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Analyst: Wendy's growth won't slow

With a new leader, menu innovations and refreshed restaurant designs, the quick-service chain outlines its expansion plans

Wendy’s has sold Arby’s Restaurant Group, tapped a new chief executive and introduced a reformulated burger, all in the past nine months.

But management has no plans to slow down, and the chain’s leaders are optimistic that they will get the needed lift from Wendy’s key initiatives to achieve the brand’s growth goals in the near future, according to a new research note from analyst Jeffrey Bernstein of Barclays Capital. Last week Bernstein met with senior Wendy’s executives, including chief financial officer Steve Hare, after new chief executive Emil Brolick took over, but before the nationwide rollout of Dave’s Hot ‘N Juicy Cheeseburger, and came away bullish.

“2011 has repeatedly been characterized as a transition year, though top-line momentum seems to be building,” Bernstein wrote. “Management is excited about near-term premium-product news.”

The analyst and Wendy’s executives acknowledged that persistent commodity inflation — projected to rise from 5 percent to 6 percent in 2011, with no relief in sight next year — would be a headwind. But Bernstein noted that Wendy’s balance sheet has far less leverage after the Arby’s sale, and is sitting on more than $500 million in cash to fund major initiatives.

His research note detailed Wendy’s growth strategy over the next several years.

New leader, same ambitions

Brolick, most recently president of Yum’s former Long John Silver’s and A&W All American Food chains, replaced Roland Smith, but is focusing on aggressive goals identified during Smith’s three-year tenure, Bernstein wrote.

Beginning in 2012, Wendy’s management is aiming for annual growth in earnings before interest, taxes, depreciation and amortization between 10 percent and 15 percent. That growth assumes annual same-store sales growth between 2 percent and 3 percent. That requires that Brolick win franchisee support for further investments in menu, daypart expansion and restaurant remodeling.

Bernstein noted Brolick’s strong reputation as an operator, not only as chief operating officer and leader of Taco Bell, but also as a marketing expert during an earlier 12-year stint at Wendy’s, working with founder Dave Thomas.

“Management believes franchisees are excited to see Brolick return to Wendy’s and expect him to accelerate menu innovation and daypart expansion efforts,” Bernstein wrote. “We do not expect a significant change in corporate strategy under new leadership, but rather a focus on elevated execution at the store level.”

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Menu innovation at a premium

Bernstein sees further room for sales and margin improvement thanks to ongoing production from Wendy’s menu innovation pipeline. After shoring up its “My 99” value menu in 2010, Wendy’s pivoted to a “premium-QSR” positioning in 2011 with four new salads, revamped French fries, expanded beverages and desserts, and, most recently, Dave’s Hot ‘N Juicy Cheeseburger, he noted.

New sandwiches from “Project Gold Chicken” would go systemwide in the first quarter of 2012, the research note revealed. The effort to enhance chicken sandwiches follows the same testing process as “Project Gold Hamburger,” which produced the new cheeseburger.

Dave’s Hot ‘N Juicy Cheeseburger drove incremental same-store sales between 2 percent and 3 percent in test marketing, Bernstein noted.

“Franchisee reception to the new burgers has been positive, with the company offering some financial help to offset the approximate $25,000 cost of outfitting each restaurant with the equipment necessary to produce the new burger,” he said.

Early returns

Wendy’s executives told Bernstein that the brand’s breakfast menu was performing well in all but one of the seven test markets. Sales are up about 40 percent in Pittsburgh, Phoenix and Kansas City, Mo., where the current breakfast menu replaced an earlier, unsuccessful version of Wendy’s breakfast.

“Even more importantly,” Bernstein wrote, “sales have continued to remain steady or increase slightly, even as the new markets phase out the extensive couponing used at the beginning of the breakfast launch to encourage customer trial.”

Of the 1,000 stores Wendy’s wants to test breakfast by the end of the year, 70 percent would be franchised and 30 percent would be company-owned. As with the new hamburgers, breakfast requires new equipment investments of about $25,000 per restaurant. Wendy’s will offset some of that with a loan program and royalty abatement for franchisees.

“Management noted that franchisees remain cautious around the breakfast expansion, cognizant of the company’s past failed attempts to expand into the daypart,” Bernstein wrote. “But the company hopes to gain broader support at its franchisee convention in October 2011.”

Most test markets are averaging incremental sales above the $150,000 goal set for breakfast, while San Antonio has underperformed, he noted. Wendy’s attributes the Texas underperformance to lower initial couponing compared with other markets, a more challenging competitive landscape and regional menu differences.

“In the long-term,” Bernstein wrote, “the company hopes to migrate some of its breakfast offerings into the lunch and dinner menus in order to more effectively compete in the snack daypart and provide opportunities for 24-hour operations at certain locations.”

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Keeping up, growing up

Wendy’s management said it would use its more than $500 million in cash to fund unit growth, including as many as 1,000 new restaurants in the United States, 8,000 internationally and hundreds of remodels in the near term.

The chain is testing four new prototypes, including a $1 million location in Columbus, Ohio, and has previously stated guidance for 100 remodels in 2011. Officials expect the sales lift from upgrades to settle around 25 percent, Bernstein noted.

Internationally, Wendy’s has 333 restaurants abroad, with agreements for 700 more. But chain executives told Bernstein they believe they benefit from a “last-mover advantage” in foreign expansion.

“With international consumers already accustomed to Western fast-food and much of the support infrastructure already in place, the company believes it can eventually have 8,000 stores outside North America — 40 percent of that goal in China, Brazil, and Japan,” Bernstein wrote.

Dublin, Ohio-based Wendy’s operates and franchises more than 6,500 restaurants in the United States and 25 foreign countries.

Contact Mark Brandau at [email protected].
Follow him on Twitter: @Mark_from_NRN

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