WEN - INTERMEDIATE TERM ISSUES BUT THE LONG TERM STILL LOOKS GOOD

Wendy’s is a name that has divided the street of late.  A recent upgrade has put some support under the stock but, overall, the intermediate term carries a fair degree of uncertainty for the concept.  Longer-term, a more focused management team thanks to the long-overdue sale of Arby’s.  Below, I go through some key initiatives being enacted by management and give my take on whether or not the initiative is progressing well or has positive implications for future earnings power.

Improvements completed to the core menu:

  • Value, with the introduction of the My 99 Value Menu
  • Salads, with the introduction of four premium entrée salads
  • Fries, with the introduction of natural-cut fries with sea salt

HEDGEYE VIEW - A much needed upgrade that will benefit the perception of the Wendy’s brand!


 

Improvements in the pipeline to be done by year-end:

  • Working to improve the core hamburgers line - Dave's Hot 'n’ Juicy cheeseburgers will be introduced 2H11. 
  • Working to improve chicken sandwiches; In 4Q11 will see the introduction an entirely new line of chicken sandwiches known as the Gold Chicken line, including new flavors and toppings, such as bruschetta with diced tomatoes, chopped basil and balsamic glaze. These sandwiches will also feature a new butter-toasted bun. 

HEDGEY VIEW - This will be critical in developing incremental customer visits in 2H11.  This should be a positive for comps as it is rolled out across the system. 


 

Current sales trends as of the end of 1Q11:  North America company-owned same-store sales turned positive in April, up 0.5%.  Furthermore, the U.S. was stronger at up 1.1%.  In the current quarter, Wendy’s restaurants are promoting the Bacon Mushroom Melt Hamburger or Flavored-Dipped Chicken Sandwiches.  In June, Wendy’s introduced the new Berry Almond Chicken Salad and Wild Berry Tea.

HEDGEYE VIEW - I continue to believe that current trends remain in the 2-3% for WEN USA.  Using a strategic pricing model initially implemented in 2010, WEN plans to raise prices in 2011.

 


REMODELS - An important part in pulling all the initiatives together will be upgrading the asset base of the concept.  Management has been working on several new restaurant designs, with the intention of beginning the remodel process in 3Q11.  They are currently testing four new restaurant designs and expected to have at least one of each open by late September, with expectations for an aggressive rollout program to begin in 2012.

HEDGEYE VIEW - I believe that the customer feedback is not working and that management is going back to the drawing board.  I also believe that the success of the MCD units in Tampa, Florida has had an impact on what features management is ultimately seeking to implement at the remodels.

BREAKFAST - Wendy’s is trying very to participate in the fastest growing day-part of the QSR segment.  Management has last communicated that they are making excellent progress on Wendy's breakfast program, and they are very encouraged with both sales and customer reaction to our new breakfast products.”  Currently, the company is testing its products in six markets and has recently reduced couponing. 

The breakfast expansion timeline:

  • In 2H10 management launched the new breakfast menu in four test markets: Kansas City, Phoenix, Pittsburgh and Shreveport.
  • In the first half of 2011, expanded breakfast into two additional markets: Louisville and San Antonio. 
  • Over the balance of 2011, the intention is to have more breakfast markets added. 
  • By the end of 2011, the intention is to have the breakfast menu in about 1,000 restaurants including approximately 600 franchise restaurants.

HEDGEYE VIEW - Longer term, we believe breakfast represents an opportunity to grow incremental system wide sales.  In the short run, while customer awareness, trial and repeat purchase rates are all improving, the current level of sales are not supportive of a major roll-out, which could cause the company to fall short of the 1,000 unit goal. 

SUMMARY - I like the long term potential for the Wendy’s as a standalone concept.  While 2011 is a transition year, a short fall in a couple of the growth initiatives could lead to a short fall for the company being able to hit the double-digit EBITDA growth in 2012.  At the very least it puts incremental pressure on core menu initiatives to incrementally more successful to make up for the short fall in the other initiatives.

WEN - INTERMEDIATE TERM ISSUES BUT THE LONG TERM STILL LOOKS GOOD - mcdwenjacksonc comps

Howard Penney

Managing Director