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We like to think about stocks on three different durations TRADE (three weeks or less), TREND (three months or more) and TAIL (three years or less). 

For WEN we are cautious on TRADE and TREND, but positive on the TAIL. 

Over the past month, Wendy’s has traded up 6% on the back of the uptick in comparable restaurant sales coming from the launch of the new burgers.  Generally, we believe that the company is headed in the right direction but there are still some issues that are pose a headwind for a sustained improvement in same-store sales. 

In the short run, we still believe that new CEO Emil Brolick’s will need to put his stamp on the company’s strategy and stop working through the legacy issues of his predecessor.  We expect him to further refine his approach to fixing the brand at the February analyst meeting.

While the recent uptick in comparable store sales is nice to see, we believe that any sustained performance is going to require an upgraded asset base. 

On my recent visit to Phoenix, I got a detailed tour of one of the company’s remodeled stores in that market.  Currently the company has the four remodel prototypes in five different test markets – Pittsburg, Virginia Beach, Toronto, Columbus and Phoenix.

The new Wendy’s store I saw was very impressive, but it’s unlikely to be the “end” version of what the official remodel will look like.  The company needs to strike a balance between counteracting the competitive threat of McDonald’s and that company’s remodel program with a realistic level of spending.  The Phoenix remodel looked like the company spent upward of $400,000 on the remodel and the company estimates that the sales lift from the investment was 35-45%.  One of the highlighted improvements emanating from the new look and feel is that the company is seeing more people come in during the afternoon day-part with their mobile devices.  Yes, mobility and WIFI are key drivers for expanding the usage of the dining room during non-peak periods.   

The company is 6-9 months away from communicating lessons learned from the new remodel testing initiative.  The timing suggests that any real impact on the store base will begin sometime in 2013.  We feel (and the company agrees) that any sustained competitive advantage in the burger category will only come along with a much needed asset base upgrade.  In the short run, improvements in same-store sales will need to be driven by the new burger campaign and any other new products the company develops. 

WEN: ASSET UPGRADE NEEDED FOR LONG TERM TRENDS - wen wall plaque

WEN: ASSET UPGRADE NEEDED FOR LONG TERM TRENDS - wenpod1

Howard Penney

Managing Director

Rory Green

Analyst