Wendy’s ($WEN) – Stock Pick for 6/18/14

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Can a Pretzel Bacon Cheeseburger kick-start growth and recovery in a business? For Wendy’s ($WEN) it just may have. Since its debut last summer, it’s been getting great reviews from customers and the restaurant industry. The description certainly sounds tasty: “A delicious twist on our classic hot n juicy cheeseburger with a sweet & smoky honey mustard sauce, melted cheddar cheese and applewood smoked bacon all on a warm, soft pretzel bun.” The response was so positive that it was named “Best Limited-Time Offer” of 2014 by Nation’s Restaurant News’ (NRN) MenuMaster. It was so popular, it helped Wendy’s beat McDonald’s and Burger King in same-store sales growth in the 2nd half of 2013.

Although the sales have slowed down a bit since, the financial results for the 1st quarter still exceeded Wall Street expectations. Wendy’s had sales growth of 1.7%, even with the terrible winter weather most of the country had in that time period. It managed to improve its profitability by lowering costs and improving sales.

The company is taking on various strategic moves to boost its earnings and revenue. Currently, Wendy’s is focusing on the franchise model to improve its profitability. The company has been selling its stores to franchisees so that it can focus more on the menu and customer experience, leaving the operation of the locations to franchisee partners. Under this strategy, Wendy’s has completed the sale of 418 company-owned restaurants to its new and existing franchisees.

Privately held NPC International has made three separate purchases from Wendy’s to get to a total of 146 restaurants from Wendy’s. Clearly they see a lot of potential for all the changes that Wendy’s is undertaking and see it as a great opportunity. This is a positive for Wendy’s as it shows that an outside company believes in what they are doing and is willing to take so many of their restaurants into a franchise agreement.

Wendy’s has improved its restaurant designs and packaging and has trained its employees to be more customer-friendly. In addition, Wendy’s has added innovative limited-time items to its menu such as Tuscan Chicken on Ciabatta, Asian Cashew Chicken Salad, and BBQ Ranch Chicken Salad. These limited time offers are expected to play a prominent role in bringing more traffic to Wendy’s locations which will help grow sales in their permanent menu items.

It wasn’t just the burger that helped grow the business. They are also trying to revamp their image with their “Image Activation” program. Renovations include the installation of multiple flat-screen televisions, WiFi, fireplaces, lounge seating, and digital menus. 200 of its company-owned and franchised locations were remodeled as of the end of 2013. In 2014, the company expects another 200 more restaurants to undergo the remodeling. This will be split evenly between company-owned and franchised stores. By 2017, Wendy’s expects 85% of its company-owned locations to be converted to their new format.

Wendy’s posted adjusted EPS of $0.07 which more than doubled from Q1 2013’s $0.03. Now their consolidated revenues declined from the same period last year due to franchisees taking over 418 of its company-owned locations. However their net income skyrocketed from $2.1 million to more than $46.3 million.

Looking ahead, Wendy’s expects its adjusted earnings to be within $0.34-$0.36 cents per share in 2014 which is higher than levels in 2013. Management believes same-store sales growth will likely be in the range of 2.5% to 3.5% at company-operated restaurants.

If Wendy’s can continue to focus on innovation, improving the customer experience and quality, there is no reason they can’t continue to grow and beat out their rivals. As was stated before, they beat Burger King and McDonald’s in same-store sales growth in the second half of last year.

The current price of the stock is $8.38 and it has a dividend yield of 2.4%. Except for a spike in price in February, the price of the shares has stayed in the $8-$9 range. The highest analyst target price currently listed is $12. From the current price, that would represent a 43% increase. While I don’t see it gaining that much quickly, over the longer term, it should easily head that direction.

Although Wendy’s stock price performance has been weak this year, the company’s business has remained strong. Its strategies look really good and should result in earnings growth going forward. Any pullback in Wendy’s should be seen as a buying opportunity to take advantage of. In time, Wendy’s may finally be able to recover share price from the financial crisis in 2007.

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