On Nov. 4, Wendy's (WEN -0.09%) reported fiscal third-quarter adjusted earnings per share of $0.19 on revenue of $452.2 million, above consensus earnings estimates of $0.17 but falling slightly short of expectations for $454.1 million of revenue. The top line was aided by strength in the company's digital segment and breakfast revenue. Overall, the results showed a recovery from the previous quarter, which was adversely impacted by the COVID-19 pandemic.
Here are three major takeaways from the consumer-discretionary company's latest report.
1. Wendy's business is recovering
Year-over-year revenue growth for the quarter ended Sept. 27 was 3.3%, versus 9.3% in the prior-year period and a decline of 7.6% in the fiscal second quarter. Stronger revenue at company-operated restaurants and higher franchisee royalty revenue and fees powered the results, which were also boosted by Wendy's new breakfast offering in the U.S. market. The company rolled out that daypart in March, and it was been well received by diners.
Wendy's recorded its highest global comparable-restaurant sales growth figure in 15 years during the quarter. That momentum flowed into October as U.S. comparable-restaurant sales increased 6.6% for the month.
The quick-service chain is also seeing "rest of day" revenue increase over 5% on a two-year basis with larger order sizes during the third quarter. Wendy's launched two new products in the quarter, the New Spicy Crispy Chicken Sandwich and the Pretzel Bacon Pub Cheeseburger. These new items help it compete with popular chicken sandwiches from Popeye's and Chick-fil-A.
2. Digital and breakfast revenue were strong
Wendy's attributed a large part of its 7.9% U.S. comps growth to "our breakfast daypart [...], a growing digital business and increased mobility." As a percentage of total sales, breakfast has stayed steady at around 7%. The company will continue to invest in marketing for this segment as management sees plenty of upside, especially when consumers revert back to their normal daily routines once COVID-19 fears subside.
Even as many people in the U.S. are working remotely this year, making them less likely to eat out for breakfast, Wendy's breakfast menu is still drumming up solid sales. CEO Todd Penegor noted on the earnings call:
We have been seeing some very positive trends on top of the fact that breakfast is providing a sales and profit layer that we did not have previously. We have now been able to get data on customer repeat, and we are seeing this to be very strong. We are also seeing our customer satisfaction scores be our highest at the breakfast daypart, as customers are loving the offering that we have.
Digital business continued to expand each month during the fiscal third quarter, reaching 5.5% of total U.S. sales and doubling from a year ago. Wendy's rewards program is also boosting this segment with app downloads increasing over 15% since the launch of Rewards in July 2020. "We have also seen higher average checks and higher frequency, both of which were expected benefits of the program," said Penegor. "We are excited about this program, and we'll continue to drive awareness through compelling offers and within our marketing messaging to grow this program in the coming months."
3. Risks around possible new restrictions on restaurant operations
Wendy's, like other quick-service restaurants, has enjoyed some tailwinds this year, despite the pandemic, as consumers favored low-contact, convenient dining options. And the company's value-priced offerings resonate with people who may be nervous about the economic slowdown and uncertainty this year. With many dining rooms across the U.S. and parts of the world closed or partially closed, off-premise dining is driving sales at many restaurants.
But even though Wendy's had a solid third quarter, there's risk around additional restaurant closures or restrictions. In November, the U.K. and parts of France are under heightened restrictions and lockdowns. Wendy's said in 2020 that its growth plans include opening new company-owned restaurants in the U.K. and additional parts of Europe, so these restrictions may hurt new restaurant openings. There are also parts of the U.S. that could impose more stringent containment measures if there is a continued surge in COVID-19 cases.
Overall, Wendy's is seeing a nice recovery in its business. It also has promising strategies in place, including digital and rewards offerings, to drive traffic to its restaurants. The company's new breakfast menu is also likely to fuel revenue growth long term. However, investors should be aware of near-term risks around pandemic-related disruptions.