Here's Why Wendy's Slowdown Won't Continue for Long

Wendy's (NASDAQ: WEN  ) has been a high-flying stock for the past year, gaining almost 35% and outperforming arch-rival McDonald's (NYSE: MCD  ) by a wide margin. However, Wendy's seems to have slowed down in 2014, as its shares have lost more than 6%. However, a look at the company's first-quarter results will make it quite clear that Wendy's is down but not out.   

A smart strategy
Wendy's reported strong results for the first quarter. It managed to improve its profitability by lowering costs and improving sales. The company is undertaking various strategic moves to boost its earnings and revenue. For instance, Wendy's is focusing on the franchise model to improve its profitability. The company has been selling its stores to franchisees so that it can focus more on the menu and customer experience, leaving the operation of the locations to franchisee partners. Under this strategy, Wendy's has completed the sale of 418 company-owned restaurants to its new and existing franchisees.

Moreover, Wendy's has improvised its restaurant designs and packaging and has trained its employees to be more customer-friendly. In addition, Wendy's has added innovative limited-time items to its menu such as Tuscan Chicken on Ciabatta, Asian Cashew Chicken Salad, and BBQ Ranch Chicken Salad. These limited time offers are expected to play a prominent role in bringing more traffic to Wendy's locations and also increasing demand for Wendy's permanent menu items.

In addition, Wendy's is focusing on brand transformation through its Image Activation initiative. It completed or initiated more than 200 Image Activation reimages of company-owned and franchise restaurants in 2013. Wendy's expects to double the pace of the Image Activation initiative in 2014. By 2017, Wendy's expects to implement the Image Activation initiative in 85% of its company-owned locations and 35% of its North American restaurants to make its stores feel more contemporary and to attract more customers. 

Connecting with customers
It is necessary for Wendy's to make itself more connected with the baby boomer generation and also to establish relevance with the millennial generation. Hence, the company is trying to build customer loyalty by connecting with them through channels such as TV, radio, and mobile devices. Considering that millennials and baby boomers contribute 25% and 33%, respectively, to Wendy's business, the company needs to establish a proper balance to satisfy both sets of customers. 

The company has been successful in doing the same so far. For example, it launched the Pretzel Bacon Cheeseburger with Love Songs digital promotion based on consumers' Facebook comments and tweets. On the other hand, Wendy's reaches out to the baby boomers by way of traditional broadcast campaigns. 

Wendy's is also focusing on technology. Management believes that the use of new technology will attract new customers and result in more visits from existing customers. As an example, it is trying to establish individual relationships with customers and cater to their needs on the basis of transaction-based information. Wendy's intends to use the information that it receives to provide a more customized experience for customers and to offer them relevant products according to their taste.

Analyzing the competition: McDonald's and Burger King
Wendy's strategies seem to be reaping solid results, as it has been performing better than McDonald's, a much larger competitor. Although McDonald's global sales increased in April, its performance was disappointing in Europe and the U.S.

McDonald's has struggled due to a sluggish employment scenario and slow wage growth. Additionally, stiff competition from fast-food rivals such as Wendy's as well as weak strategies have resulted in complicated menus and slower service. In fact, McDonald's has not reported growth in comparable-store sales, or comps, in the U.S. since October.

In comparison, Wendy's posted comps growth in each of the last four quarters. However, Wendy's needs to keep an eye on Burger King Worldwide (NYSE: BKW  ) , which is aggressively focusing on menu innovations. Last year, Burger King made its menu healthier by introducing a variant of French fries, known as Satisfries.

According to Fool writer Anh Hoang, Satisfries contain fewer calories and less fat as compared to Wendy's Natural Cut Fries. In addition, Burger King's Big King sandwich is another relatively healthier choice for customers because it contains fewer calories than McDonald's Big Mac.

Bottom line
Although Wendy's stock price performance has been weak this year, the company's business has remained strong. Its strategies look stunning and should result in earnings growth going forward. So, it would be wise for investors to use Wendy's pullback as a buying opportunity as the stock can deliver strong growth in the long run.

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  • Report this Comment On June 07, 2014, at 9:53 AM, yellow20jacket wrote:

    Interesting article, Ayush.

    In the fast food industry, I see WEN becoming more of a player against giant MCD than BKW ever will. Both WEN and BKW are selling at similar P/E ratios but I think the growth potential for WEN is stronger due to the focus on more of a quality product and experience with their menu and restaurant innovations/renovations. BKW's latest big thing are the "satisfries" which does not pose a threat to either MCD or WEN. If people want french fries they are going to go to MCD; I dont think anyone can argue this. I do not think healthy french fries are what people want. 'Healthy' and 'french fry' do not belong in the same sentence! French fries belong to MCD and I am okay with it staying that way as a WEN investor.

    This is where I think it is important for WEN to play in another field.... the burger and other menu items. With no true leader in the burger segment of the fast food industry, I like Wendy's approach to develop innovative burgers to create draw to their restaurants. With this approach and its focus on millenials through their latest TV adds, I think WEN is going to prove to be the best long-term investment in the fast food industry.

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