Wendy’s (WEN) is making progress with its plan to cut costs and boost cash flow, but the market still seems skeptical of the burger chain, sending WEN stock lower even after after reporting better-than-expected earnings.
These are tough times for old-line fast-food chains like Wendy’s, McDonald’s (MCD) and Burger King (BKW). Cash-strapped customers have cut down on their purchases during this long, slow economic recovery. At the same time, competition has never been tougher.
Fellow fast-food chains like Yum Brands’ (YUM) Taco Bell are moving into serving breakfast — a lucrative business dominated by McDonald’s. Meanwhile, fast-casual upstarts like Chipotle Mexican Grill (CMG) are luring away customers with the promise of fresher ingredients and healthier offerings.
Add in the effects of currency exchange — it’s hard to be an international company when the dollar is relatively strong — and fast-food stocks like WEN stock, BKW and MCD have been going in very different directions.
WEN is selling company-owned restaurants and transforming itself into an operator of franchises. The franchise model means more earnings, more return on equity, more revenue from rents and royalties, and more free cash. (Owning restaurants is capital-intensive.)
Despite early success from a turnaround plan, WEN stock is off 6% for the year-to-date, lagging the S&P 500 by 3 percentage points.
Like Wendy’s, Burger King also is selling its company-owned locations to cut costs and lift cash flow. However, unlike with WEN stock, the market is applauding. BKW stock is up 12% for the year-to-date, beating the market by 10 percentage points. McDonald’s, meanwhile, is up just 5% since Jan. 1, 3 points better than the S&P 500.
WEN Stock Falls Even as Profit, Sales Beat Expectations
WEN reported Street-beating earnings Thursday thanks to lower costs, so its plan seems to be working.
For the most recent quarter, Wendy’s booked net income of $46.3 million, or 12 cents a share, up from $2.1 million, or a penny a share, a year ago. Excluding gains from selling restaurants, WEN earnings came to 7 cents a share, which exceeded analysts’ average estimate by 2 cents, according to a survey by Thomson Reuters.
As expected, WEN revenue declined, falling 13% to $523.2 million because of lost sales from sold-off restaurants. Regardless, the WEN top line beat the Street projection of $498 million. Additionally, WEN affirmed its full-year outlook.
However, like McDonald’s, sales at Wendy’s domestic locations remain soft — a key headwind for both WEN and MCD stock.
On the other hand, at least they grew. Indeed, McDonald’s would love to have Wendy’s problem.
Wendy’s same-location sales rose 1.3% at company-owned locations and 0.6% and franchises. As for MCD, the company said global same-restaurant sales grew 1.3%, but were flat in the U.S. Since almost a third of McDonald’s revenue comes from the U.S., the fact that the company hasn’t posted same-restaurant sales growth here since October has been a big drag on MCD stock.
As promising as the numbers were, though, the Street’s immediate reaction on WEN stock was a thumbs-down, which spread to MCD stock and BKW stock too. Surely poking the bears was the fact that the best-performing part of Wendy’s are the same company-owned locations that it’s selling off.
BKW and WEN stock both go for more than 20 times forward earnings, while MCD gets a forward price-to-earnings multiple of 16. So none of these stocks looks particularly cheap given the economic backdrop.
At some point the economy will pick up, the market will expand — and we’ll see if there’s enough business to go around. Until then, fast-food stocks like BKW, MCD and WEN stock are holds because they look destined to match or slightly exceed market returns this year.
- Look for BKW stock to continue to fall toward market performance, if only because it’s too pricey.
- More results like the latest quarter will help WEN stock get back to breakeven as the market appreciates the success of its franchise plan.
- And MCD will keep puttering along on ho-hum but hardly disastrous results.
The sluggish economy means customers are being highly … well, discretionary with their discretionary income. Fast-food chains are fighting for parts of a stagnant market, and that limits upside across the sector.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.