
Wendy’s Struggling to Turn Around in Make or Break Year
NEW YORK (TheStreet) -- Wendy's (WEN) - Get Report is working hard to turn itself around. Over the last 10 years, the S&P 500 has substantially outperformed an investment in Wendy's. This year could be a make or break year for the restaurant company and its shareholders.
Last quarter Wendy's posted underwhelming results as it continues to struggle. Upside to the stock has remained elusive. Investors had felt good after a February analyst meeting but the company hasn't delivered on its promises fast enough.
At that meeting management outlined progress: It "recapitalized" its balance sheet (i.e financial engineering). The recapitalization resulted in more debt and a billion-dollar stock buyback program. Like other competitors in the quick serve category, Wendy's has been trying to shed company-owned outlets, sell all of its 540 company-owned restaurants and move to an "asset-light" model similar to Dunkin Brands (DNKN) - Get Report .
The Dunkin' model is really popular now: Get rid of all company-owned locations and focus your efforts on selling napkins and paper bags to the franchises all the while collecting a percentage of their revenue as royalties.
So Wendy's management expects the sale of 240 restaurants to close sometime in the second half of the year. By mid-2016 the company is trying to get to a franchise mix of 95% versus the current 85% (franchisee vs company-owner stores).
Because the company has sold off its bakery operations and is shedding restaurants, total revenue is projected to decline from $2.4 billion in fiscal 2011 to $1 billion by 2017. But because the company has fewer moving parts, Wendy's would get more profitable. Restaurant margins would go from 14% in 2011 to as high as 20% by fiscal 2017. Likewise, Ebitda margins would climb from 13.9% to 33%. Of course, that's assuming Wendy's is able to successfully execute its plan.
Wendy's has an aggressive stock buyback plan that has added debt to the balance sheet. Back in July, the company announced the results of a Dutch auction that lead to the repurchase of 55.8 million shares at $11.45 per share. The company spent $639 million for the stock. Wendy's will also purchase 18.4 million shares from activist investor Nelson Peltz' Trian. In total, the company will repurchase 20% of its outstanding shares for $850 million. After all the dealing, the company will still be able to spend another $400 million on share repurchases.
If Wendy's is able to achieve its goals, the stock could be higher over the course of the next two years. But I think it could be a rocky journey simply because some of Wendy's most powerful competitors, such as Chipotle (CMG) - Get Report , control most of their stores and don't depend on franchisees to do all the heavy lifting. The new wave of quick-service restaurants controls everything from start to finish to provides a superior product and outstanding service.
Customers have noticed and flocked to these hot new eateries. This "asset-light" and financial-engineered approach may work for Wall Street, but it remains to be seen if it works for customers.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.








