The Wendy’s Company (NASDAQ:WEN) is capitalizing on strong comparable sales (comps) growth, a well-executed expansion strategy, and its franchised business model. Moreover, the introduction of new menu items and an array of offerings are contributing to its success.
Over the past six months, WEN shares have experienced an 11.8% decline, contrasting with the Zacks Retail – Restaurants industry’s modest 1.4% growth. This quick-service restaurant giant is navigating challenges stemming from inflationary pressures and an uncertain macroeconomic climate.
Factors Boosting WEN’s Growth
Wendy’s continues to witness impressive global comps growth. During the first half of fiscal 2023, the company reported a year-over-year global comps growth rate of 6.5%, compared to 3.1% in the previous year. This remarkable upswing can be primarily attributed to higher average checks and strategic pricing initiatives. The company has set its sights on achieving 6-8% growth in global system-wide sales in fiscal 2023, underpinned by mid-single-digit global same-restaurant sales and approximately 2% global net unit growth.
Wendy’s is actively pursuing global expansion through various strategies. These include bolstering same-restaurant sales momentum across all dayparts, hastening the adoption of consumer-centric digital platforms and technologies, and broadening its international footprint. The company’s confidence in growth opportunities extends to both the United States and international markets. In the first half of fiscal 2023, Wendy’s opened 80 new restaurants, including the inaugural Global Next Gen restaurant launched on August 15. Additionally, the company reported growth in international markets, spanning Canada, the UK, India, and the Philippines. Wendy’s remains committed to its growth trajectory, with plans to achieve around 2% net unit growth in 2023. Looking further ahead, it anticipates global net unit growth to fall within the ranges of 2-3% for 2024 and 3-4% for 2025, year over year.
The company’s transition to a franchised business model is notably fueling its expansion. During the second quarter of fiscal 2023, Wendy’s entered into a franchise agreement with Flynn Restaurant Group to develop 200 Wendy’s restaurants in the Australian market. Moreover, during the same quarter, the company made significant progress in converting franchisee interests into new development agreements, encompassing programs like Pacesetter, Groundbreaker, and Build-to-Suit.
Additionally, Wendy’s brand transformation initiative, featuring menu innovations and related offerings, is contributing to its upward trajectory. The company has devised a range of product promotions catering to various price points and occasions. In the second quarter of fiscal 2023, Wendy’s introduced a new menu item, Frosty Cream Cold Brew, with expectations of launching more menu innovations in the near future. The return of customer favorites like the Strawberry Frosty and the introduction of the Ghost Pepper Ranch Chicken Sandwich are also bolstering its performance. During the quarter, the company recorded its highest-ever quarterly breakfast sales volume, primarily driven by the $3 croissant promotion. Wendy’s emphasizes menu innovation, raising awareness of new products, and promoting targeted trial-driving offers to spur growth.
Challenges to Growth
Wendy’s is grappling with elevated costs due to the prevailing inflationary environment and uncertain macroeconomic conditions. In the second quarter of fiscal 2023, the company’s total cost of sales reached $201 million, compared to $197.3 million in the prior year quarter. This increase was primarily attributed to higher labor costs, a decline in customer counts, and rising occupancy, advertising, and other operating expenses. Looking ahead, the company anticipates these challenges to persist for some time, with our model predicting a 3.4% year-over-year increase in the cost of sales, reaching $799.3 million for 2023.
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