Is This The Beginning of a Fast Food Renaissance?

After being in a trading range for three years, Wendy's (NASDAQ: WEN  ) finally changed gears, trading 65% higher for the year and at a five year high. There are a lot of changes going on in the company's operations. Let's see if this is the beginning of a long, successful run for the fast food giant.

Transformation into the franchise model

Management is keen to completely transform the company into the franchise model, which is why it sold 425 company-owned stores this year to reduce its total ownership from 22% to 15%. Franchises require less capital and bring in higher margins and a steady cash flow; thus this initiative could be highly beneficial in the long term profitability of the company.

A brand new Wendy's is on its way

Wendy's image makeover program is also going strong. The stores remodelled with lounge seating, fireplaces, flat-screen TVs, Wi-Fi, digital menu-boards and the kitchen partially exposed to convince the customers of the high quality food have already seen sales increase of 25%, so if the company successfully remodels its 600 stores by 2015, it could differentiate itself from the grab and go image, creating a strong brand name for itself and improve the revenue considerably.

International expansion opportunities to drive growth

Over 90% of Wendy's stores are located in the U.S.; thus it has plenty of growth ahead. Management plans to take the total international stores to 700 from 374 at the end of 2012, and 45 international stores are slated to open this year. Earlier this year Wendy's opened its first store in Ecuador, of the 20 stores planned for the country.  

Interesting new line of products

Apart from remodelling its stores, Wendy's has been innovative with its products. The Pretzel Bacon Cheeseburger has been a huge success, and analysts estimate this could help sales increase 5.5% in the third quarter.

Its dual pricing strategy, in which six products are priced at $0.99 and eight items between $1.19 and $1.79, offers customers a lot more variety in the value meal segment. The flat bread grilled chicken sandwich introduced earlier this year has also been a success, providing a nice change to the usual burger and fries combo.

To improve the profitability of the stores, management has decided to discontinue serving breakfast except for a small percentage of the stores where there is demand for the meal.

Positive growth estimates

For 2013 management expects average comps in company-operated restaurants in North America to grow 2%-3%, and the operating margin to increase to a range of 14.2%-14.5%. Seeing good response to its new products and remodelled stores, improving comps and profit margins, and cost-saving initiatives, management raised the earnings outlook from 2013 onwards. Wendy's underwent debt refinancing, which will generate ongoing annual interest savings of more than $19 million, in addition to approximately $30 million in ongoing annual interest savings from refinancing done in 2012.

Year

EPS

EBITDA

     

2013

$0.21

$355 million

2014

$0.23

$377 million

2015

$0.24

$387 million

Wnedy's hiked its cash dividend by 25% to 5 cents per share from 4 cents per share paid previously, and also has a $100 million buy-back program to be completed this year.

Let's see where peers are headed

Like Wendy's, its peer Sonic (NASDAQ: SONC  ) , known for its hamburgers, hot dogs, french fries, and milkshakes, is also keen on improving its image, for which it has invested heavily in national advertising. Moreover, like Wendy's, it is moving more to a franchised system, which resulted in 0.41% decline in revenue in 2012 due to the selling of 34 company-owned stores to franchisees. Its free cash flow increased 17% and long-term debt decreased 3%. And to further attract franchisees, it has come up with a small store format that reduces non-land costs by 15%-20% and helps it expand into smaller markets.

Sonic came up with a new Point of Sale system, which helps streamline business operations, manage inventory, and improve efficiency. This initiative could improve margins by 0.5%-0.75% according to management. 850 stores are scheduled for license conversion and renewal in 2015, which should drive revenue growth significantly, and the new higher royalty rates should drive growth over the long term. Analysts on a consensus basis anticipate the company to grow earnings by 15.1% on average over the next five years.

Burger King also on the same path as Wendy's

Burger King (NYSE: BKW  )  is also moving towards the 100% franchise model. As of 2012, 97% of its stores were owned by franchisees, and it expects to reach the 100% mark by the end of this year. Thus it can focus on building a brand rather than losing time managing the day to day operations. Because of the refranchising initiatives, second quarter profits came in at $0.21 per share, beating analyst estimates by $0.03, while revenues fell 48.5% year over year because of the same.

The company's value items, like a $1.25 Whopper Jr, $0.50 ice-cream cone, and $1 frozen lemonade, are getting a good response, and so is the "Mix & Match 2 for $5 Special." Management intends to continue to focus on the value meals in the second half of the year.

Burger King is also on a reimaging spree, planning to renovate 40% of its U.S. and Canada stores by 2015, through which management expects to see sales increase by 10%-15% on average. It also brought down the average cost to reimage a restaurant from $500,000-$600,000 to approximately $300,000.

International expansion is going to be the key long-term growth drivers for the company. As a part of this growth strategy the company entered into agreements in Russia, South Africa, Colombia, Mexico, Central America, China, and Singapore/Malaysia, with 500-750 international stores slated to open this year.

It partnered with Seattle's Best Coffee to offer coffee in its restaurants adding 10 new coffee drinks to the menu. To further increase its revenue, it started a home-delivery system, which is currently in the testing phase.

The improving profits due to franchising, increasing sales due to store reimaging, new innovative products at valuable prices, and growth opportunities abroad may bring some nice profits for Burger King investors.

Conclusion

The transition toward 100% franchisee model, positive results from store renovations, and hot new line of products should continue to build Wendy's brand leadership. Improving same store sales, positive EPS growth expectations, cost saving initiatives and international growth opportunities present an excellent buying opportunity in the company.

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Read/Post Comments (2) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 30, 2013, at 7:47 PM, PHBLYTHE wrote:

    In the words of Peter Lynch, buy what you know. I am impressed with the way Sonic keeps up their units, at least in this area. Good variety of menu and a powerhouse advertising program. Wendy's will be interesting to watch. If the local Burger King's are an example they have lots of opportunity for improvement.

  • Report this Comment On August 31, 2013, at 9:20 AM, glensarahs wrote:

    When was this written? It is dated 8/30/2013 but references 2012 and 2013 as the future. Referring to :Over 90% of Wendy's stores are located in the U.S.; thus it has plenty of growth ahead. Management plans to take the total international stores to 700 from 374 at the end of 2012, and 45 international stores are slated to open this year. Earlier this year Wendy's opened its first store in Ecuador, of the 20 stores planned for the country.

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