This Fast Food Giant Will Fetch a Good Return in 2013

Abir is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The Wendy's Company (NASDAQ: WEN), founded in 1969, is a quick-service hamburger company that, in 2011, became the second largest burger chain in terms of sales in the United States. It has a market capitalization of about $1.75 billion.

While fellow fast food companies Chipotle Mexican Grill (NYSE: CMG), McDonald's (NYSE: MCD), and Yum! Brands (NYSE: YUM) suffer losses, Wendy’s share price is up about 7% since September 2012. Only Burger King Worldwide (NYSE: BKW) is outperforming Wendy's, as it is up by more than 20% over the same period.

Wendy’s Performance

Compared to the third quarter of 2011, Wendy’s top line growth has risen 4.1%.

Sales growth

<img src="/media/images/user_13778/wen-1_large.jpg" />

Except for Wendy’s, the percentage increases/decreases in the latest quarter are worse for each fast food company. The Dublin, Ohio-based company’s quarterly revenue growth in the latest quarter (4.1%) was 14.3% higher compared to the growth in year-to-date sales (3.5%).

Stores Growth

<img src="/media/images/user_13778/wen-2_large.jpg" />

In terms of number of stores, as of the latest quarter end, there were 6,543 Wendy's (of which 1,447 were company owned), compared to 6,244 (1,417 company owned) at the beginning of the year, an increase of 299 stores (or 4.8%). Each company has its own dynamics, such as geographic locations and company operated vs. franchise, so restaurant growth and revenue is difficult to compare. But, it is clear that McDonald's and Burger King are increasing stores while sales are declining, a particularly bad situation.

Company Initiatives

The company’s management team is utilizing a number of new initiatives to bring short and long-term shareholder value. Some of the initiatives are:

  • For a new annualized yield of 3.4%, quarterly dividend increase from $0.02 to $0.04
  • Share repurchase program through Dec. 29, 2013 in the amount of $100 million
  • Increased breakfast and coffee offerings
  • Remodeling of outdated restaurants with a more modern, inviting look
  • Japan expansion
  • Social media

Wendy's doubled its dividend, while at the same time announcing a share repurchase program. These two events should bring shareholder value in the short term. Currently, due to the share repurchase program, the share count is likely to decrease even as Wendy’s common stock offers a solid dividend yield. This is likely to make investors more comfortable with owning Wendy's common stock, until the share price rises significantly, causing the dividend yield to drop.

The initiatives on the operational side would likely bring longer-term shareholder value. Wendy's is carefully and profitably expanding into the breakfast and coffee categories. This expansion will allow the company to utilize restaurants for a larger part of the day, and create a more complete customer experience. According to data from Nation's Restaurant News, McDonald's and Burger King generate 25% and 16% of their sales from breakfast, and have about a 20% and 3.3% share, respectively, of the quick-service breakfast market. This paves the way for Wendy's to grow in this area. The world’s second largest quick-service hamburger company’s breakfast sales generated 2.2% of the company's total sales, and the company has 0.4% of the early morning meal market. In addition, more consumers are expected to purchase breakfast from quick-service restaurants in the future.

In 2013, 2014, and 2015, Wendy's expects to renovate 50% of its stores. CEO Emil Brolick said that a new look of the company stores is needed to signal the chain's transformation to customers, as well as to justify the higher prices. The look, which has a variety of seating options, light wood, and flat-screen TVs, is intended to make people feel that they can relax and enjoy their meal. This new design will improve customer experience, and when combined with the new menu items (including the latest mozzarella chicken supreme sandwich and bacon portabella melt) could give Wendy's a significant advantage over its larger (and less prone to change) competitors.

The company is making efforts to expand in Japan with a higher tier menu items there, such as Foie Gras Rossini and avocado & wasabi burgers. While progress in Japan is slow, Wendy's is popular in the country, and its innovative menu has received significant media attention.

In addition, Wendy's is increasingly relying on newer social media to rapidly expand its already successful digital program. The company hired a new digital advertising agency, VML, to help with Wendy's digital and social media initiatives.

Enterprise Value (EV) to Earnings before Interest, Taxes, Depreciation, and Amortization (EBITDA)

<img src="/media/images/user_13778/wen-3_large.jpg" />

The company expects to generate earnings before interest, taxes, depreciation, and amortization (EBITDA) in 2013 of $350 to $360 million. This was revealed in the Q3 management call. Thus, Wendy's common stock trades at 8.2 times enterprise value (EV) to EBITDA, which is favorable compared to the EV to EBITDA ratios of its competitors. The ratios are given in the above chart.

<img src="/media/images/user_13778/wen-4_large.jpg" />

Graph from StockCharts.com

To wrap things up

In the past few months, Wendys' share price performance has outperformed most competitors, but still, the common stock is attractively priced. With the help of a number of initiatives, the company is in a position of being able to grow organic sales. The major risk comes from food inflation, and the company's ability to control input costs could present a significant challenge. In addition, the fast food industry is currently undergoing a big shift. It is becoming healthier and fresher, and customers are expecting a better experience and more choices. With its established focus on quality, freshness, and smaller size, Wendy's appears well positioned to meet these new challenges.

 From the company’s Image Activation campaign to the new menu items, it is evident that Wendy's focuses on good quality, innovative menu, and customer experience. The campaign, combined with a shareholder-friendly management, should generate significant stock appreciation in the future despite cost pressures. So far the company has done a good job, and I am pretty bullish that in the coming year it is not going to disappoint its valued investors, as well as customers.


abirk has no positions in the stocks mentioned above. The Motley Fool owns shares of Chipotle Mexican Grill and McDonald's. Motley Fool newsletter services recommend Burger King Worldwide, Chipotle Mexican Grill, and McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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