The Wendy’s Company (NASDAQ:WEN) is poised to take on its rivals more aggressively, as it aims to rapidly expanded store base in coming years. The WEN stock fourth quarter and full year results were pretty decent, and offer a pretty good foundation from which to continue expanding.
That single look at some of the important numbers out of Wendy’s and what they imply about the underlying health of the business.
WEN stock saw North American same-store sales increases of 1.3% in the fourth quarter and 2% overall for the entire year. For the burger business, for a legacy chain restaurant like Wendy’s, these numbers are acceptable.
They translate to about 2.5% revenue increase in North America to $2.44 billion for the fourth quarter and $300 million increase, or a little over 3% to $9.8 billion for the year.
However, sales exploded internationally, up 14.6% for the fourth quarter and 14.8% for the year. These were substantial increases over 2016, which saw an 11% increase in the fourth quarter and 5.8% increase for the full year.
WEN Stock by the Numbers
As we dig into the numbers, there are few items of great interest to me. The revenue numbers are impressive considering there were 90 fewer company-owned restaurants at the end of the year than the year before. That obviously means that the loss in sales at those company operated restaurants were offset by increased franchise royalty fees and rental income.
By having fewer company-owned restaurants, there is less money spent on capital expenditures. Indeed that number fell from $150 million$ to 82 million. That obviously affects free cash flow which exploded two $170 million compared to just $40 million the year before. This cash flow is key because it allows the company to more efficiently use its capital to expand.
As part of the expansion process comp, WEN stock management also is using its “image activation” concept to reimagine existing restaurants and build new ones. With another 550 restaurants in North America re-imaged, 43% of the restaurants in the company have now reached this milestone.
WEN stock management has also taken an interesting approach with respect to franchises. Wendy’s stock appreciation is partially being hitched to the idea of larger and more established franchises being encouraged to buyout smaller ones that are not is committed to long-term growth.
I have some family members in the McDonald’s Corporation (NYSE:MCD) franchise business. What I’ve learned from them is that some of the smaller operators either don’t run their stores very well, or seem perfectly happy to take home a constant paycheck, rather than attempt to grow.
Wendy’s seems to want to push that category of franchisee out. That’s because growth in a franchise means growth and royalty revenue.
Wendy’s stock also increased its dividend by 21%, and it now yields just under 2% per year. It is also notable that if you buy WEN stock, you’re also buying a 12% stake in Arby’s, and in turn you get 100% ownership in Buffalo Wild Wings along with it.
WEN stock is currently supported by over 6,600 restaurants around the world, and it is aiming to hit 7,250 restaurants by 2020. As part of this growth it hopes to boost free cash flow from hundred $70 million per year to $300 million per year, and substantially juice adjusted EBITDA margins from 32.3% to between 37% and 39%.
There is no right answer when it comes to the question of which burger chain to buy. They are each on their own trajectory. I think you have to evaluate each one in turn. What do I see with Wendy’s? I see a chain in the midst of trying to reinvent itself.
We saw rivals like McDonald’s do so very successfully, along with Restaurant Brands International Inc. (NYSE:QSR). Wendy’s may be bringing up the rear, but there may be decent risk/reward upside from today’s price.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years’ experience in the stock market, and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.