This Restaurant's 3-Step Program

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To the extent that same-store sales growth impacts market value, shares of The Wendy's Company (NASDAQ: WEN) have upside potential. The company is predicting a 2%-3% jump in its 2013 same-store sales in 2013. According to statements at a recent investment conference, Wendy's executives are also projecting a 0.5%-1% increase in industry traffic this year -- with an emphasis at the lower end of that range -- at the expense of casual dining restaurants.

Perhaps Wendy's plans to take some of Chipotle Mexican Grill's (NYSE: CMG) diners in light of its rival's plans to raise the prices on its menu items this year amid commodity price inflation, according to a recent Wall Street Journal article. Wendy's faced the commodity inflation too, but still managed to grow its 4Q profit margins from 15% to 15.9% compared to the same quarter a year ago.

Chipotle, however, is expected to post 4Q same-store sales that are 4.8% better than the year ago period. If Chipotle raises its prices its same store sales performance could be in jeopardy, as customers already pay an average of almost $10 for each meal, according to WSJ.

Everything at Stake

Wendy's optimistic outlook needs to materialize for the company to shake off the same-store sales doldrums that plagued the restaurant recently. In the fourth quarter, North American same-store sales at company-owned restaurants declined by 0.2% despite the fact that full-year same store sales advanced 1.6%.

Over the next few years, Wendy's growth plans are essentially limited to domestic expansion, which is probably a good idea until some of its recent capex spending pays off. The company is in the midst of a re-branding effort that involves everything from the restaurant logo to the appearance of the restaurant grounds and worker uniforms.

In 2012, Wendy's had an EBITDA of $333.3 million, which represents a 2% increase over 2011 levels. In 4Q alone, EBITDA was up 19% over the year ago quarter. Over the next three years, Wendy's has a 3-point plan that it expects will bolster its EBITDA further. These areas represent where Wendy's is going to focus its efforts through 2016. The steps include:  1.) attaining 3% North American same-store restaurant sales growth, 2.) a continuation of an image activation effort, and 3.) new restaurant development.

Same-store sales

To grow its same-store sales activity, Wendy's is relying on another multi-point plan. It involves a focus on product innovation -- one that builds upon its recently featured bacon portabella melt burger and chicken mozzarella supreme sandwiches. Wendy's will also ramp up its spending on marketing and media efforts, which includes an attempt to capture more of the Hispanic clientèle -- a demographic where company executives say the company has been weak. Wendy's is also continuing its formal 'Image Activation' roll-out, in which many of its company-owned and franchise restaurants are receiving an aesthetic face-lift.

Image Activation

Wendy's image activation has been ongoing. The fast-food restaurant is already in the midst of a brand re-imaging campaign, dubbed "A Cut Above,' and image activation is part-and-parcel to the brand overhaul. Combined, the efforts include the roll-out of the new Wendy's logo, upgrades to the interior and exterior of restaurants, new food item packaging, and the introduction of new menu boards.

Incidentally, Wendy's is not the only fast-food chain to revise its packaging. Rival McDonald's (NYSE: MCD), which reports its 4Q earnings on Jan. 23, is in the process of rolling out its new package design that includes QR coding. This is McDonald's attempt to play in the mobile device market as the QR-coded packaging discloses the nutritional statistics for menu items on mobile phones. Wendy's also has a mobile-phone application for calorie counting that is in beta stages, according to Fox Business

In 2013, Wendy's intends to open 120-to-130 new stores globally. The company expects that 200 of its stores will adopt the 'Image Activation' transformation, and soon the higher standard will be a requirement for all new franchisee restaurant locations. The changes have been paying off as sales at 66 Image Activation restaurant locations increased 25% in 2012 compared with pre-image activation sales results.

In terms of its marketing efforts, Wendy's executives said at last week's ICR XChange conference that they will spend "more money" in 2013 on advertising. Executives hope to strike a better balance between its premium and value menu items in 2013. This focus is a direct result of slipping market share in the price-value segment over the past 15 months in particular. 

Shares of Wendy's are up 8.5 % in the first three weeks of 2013. The company's stock was pressured in 2012, but shareholders went out on a positive note when the company's doubled its quarterly dividend payout to $0.04 per share. In September 2012, McDonald's increased its quarterly dividend by 10%.

 

This year could be pivotal for Wendy's, as the company has so much riding on its transformation efforts. The company is slashing costs in areas that were not profitable enough, such as breakfast in many restaurants, and has a clear-cut plan to improve earnings and sales. If the company manages to double its same-stores sales growth in 2013 -- as Wendy's executives are preparing to do -- the stock should see some upside before the year is over.


GerelynT has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill and McDonald's. The Motley Fool owns shares of 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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