Wendy's Non Food Refresh Gamble. Deep Value?
George 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 Co. (Nasdaq: WEN) reported Q4 and year end numbers announcing same store increases and all time highs for average unit volume. Investors many be pondering "Is this a deep value play a la Warren Buffett." Let's go through some of the upcards.
Wendy's is the third largest quick service restaurant (QSR) chain behind McDonald's (NYSE: MCD) and Yum Brands (NYSE: YUM). Both McDonald's and Yum Brands are very expansion focused. Wendy's needs to do something to get back into the game. A refresh has been long anticipated. Despite this being an earnings announcement Wendy's President and Chief Executive Officer Emil Brolick took the opportunity to remind investors that the program is expected to earn 15%. Currently the new Image Activation costs between $750,000 to $850,000. The Wendy's system has 6,594 stores. You can do the math. Management is quick to point out they are still value engineering the concept.
Emil Broderick also reminded investors that they intended on using their balance sheet and cash flow to pay for the program. Investors are only too aware of the huge $1.3 billion loan that continues to hang around their neck. Although progress has been made in the past year.
They only plan to spend $80 million on new restaurants and remodels. Not enough to make a difference. So its back to the basics. Food and value. Sure customers like to hang in a nice place. But until customers have compelling value propositions Wendy's will not have a reliable driver.
Can this company become a deep value proposition? The following will have to be lining up.
- Compelling menus that bring back customers and generate good margins.
- Decreased debt load releasing cash flow for investor friendly strategies.
- Fast paced expansion plans increasing store count. Many markets have been surrendered.
Investors will have to monitor managements heavy lifting and look for well priced entry points. Deep value investments look ugly when purchased. McDonald's and Yum look way prettier than Wendy's.
George Gutowski writes from a caveat emptor perspective.