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Wendy's Re-Imaged Restaurant in Portsmouth to Drive Traffic

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The Wendy's Company (WEN - Free Report) yesterday announced that it will open a restaurant, Smart 55, at 877 London Blvd, Portsmouth, VA., on Mar 22. The new outlet, to a great extent, will deviate from the earlier Wendy’s restaurants in terms of design and appearance.

It will be the 4th Wendy's restaurant in Portsmouth and 30th in the Hampton Roads under Delight Restaurant Group, a Wendy's franchise.

The new outlet will exemplify an invigorated decor, with innovative interior and exterior design, and other customer friendly amenities. The company modeled this new restaurant with a smaller footprint than a traditional Wendy's restaurant and also made it energy efficient.

Notably, shares of Wendy’s have rallied 29.3% in the past year, outperforming its industry’s gain of 13.9%

New Design to Improve Guest Traffic

The move appears to be part of Wendy’s Image Activation program aimed at revitalization of restaurants to improve guest experience. This program has gained traction in the recent past leading to increased traffic and higher sales, with Wendy’s targeting at least 70% of its restaurants re-imaged by 2020. At the end of 2017, 43% of the global system featured the brand’s new image.

Interestingly, as a result of this reimaging, customers have seen some bold designs and friendlier restaurant teams. In 2017, Image Activation benefited customer traffic and North America same-restaurant sales by 70 basis points (bps), while the company expects a 60-bps benefit in 2018.

Franchise Business Model Aiding the Company

Delight Restaurant Group is one of the prominent franchisee of Wendy's restaurants with a total of 30 locations and roughly $50 million in gross annual revenues.

Franchising a large chunk of its system is expected to lower Wendy’s general and administrative expenses, and thereby boost earnings. Moreover, over the long term, it would generate a higher return on equity by lowering capital requirements. This would also boost free cash flow, thereby enhancing shareholders’ return.

Driven by increased franchise ownership, adjusted EBITDA margin in 2017 increased roughly 600 bps and free cash flow more than quadrupled, increasing from $170 million to $39 million.

Expenses Likely to Go Up

Even though the company is on track to gain from its restaurant remodeling and refranchising strategies, expenses can also increase as a result of these.

From boosting the re-imaging program, Wendy’s is likely to incur additional capital expenditure in the coming years. Also, the Buy and Flip strategy associated with the Franchised business model can result in higher interest and depreciation expenses, driven by the new capital leases involved. 

In order to cope with these additional costs, Wendy’s needs to strengthen its focus on cost savings.

Zacks Rank & Stocks to Consider

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

A few better-ranked stocks in the industry are Dine Brands Global (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.

Dine Brands, BJ's Restaurants and Carrols Restaurants' earnings for 2018 are expected to grow 22.7%, 27% and 30%, respectively.

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