WEN LOOKS GOOD BUT WILL TAKE TIME

Wendy’s hosted a lunch in New York yesterday with the new president and Chief Executive Officer Emil Brolick.

 

Yesterday's lunch with Emil Brolick focused on the plan for Wendy’s going forward and Mr. Brolick’s general vision for the brand at this early stage in his second phase at the company.  We are impressed with Mr. Brolick’s knowledge of the broader industry and Wendy’s in particular, especially given the role he played in Wendy’s during the 1990’s, often working directly with founder Dave Thomas.  Below are some takeaways from the meeting that we think are valuable.

  1. ASSET BASE IS AN ISSUE - The asset base being reimaged is a key focus that franchisees and management agree needs to be addressed.  However, it seems that we are still two years from this becoming a reality and MCD and other competitors opening new/reimaged stores is a negative for Wendy’s.   Brolick noted the importance of improving the line-of-sight that customers have in the renovated restaurants as one of the many features of reimaging that is additive to the customer experience and, therefore, sales growth.
  2. BREAKFAST IS STILL NOT WORKING - Breakfast remains a key component of the company’s plan to achieve its long-term goal of 10-15% EBITDA growth.  Management is aiming to roll out breakfast to 1,000 stores by the end of 2011 (currently in roughly 300) and Brolick emphasized that feedback on the breakfast menu has been positive.  The goal for breakfast is to drive it to a level where incremental average weekly sales are between $150,000 to $160,000 and, Brolick says, “we’re close”.  San Antonio remains disappointing.  
  3. FOOD INFLATION - Food inflation remains a concern for the company.  Beef is the largest component of WEN’s commodity basket and, because of Wendy’s commitment to using fresh beef rather than frozen, the inflation currently in the price of beef is impacting margins.  Brolick also highlighted a new pricing model the company has been using that focuses on sales, traffic and profits to enable management to make prudent decisions on pricing that do not hamper profit growth. 
  4. A NEW MARKETING MESSAGE IS NEEDED - While Brolick has not been on board long, we got the impression that there is a desire to step up the marketing focus at the firm.  This is not a new thought; in January at the Analyst/Investor Day, new commercials were shown emphasizing a return to the roots of the chain.  However, Brolick said that the company was searching for a Chief Marketing Officer currently.  Brolick’s time as CEO is just getting started, but this statement, as well as his repeated highlighting of the importance of people, implies that he is looking at every level of the company for possible areas of improvement.  For instance, he noted that service in the restaurant at off-peak times was not as strong as it needed to be.
  5. CAPITAL - The company continues to commit capital to new unit growth as well as the other sales driving initiatives and stock buybacks.  We believe that fixing the restaurant and core products remains the key ingredients to the WEN turnaround; the more time that slips by, the further behind competitors the company falls. 
  6. SUMMARY - Lastly, we continue to like WEN on the long side but believe that the process of turning the company around will take time.  Having Emil Brolick at the helm is, in our view, good for the company and we are bullish on the stock on a TAIL duration (3 years or less) but despite the “cheap” valuation, would not be a buyer of the stock until the reimaging program looks more secure.  However, the short-term TRADE (3 weeks or less) remains negative.

 

Howard Penney

Managing Director

 

Rory Green

Analyst


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