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Wendy's (WEN) Stock Up 14% in a Year: Can it Gain Further?

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Shares of The Wendy's Company (WEN - Free Report) are riding high on sales building initiatives, increased investments in technology, reimaging of its restaurants and expansion of delivery service. These efforts have helped the company’s shares to gain 13.8% in a year’s time compared with the industry’s 8.5% growth. However, higher labor and commodity costs along with capital spending remain concerns. Let’s delve deeper.

Factors Driving Growth

Wendy's top-line performance has been impressive over the past few quarters. Additionally, its brand transformation initiatives that include menu innovation, promotional offers and bold new packaging for boosting sales bode well for the company. Notably, the first quarter of 2018 marked its 21st consecutive quarter of positive same-store sales growth in North America, mirroring long-term strength and relevance of the brand. We expect the company’s solid menu pipeline, limited time offers (LTO), marketing initiatives and increased emphasis on core and price value offerings to help maintain the trend.

The company will transition to 100% cage-free eggs for its breakfast items served at the U.S. and Canadian locations by 2020. Also, it intends to eliminate the use of gestation stalls from its pork supply chain by 2022. These efforts will make the company popular among health-conscious diners. All in all, Wendy’s expects its balanced marketing approach, new restaurant development and reimaging of restaurants to drive long-term growth. These, in turn, should help the company to achieve its 2020 target of $12 billion in system wide sales.

Further, Wendy’s remains on track to achieve its goal of 7,500 global restaurants by 2020. Also, it plans to expand and form partnerships in emerging markets of Argentina, the Philippines and Japan.

Hurdles to Cross

Rise in cost might dent the company’s margin in the coming quarters. In fact, Wendy’s would incur additional capital expenditures in a bid to boost the re-imaging program. This, in turn, might lower free cash flow in the near term. Although the company has transitioned toward a franchise-based model that reduces capital expenditures, we believe it will take time to reap benefits. For 2018, Wendy’s expects capital expenditures of approximately $75-$80 million.

Zacks Rank & Stocks to Consider

Wendy's currently has a Zacks Rank #3 (Hold). Better-ranked stocks worth considering in the same space include BJ's Restaurants, Inc. (BJRI - Free Report) , Carrols Restaurant Group, Inc. (TAST - Free Report) and Denny's Corporation (DENN - Free Report) . BJ's Restaurants sports a Zacks Rank #1 (Strong Buy), while Carrols Restaurant and Denny's carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

BJ's Restaurants, Carrols Restaurant and Denny's earnings in the current year is expected to increase by 50.4%, 80% and 17.2%, respectively.

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