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

Wendy's shares are down this year, but they can pick up once again.

Jun 4, 2014 at 1:29PM

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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Ayush Singh has no position in any stocks mentioned. The Motley Fool recommends Burger King Worldwide and McDonald's. 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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