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I Finally Understand What Wendy's Is Doing

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Almost exactly a month ago, I wrote about the high market valuation that investors have bestowed on Wendy's (NASDAQ: WEN  ) and the plans that the company has for reinvigorating its image. At the time, I was skeptical that the plan was going to work, and I thought that the changes included in its "Image Activation" plan were too minor. That was before I went to a revived Wendy's location.

This weekend, I was traveling through Houston's Hobby airport, and I was hungry. As it turns out, most of the food served in the airport is near inedible. Enter Wendy's. I happened upon a location in the food court, and was taken aback. The menu looked nice on digital screens, the food photography looked clean and new, the whole layout of this tiny little location had clearly been well thought-out. My own reaction shocked me, and I decided to revisit the stock.

Wendy's plan
The future of Wendy's is wrapped in the company's new image plan. Renovated locations are supposed to look more modern, with clean lines and brighter lighting. The push is clearly meant to help Wendy's move beyond its burger roots and into the world -- or at least the sales growth -- of fast-casual companies like Panera (NASDAQ: PNRA  ) .

It's not what anyone would call rocket science. If we take Panera as the leader in fast-casual and McDonald's (NYSE: MCD  ) as the leader in plain old fast, it's easy to pick a side. McDonald's increased its comparable location sales by a measly 1% last quarter, while Panera's comparable sales grew 3.8%. In McDonald's defense, it's still a cost king. The company pulls in a solid 31% operating margin, which blows Panera out of the water.

To tap into that sales growth -- Wendy's only increased comparable sales by 0.4% last quarter -- Wendy's is dressing itself up. The location I visited had cleared out all of the vestiges of fast food gone by. Those yellowed menu boards, huge registers, and fading food images had taken up refuge in the dumpster. In their place was a shiny new system and presentation. The business is also introducing new sandwiches to compete with the fancier chains. Earlier in the year it released a chicken flatbread sandwich and more recently it launched a pretzel bacon cheeseburger.

Keeping it close to the roots
Even with its new offerings and new branding -- including last year's logo change -- Wendy's is trying to keep to its fast-food roots. While it may try to tap into the fast-casual crowd, it has no intention of becoming a fast-casual restaurant. Management has said that it still wants to cater to the price-conscious crowd, becoming a sort of hybrid chain.

With my fresh view of the chain, I can see that it's started to achieve the goals that it set out. Whether it's worth the price is still up for debate. Wendy's has a price-to-trailing earnings ratio of more than 200 -- wow -- so there's a lot riding on the future. In the end, I understand why some investors are getting excited about this stock, and I'm interested to see where it goes. As a final note, yes, they did get my order wrong, but I sort of didn't care -- it was still a good experience.

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Related Tickers

9/29/2016 1:17 PM
WEN $10.66 Down -0.06 -0.51%
Wendy's CAPS Rating: ***
MCD $115.26 Up +0.08 +0.07%
McDonald's CAPS Rating: ***
PNRA $192.51 Up +0.33 +0.17%
Panera Bread CAPS Rating: ****