks Rank #1 (Strong Buy), BJ's Restaurants and Carrols Restaurant Group carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

DineEquity, BJ's Restaurants, Carrols Restaurant Group’s earnings for 2018 are expected to improve 22.7%, 27% and 30%, respectively.

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