The Wendy’s Company

The Wendy’s Company Details

The Wendy’s Company (NASDAQ: WEN) is a major quick-service restaurant chain in the United States; with USD 11.1 billion in systemwide sales in 2021, It overtook Burger King (USD 10.3 billion). The company now only maintains the burger brand, producing revenues throughout a footprint of approximately 7,000 total units in 30 countries after divesting Tim Horton's (2006) and Arby's (2011). The sale of hamburgers, chicken sandwiches, salads, and fries at Wendy's locations controlled by the corporation produces income, franchise royalty and marketing fund payments made by its 94% franchisee-owned restaurants and franchise flipping and advising fees.

Latest News:

• Wendy’ and Tiger Pistol Partnership for Collaborative Advertising: The Wendy's Company and Tiger Pistol, the top collaborative advertising platform that offers local activation at scale, announced a collaboration on June 16, 2022, to fuel each other's national-to-local social advertising campaigns.
• Launch of Products on Customer Demand: On June 6, 2022, Wendy's announced that two delectable berry dishes had been added to the menu, including the return of the seasonal Summer Strawberry Chicken Salad and the limited-time Strawberry Frosty.
• Re-Affirming Outlook: On May 26, 2022, WEN updated its forecast for 2022. This update was motivated by the company's strong momentum, excellent execution of its strategic goals, and increased margin of its company-operated restaurants.

Financial Highlights: Q1FY22

• Decent topline performance: The business's overall revenue increased to USD 488.6 million in Q1FY22 from USD 460.2 million in Q1 FY21, primarily due to stronger sales at restaurants run by the company, which was helped by the fourth-quarter 2021 purchase of 93 franchise-operated locations in Florida.
• Slippage in Profitability: As a result of a decline in operational profit, the net income fell from USD 41.37 million in Q1 FY21 to USD 37.40 million in Q1FY22. Offset by the successful debt restructuring in the second quarter of 2021.
• Robust Financial Position: The company generated significant cash as of April 3, 2022, which was up from USD 249.44 million as of January 2, 2022, to USD 741.22 million, along with an increase in investments and other assets, which led to assets/equity of 12.24 times in Q1FY22 compared to the industry median of 3.72 times. Following a successful debt-raising deal, it raised its share repurchase authorization from USD 150 million to USD 250 million.
  

FY2022 Outlook:

(Source: Company Filings) 

Key Risks

• Third-Party Dependence: The guidelines mentioned in the franchise and other agreements with Wendy's must be followed by franchisees while operating their locations. On the other hand, franchisees are independent contractors over whom WEN has no authority; they own, own, and manage the day-to-day operations of their restaurants. Hence these third parties' breach of their contractual obligations might have a negative financial impact on the business.
• Leveraged Balance Sheet: The company is exposed to balance sheet risk, given higher debt contribution in the total capital. Debt/Equity ratio at the end of Q1FY22 stood at 7.58x an increase from 6.77x at the end of Q4FY21. Further, the Net debt is ~25.60x of EBIDTA at the end of Q1FY22 compared to 11.06x industry median.

Valuation Methodology: Price -to-Earnings Per Share-Based Relative Valuation

(Source: Analysis by Kalkine Group)

Stock Recommendation:

The stock has declined by 22.71% over the past six months and is trailing from the lower end of the 52-week trading range of USD 24.48 to USD 15.76. We have valued the stock using the Price/Earnings-based relative valuation methodology and arrived at a target price of USD 20.62.

Based on the decent revenue matrix, customer demands, strong business model, strong cash position, associated risks, and current valuation, we recommend a "Hold" rating on the stock at the current market price of USD 17.76 as of June 22, 2022, at 09:20 AM PDT.

1-Year Technical Price Chart (as of June 22, 2022, at 09:20 AM PDT). Source: REFINITIV, Analysis by Kalkine Group 

Note 1: The reference data in this report has been partly sourced from REFINITIV.  

Note 2: Investment decision should be made depending on the investors' appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the valuation has been achieved and subject to the factors discussed above. 

Note 3: The report publishing date is as per the Pacific Time Zone.