Wendy’s Earnings: Is Its Overhaul Too Slow?

Wendy’s Co. (NYSE: WEN) last week reported first-quarter results that showed a company in the midst of a major overhaul that has just started to produce some results.Wendy's earnings
But Wendy’s first-quarter earnings report also shows a company that may not be moving fast enough in a food sector that defines itself not only on fast service but also on swiftly adapting to consumer demands.
Wendy’s led its earnings release with news that its same-restaurant revenues rose 3.6% in the first quarter.
Some of the smaller print in Wendy’s earnings report for the first quarter was more complicated. The company’s total revenues fell 16.2%, while its franchise revenue, jumped more than 26.8%.

A Transition to Franchises

These numbers capture a company that is aggressively transitioning from a company-owned restaurant model to one that is dominated by franchises. At the same time, Wendy’s is seeking to refresh its overall corporate and store image – a mission it’s describing as “image activation” – and is hoping its growing number of franchisees will commit to that process.
Clearly Wendy’s is making progress on the first part of that strategy. Over the past three years it has sold 800 of its once company-owned restaurants. What’s still not clear is how that image activation is going, and whether upgrades to the company’s physical restaurant chains will be enough to attract more diners.
At the same time that Wendy’s is dramatically changing its franchise structure and supporting store upgrades, it seems to lack a compelling menu strategy. Wendy’s technically does offer breakfast items such as artisan egg sandwiches, homestyle potatoes and oatmeal bars, but because these menu items are not available at all its restaurants, it is widely known as the fast food chain that doesn’t offer breakfast and as a result often loses out to a wide range of competitors from McDonald’s (NYSE: MCD) to Starbucks (NASDAQ: SBUX).
Similarly, while Wendy’s does offer a variety of salads on its menu, it hasn’t pushed these items sufficiently to compete with the likes of Chipotle Mexican Grill (NYSE: CMG), which has gained a huge following among diners who want healthy fast food.

Wendy’s Earnings: Bottom-Line Effect?

Other key details from Wendy’s first quarter include a modest decline in net income, which fell to $25.4 million from $27.5 million. Despite this drop, Wendy’s also raised its outlook for 2016 adjusted earnings per share to 38 cents from 35 cents. The increase was encouraging but did not address Wendy’s bottom line.
In summary, this is a company that is pinning its future successes on an aggressive two-pronged strategy (selling stores and updating their images) that will take a while to execute and may still not be sufficient to improve its competitive position. While Wendy’s shares have grown about 30% over the past two years, they’ve been close to flat over the past year, which is particularly concerning given how aggressively the company has repurchased shares.
In short, Wendy’s may not be moving fast enough.

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