What's all the Hubbub About Wendy's?

A look at Wendy's explosive news and mediocre results, and an assessment of how the company stacks up against Chipotle and Panera.

Jan 16, 2014 at 2:16PM

Monday was a great day for Wendy's (NASDAQ:WEN) shareholders. After the company reported preliminary results for the fourth quarter of 2013, its shares rose to close up 6.4%. This, on a day when the S&P 500 fell 1.26%, likely left its investors with a feeling of triumph. However, is it possible that Mr. Market got a little too excited over Wendy's news and that the picture at the company is worse than investors think?

The good news!
According to management, Wendy's will fall short on revenue for the quarter but should beat on net income. For the quarter, the company's sales will come up to $592.4 million, 6% less than the $629.9 million the company reported for the same quarter a year earlier. This sales total also happens to be 3.1% less than the $611.32 million that analysts expected. On the upside, comparable-store sales rose 3.1% over the quarter last year, which suggests that management must be doing something right.

Looking at the situation year-over-year, we see that Wendy's sales will fall 1.5% to $2.17 billion from the $2.2 billion reported last year. In the release, the primary driver behind lower revenue both for the quarter and the year stems from an initiative to sell off some company-owned restaurants. By doing this, management hopes to turn the business into a franchise-focused one because of the higher margins that result.

While such a miss on the top line might warrant a sell-off, the company reported some really good news. For the quarter, earnings per share are expected to come in somewhere between $0.06 and $0.07. With net income staying in a range of $24.8 million to $28.7 million, Wendy's results will approximately mirror those of last year. This alone doesn't sound thrilling, but when you consider that analysts expected earnings to come in at around this level on higher sales, it's no wonder that investors are optimistic.

The really good news!
With the good earnings news that management reported, it's no wonder that Wendy's shares rose so much Monday. However, that's not the best part of the report! The company also announced that it's dedicated to investing in itself by buying back shares over the coming months. In an effort to bolster investor confidence, management will conduct a $275 million share buyback by means of a "Dutch Auction."

Wendy's will conduct the buyback with its $580 million in cash on hand and the buyback will take place in a price range between $8.50 and $9.25. In this range, management estimates that the company will repurchase approximately 8% of shares outstanding. This may not sound large, but when you consider that it's almost four times more than the $69 million share buyback the company completed in 2013, you will come to realize that it's nothing to balk at.

Does any of this really matter?
At first glance, it appears as though Wendy's may have just become a beautiful investment. This is definitely a possibility, but there might be better opportunities out there. Take Chipotle Mexican Grill (NYSE:CMG) and Panera Bread =(NASDAQ:PNRA) for example.

Over the past four years, the results for Chipotle and Panera have far surpassed those of Wendy's. For instance, from 2009 through 2012, revenue at Panera has grown 57.4% from $1.35 billion to $2.13 billion. Chipotle has done even better. Over the same time-frame, revenue at Chipotle has grown 79.9% from $1.52 billion to $2.73 billion.

The growth experienced at both of these so-called quick-casual restaurants has been driven by a change in consumer tastes away from lower-quality fast food and toward higher-quality food at a reasonable price point. This has materialized in the form of increasing comparable-store sales at both restaurants and an increase in each company's store count.

Between 2009 and 2012, the number of Chipotle restaurants has risen 47.5% from 956 to 1,410. Panera's store count has lagged this, but it still grew 19.7% from 1,380 to 1,652. In comparison, Wendy's has seen its store count rise only 0.3% from 6,541 to 6,560.

Even though Wendy's has more locations, the company's 2012 revenue of $2.51 billion fell in the middle of Panera's $2.13 billion and Chipotle's $2.73 billion. This suggests that while Wendy's growth prospects are likely limited, Chipotle and Panera still have a long way to go before they reach maturity.

Foolish takeaway
The news Wendy's released on Monday has both its ups and downs. More likely than not, shareholders were most impressed by the company's share repurchase announcement. This means that, in the short term at least, the company's shares probably won't fall below $8.50 or go much higher than $9.25. In the long run however, the company will have to continue innovating so that its comparable-store sales can improve further. Any failure to do so, or any other material setbacks, will make Wendy's more susceptible to faster-growing competitors like Chipotle and Panera.

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Daniel Jones has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill and Panera Bread. The Motley Fool owns shares of Chipotle Mexican Grill and Panera Bread. 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.

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Keeping it simple.

Aug 7, 2015 at 11:26AM

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