NEW YORK (TheStreet) -- Several weeks ago, following a couple of analysts' downgrades, I talked about the delicate balance that Wendy's (WEN) faces in trying to present value to customers while also attracting more investors.After years of under-investing in its business when compared to rivals such as McDonald's ( MCD), which has been transforming the appearance of its U.S. restaurants for several years now, Wendy's recently decided it was time to do the same. The company announced plans to remodel 20% of its U.S. restaurants over the next two years, which means 1,300 stores will get facelifts out of the 6,500 locations that Wendy's has in North America. This is a pretty significant number. Not to mention the considerable capital investment it will require. While I do believe this is a necessary step for Wendy's, it's unclear as to whether or not this will boost foot traffic. The other concern is the impact on margins. Given the downgrades that followed Wendy's decision, it didn't appear the Street was buying much the transformation either. But Wendy's doesn't have a choice. The company has lacked identity for some time. As good as Wendy's burgers are, the menu is considerably more expensive when compared to McDonald's and restaurants operated by Yum! Brands ( YUM). So the value proposition is something that's long overdue.
Meanwhile, when compared to the more "upscale" quick-service restaurants Wendy's wants to model itself on, it still lacks the profile of Chipotle Mexican Grill ( CMG) and Panera ( PNRA). The question is how well can Wendy's convince the Street that revitalization efforts can boost traffic and profit margins. First-quarter earnings, which arrived better-than-expected, suggest that Wendy's is on the right path and is making good progress. There must always be a caveat when discussing restaurant performance, one of which is these results, which have been broadly weak throughout the entire sector, need to be taken in the proper context. I'm seeing articles with headlines stating that Wendy's first-quarter profits plummeted 83% to $2.1 million.
I'm not going to say that Wendy's is stealing share from McDonald's and/or Chipotle, but the fact that gross margin advanced 50 basis points year over year to 23.7% is also an encouraging sign the company is outperforming its own expectations. The fact that Wendy's raised its prices, which helped offset the decline in its transactions, demonstrates good execution. In other words, although Wendy's is seeing less foot traffic, the customers it gets are paying more -- a sign the company is building leverage. If management can continue to capitalize on this performance, the stock should perform accordingly. In that regard, for the next quarter, the Street is looking for 6 cents in earnings per share on revenue of $664.4 million.