Wendy's Makes a Habit of Beating Earnings

Even though the Image Activation program has only begun to start in earnest, Wendy's (NASDAQ: WEN  ) has already generated a habit of beating expectations. In reality, the restaurant chain hasn't generated mind-boggling comps growth yet, but Wendy's has been performing better than management's plan expected. When the investment community has confidence in a company's plan, the company's stock tends to perform better.

In 2012, Wendy's undertook its Image Activation plan to modernize the look of its restaurants and spent heavily to innovate new products that included the pretzel bun. The 6,550-store restaurant chain has seen its stock appreciate roughly 100% in the last year on improved results and excitement over the updated corporate strategy.

The company competes in the massive $435 billion restaurant sector directly against McDonald's (NYSE: MCD  ) and Burger King Worldwide (NYSE: BKW  ) . The company plans to take market share by innovating and reimaging the brand to make it more attractive to consumers.

Stronger results
For the fourth quarter, Wendy's reported the all-important beat and guide higher. Investors appreciate a management team that delivers better results than expected even if the actual numbers are only average.

For the quarter, Wendy's company-operated comps were up 3.1%. The company expects earnings of at least $0.10 per share versus the consensus estimate of only $0.06. This continues a trend over the last year of Wendy's handily beating estimates as four of the last five quarters have seen impressive beats by at least 33% more than analysts forecast. Even more important, Wendy's guided up for 2014 earnings to reach $0.35. The analyst consensus only expected $0.29.

Though the market is excited about the Image Activation campaign, the company only modernized 199 stores during 2013. In total, only 300 restaurants out of 6,550 have been updated. Wendy's will pick up the pace in 2014, but its plans only include updating roughly 400 of the existing stores during the year. At the end of the year, a total of only 700 locations, or barely over 10% of the chain, will be reimaged. In reality, a major portion of the customer base might not even view a reimaged store by the end of this year.

Gaining against the big boys
Wendy's has shifted toward only owning 15% of the store base after completing several exit transactions this year to raise cash. The Wendy's franchise model is similar to the business model of McDonald's, which now has a massive market cap of $94 billion on revenue of nearly $30 billion. Even Burger King has a market value of over $8 billion and nearly double the locations of Wendy's, which has a minuscule $3.5 billion market cap currently.

In comparison, McDonald's has 35,000 locations in over 100 countries. Its restaurants are worth roughly $2.7 million per location while Wendy's only has a value of $580,000 per location. Burger King's restaurants are valued similarly at roughly $610,000 per location, even though only 1% of its stores are company-owned.

Comps at Wendy's might only appear average, but they are rising while domestically McDonald's saw a decline during November and a small 0.1% gain for 2013 through November. On the flip side, Wendy's saw 1.9% comps growth during the full year and this has increased as the modernization plan expands. For the third quarter, Burger King saw a domestic decline in system-wide sales with comp sales declining 0.3%.

Much of the growth for McDonald's and Burger King has come from international locations. McDonald's has been an international growth story for a long time and Burger King now operates nearly 50% outside the U.S. With only 400 international locations, that area provides Wendy's with another catalyst for long-term growth once the Image Activation plan makes more progress.

Bottom line
Investors have pushed up the stock price of Wendy's for a good reason. The company has been generating the best comps of the group, yet the long-term benefits of reimaging the store base have hardly kicked in yet. Most of the gains so far have come from product innovations which highlights that Wendy's has turned the quarter as a corporation. Wendy's may have years of growth and market share gains ahead which makes the stock an interesting long-term investment even at these higher prices.

1 stock with even bigger potential in 2014
There’s a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it’s one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.


Read/Post Comments (0) | Recommend This Article (0)

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.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2800513, ~/Articles/ArticleHandler.aspx, 10/2/2014 12:37:14 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Apple's next smart device (warning, it may shock you

Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!


Advertisement