Another Look at Wendy's

By Greg Sushinsky | April 15, 2011 AAA

Underperforming fast food chain Wendy's/Arby's Group (NYSE:WEN) received a burst of attention in early March when it announced it would be putting its Arby's division up for sale. Wendy's/Arby's also announced a turnaround plan along with this. Investors immediately saw the prospects for a better performing company.

TUTORIAL: Economics Basics

Getting Rid Of Arby's
The Arby's division has been a drag on Wendy's operations. Wendy's tried and failed to position Arby's into a favorable niche during the recession. At the heart of the downturn, consumers were cutting back on trips to fast food restaurants, so even the value side (Wendy's) struggled. Arby's, with its pricier menu and roast beef fare, struggled even more.

In the most recent quarter, reported in March, revenue for the combined company fell 6.7%, with results at Wendy's off even more than those at Arby's. The attention required on the Arby's division apparently dragged on Wendy's operations, so that may have been more than enough for management. Wendy's hopes to realize $200-300 million from its eventual sale of the Arby's division.

Crowded Restaurants
The fast food space is crowded, and the restaurants were squeezed hard during the recession. While the more elite chains, such as Yum! Brands (NYSE:YUM), with its diversified portfolio of Pizza Hut, KFC and Taco Bell, and its strong China presence did well, as did the roaring burrito superstar Chipotle Mexican Grill (NYSE:CMG), while some of the burger chains lagged. Sonic (Nasdaq:SONC) and Jack In The Box (Nasdaq:JACK) also lagged. Larger Burger King was taken private, in part due to its underperformance. Which brings us back to Wendy's. Its sale of Arby's will only help, if Wendy's executes its ambitious turnaround plan.

An Ambitious Fix
Along with the sale of Arby's, Wendy's plans to remodel its stores and adjust its menu. The company plans to make a big push into the difficult breakfast area. In 2010, Wendy's rolled out a new breakfast lineup in four markets, with plans to add two more markets in the first half of this year. By the end of 2011, Wendy's plans to have its new breakfast served at nearly 1,000 of its worldwide total of 6,500 restaurants.

Wendy's also plans to introduce a new burger menu item, a hot-n-juicy cheeseburger served loosely packed (like a "crumble burger", for you fast food fanatics), as well as attempt to re-brand the Wendy's image by featuring late founder Dave Thomas' daughter as spokesperson.

The Bottom Line
It certainly will be a good move to divest of the Arby's division. That will have a synergistic effect of both getting rid of a poor performing segment, as well as a millstone on the core business, Wendy's. Wendy's will have to show results, though. Its bleak operating margin of 3.9%, for example, should benefit markedly, if the company even gets its turnaround plan half-right. Revenue and earnings growth, of course, are what long-term investors, who are still in a "show me" mode, will have to see. Wendy's is giving itself a good chance to get better. (For related reading, see Sinking Your Teeth Into Restaurant Stocks.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

comments powered by Disqus
Related Analysis
  1. This Stock Is Up 1,440%... And Could Still Double

    This Stock Is Up 1,440%... And Could Still Double

  2. Unconventional Drilling Still Has Room To Boom
    Stock Analysis

    Unconventional Drilling Still Has Room To Boom

  3. Bear of the Day: Panera (PNRA) - Bear of the Day
    Stock Analysis

    Bear of the Day: Panera (PNRA) - Bear of the Day

  4. Finding An Alternative With Currency ETFs
    Stock Analysis

    Finding An Alternative With Currency ETFs

  5. Commodities: Has Their Time Come Again?
    Stock Analysis

    Commodities: Has Their Time Come Again?

Trading Center