Will the fourth time be the charm for Wendy’s (NYSE:WEN) and its breakfast menu? Could the addition help Wendy’s stock?
The Ohio-based hamburger chain best known for Frostys rolled out its new breakfast menu this week. It’s making its foray into the breakfast wars with a Baconator-themed egg and sausage sandwich, a Frosty-infused coffee drink and chicken sandwiches.
There are reasons to be skeptical.
Wendy’s Stock at a Glance
First, let’s take a look at Wendy’s stock. WEN is down about 12% so far this year, thanks in large part to the coronavirus from China selloff that absolutely blitzed the market over the last week. But as recently as Feb. 21, it was trading at a 52-week high near $24 per share.
Furthermore, fourth-quarter earnings posted last month included earnings per share (EPS) of 11 cents per share on revenues of $427.2 million. This is up from 8 cents per share and $397.8 million a year ago, along with the company’s revenue beating Wall Street estimates for the quarter.
However, guidance was a disappointment. Wendy’s stated that they expect adjusted EPS of 60 cents to 62 cents per share in 2020. That said, analysts are expecting 62 cents per share.
“Our focus remains on efficient, accelerated growth behind our three major growth pillars: entering the breakfast daypart, growing our digital business, and expanding our International footprint,” President and CEO Todd Penegor said in a statement. “We are well positioned to drive growth in 2020 and I’m more confident than ever that we will achieve our vision of becoming the world’s most thriving and beloved restaurant brand.”
Moreover, SunTrust has Wendy’s stock rated as a “buy” and set the price target at $26. Also, MKM Partners rated WEN as “neutral” with a $23 fair value estimate.
Will Breakfast Help Wendy’s Stock?
Despite the excitement over Wendy’s new menu, the company doesn’t have a great track record in its breakfast offerings. You may recall that Wendy’s first gave breakfast a shot in the 1980s, when it offered French toast sticks, pancakes and made-to-order omelettes.
But that was too expensive and time-consuming to sustain, particularly for a company that thrived as a drive-through restaurant.
In 2006, the company gave it another shot — this time by adding yogurt and granola to a morning menu. But it pulled the plug after customers soundly rejected the low-quality items.
In 2012, WEN tried breakfast for a third time. This time the menu included an artisan egg sandwich, panini-grilled sourdough bread offerings and warm oatmeal bars. But the effort failed again, as analysts called it “too little, too late” to compete with well-established entries by McDonald’s and Starbucks.
What’s Different This Time?
Wendy’s current entry into the breakfast arena features a number of interesting items. The menu includes a honey butter chicken biscuit, a breakfast Baconator that features a fresh egg, bacon, sausage, cheese and Hollandaise sauce and a Frosty-ccino — which is Wendy’s answer to the Starbucks Frappuccino drink.
Overall, there are two chicken sandwiches on the menu and seven egg sandwiches. And all of them feature fresh-cracked eggs in an effort to give customers higher-quality sandwiches.
However, the company is also trying to keep costs down for its franchisees. The limited menu is designed to be simple to assemble, and breakfast is only available beginning at 6:30 a.m. to 10:30 a.m. at the latest. And the company states the cut-off time for breakfast “depends on the particular Wendy’s location you are ordering from.”
That sounds great on the surface, but investors need to realize that there are some downsides to that strategy.
Offering food for specific hours per day will greatly limit sales, so Wendy’s window of opportunity is extremely limited. Also, with some of the dining rooms not opening until later in the morning, Wendy’s is turning away some of the walk-in crowds that often congregate in McDonald’s, Starbucks or Dunkin.
Additionally, there’s no guarantee that a Wendy’s will be the first stop for busy morning commuters, either. Think about it: If you’re driving to work, you’ve already got a routine that works for you. You’ll be far less inclined to stop at Wendy’s if it’s on the left side of the road and there’s a McDonald’s on the right side.
When WEN franchisees located their restaurants, they weren’t thinking about morning commute plans. So locations that force customers to turn through oncoming traffic during the morning rush will have a harder time luring customers who are in a hurry.
The Bottom Line on Wendy’s Stock
Collectively, Penegor says wants to see $1 billion in breakfast sales for Wendy’s in a year. That’s a hefty goal that may be unattainable.
With limited hours and limited accessibility, Wendy’s may make enough money from breakfast to cover its cost and its skeleton morning workforce. But it’s unlikely that it will generate enough sales in the immediate future to hurt MCD or SBUX, or drive Wendy’s stock higher.
Patrick Sanders is a freelance writer and editor in Maryland, and from 2015 to 2019 was head of the investment advice section at U.S. News & World Report. Follow him on Twitter at @1patricksanders. As of this writing, he did not hold a position in any of the aforementioned securities.