Why Wendy's Weak Performance This Year Is a Blessing in Disguise

Wendy's (NASDAQ: WEN  ) has been trying hard to differentiate itself from the likes of McDonald's (NYSE: MCD  ) and Burger King Worldwide (NYSE: BKW  )  to attract more customers to its stores. As pointed out by Fool analyst Alex Planes, Wendy's same-store sales, or comps, have suffered because "consumers still view all three brands in a similar light." Thus, Wendy's is employing a number of strategies to gain market share in a highly competitive environment.

Differentiation strategies
Wendy's different strategies include the implementation of its Recipe to Win program, a focus on North American comps growth, the creation of brand equity, and restaurant ownership optimization. In its commitment to increase the relevance of the Wendy's brand and improve its economic model, the company is selling and purchasing relevant restaurants and other assets as a part of its growth optimization strategy. 

It has completed the sale of 418 company restaurants to new and existing franchisees as a part of the optimization initiative announced last year. In addition, Wendy's brand positioning and the Recipe to Win strategy are designed to deliver brand, customer count, sales, and earnings growth.

Management says that consumers are experiencing a series of changes: bold restaurant designs, striking new packaging, friendlier restaurant teams, and innovative menu items like its current limited time offer, the Tuscan Chicken on Ciabatta. Wendy's is also dedicated to bringing more variety to consumers through more limited-time-offerings such as hamburgers, chicken sandwiches, and salads while also bolstering the core menu.

Its marketing efforts featured the core Asiago Ranch Chicken Club, two new salads -- BBQ Ranch Chicken and Asian Cashew Chicken -- and limited-time products such as the Ciabatta Bacon Cheeseburger and the Tuscan Chicken Sandwich on Ciabatta.

Focus on the customer
Wendy's is focusing on millennial consumers between the ages of 18 and 34 as well as baby boomers 50 years old and older; these groups account for 25% and 33% of its total traffic, respectively. The company is evolving its marketing moves accordingly to connect with these customers to drive awareness and engage with them through digital media.

Wendy's goal is to provide consumers with 360-degree marketing messages beyond TV. It is focusing on different channels such as social media, mobile marketing, and digital promotions. The use of technology will allow it to create a one-on-one relationship with consumers by way of transaction-based information. This will allow Wendy's to gauge consumer behavior and develop its marketing plan accordingly to offer targeted products and services in addition to highly customized content. 

The use of technology will also help to improve the in-restaurant experience. Mobile payments, which are now in about 85% of Wendy's U.S. restaurants, allow consumers to pay though mobile devices. Wendy's believes that mobile loyalty points, which are currently under testing, will help it to attract new customers and keep existing customers returning. Also, the company is testing mobile ordering, which will allow it to connect the consumer ordering experience with its operational capabilities.

What are peers up to?
With such moves, Wendy's should be able to differentiate itself from its competitors going forward. In fact, the company is already seeing some benefits, as its recent first-quarter results reveal. Wendy's reported a 1.3% increase in sales at company-owned restaurants, driven by successful product promotions and better traffic at remodeled locations. 

In comparison, comps at McDonald's U.S. locations dropped 1.7% versus the year-ago period. McDonald's attributed its weak performance to challenging industry conditions and bad weather. However, the company is trying to get back on track by focusing on customer-centric initiatives such as strengthening the menu. McDonald's is now testing seasoned fries, known as Shakin' Flavor Fries, as it tries to revive its menu. 

Burger King is innovating its menu too. It launched Satisfries, which it says have 20% fewer calories and 25% less fat than traditional French fries. Burger King's television ad also boasts the fact that its Satisfries contain 30% fewer calories and 40% less fat than McDonald's French fries. Burger King is targeting health-conscious customers with this move. 

The takeaway
Looking at the strategies of its peers, Wendy's is making the right moves to drive growth and stay ahead. From an investment perspective, Wendy's looks like a good buy. Its trailing P/E and forward P/E ratios of 37 and 20, respectively, indicate earnings growth in the future. Analysts also expect the same; its bottom line is expected to achieve a compounded annual growth rate of 13.7% for the next five years.

The stock has been weak year to date, declining 6%. Investors should think of making the most of this decline by purchasing more shares.

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