Wendy's: Targeting Future With Re-Imaging And Value Meals

| About: The Wendy's (WEN)

Wendy's Company (NYSE:WEN) recently posted its fiscal 4Q earnings, which were above Wall Street's expectations. The operating income increased to ~$56.8 million for this quarter, which was up from $33.9 million a year ago. The company posted a ~2% increase in revenue at ~$629.9 million from ~$615 million last year. Wendy's also reported its preliminary results for the full year 2012, which shows a ~1.6% growth in its same-store sales in North America. These figures clearly give an idea that the company's efforts toward brand positioning have started working now and have paid off well in 2012. The stock price has reacted positively to the results and has gained ~12% in the last 13 days. I think this stock has already seen its support level in October and the investors should see an uptrend for the coming months. Let's have a look at how the company is planning to capitalize its strategies in 2013.

Revamp and Restore

Wendy's is currently laying its major focus on its re-imaging program. It has decided to invest ~$10 million in order to re-image its 200 restaurants in 2013 totaling to 600 by 2015. Wendy's will be expanding its re-imaging program as this program has shown successful results. The re-modeled stores in 2012 have shown similar sales increases just as those re-modeled in 2011 averaging ~25%. This increase was from all the day parts including dining room sales (+110%), carry parts (+55%) and drive thru (+15%). The current re-imaging will not be limited to the renovations in the interiors and exteriors but will also be inclusive of improvement in the quality of service by replacing the staff at most of the stores. The re-imaging campaign will also include a new logo for Wendy's, which is part of the overall brand reconstruction. About 100 franchise remodels are planned in 2013 with about 40 new units to be opened with the new design. While some of the reimages will be the same as Tier I designs, the others will be of Tier II and Tier III designs. Among these three Tiers, Tier I remodeling will be the most expensive with an investment of ~$750,000 and Tier II and Tier III will be amounting to a smaller investment of $550,000 and $375,000 respectively.

Value Meals

The company remains cautious over its menu and is now focusing on providing low priced items. The existing policy of premium value products will be changed to cost value for price-conscious customers. The program, also called as the "right size, right price" menu, will be introduced in 2013 and will offer six items that will be priced around 99 cents. The idea behind this was that as the cost of cheese, meat and other products are increasing this revamped menu will provide cost-conscious customers more options and will give the company pricing flexibility. The breakfast items will also be sold in the North East and many other markets.

Peer Review

On the low-price menu front Wendy faces stiff competition from McDonald's Corp. (NYSE:MCD). After reporting a decline of 2% in October sales, McDonald's ramped up its promotional strategy by providing low-priced menu options such as $1 sausages, McMuffins and coffee. Also, the Dollar menu and the extra value menu, which includes items like 20 Chicken McNuggets for $4.99, were introduced. This strategy worked out well as the company saw a lift in the November sales of about ~2.5%. This strategy by the company was in line to increase its sales.

Another QSR, Buffalo Wild Wings Inc. (NASDAQ:BWLD), continues to be creative with its menu depending on the season, which will help it in increasing same-store sales. In 3Q12 it saw a tremendous response from its customers as it had two menu inserts to highlight the new menu offerings that include three new flat breads, Thai Curry Chicken, Caribbean Barbecue Pork and Five Cheese Italian Pepperoni, as well as two new summer salads. And among these pepperoni flatbread and chopped salad became permanent menu items for 2013. In November it introduced a gift card program and expanded its distribution in 11,000 grocery locations as this program in 1Q12 resulted in a ~2% increase in same-store sales. And, it is expected to bring in incremental sales in 1Q13 as in January 2013 it introduced a new menu insert, which will feature three hearty stacked burgers, including the new Italian burger.

What Lies Ahead?

For 2013, Wendy expects SSS growth for North America company operated restaurants to be around 2%-3%. On the expansion side, the company is planning to open 25 new restaurants and 40 franchise units in 2013. The company's growth plans are targeted domestically for the next few years. I feel this is a good idea as by then its capex spending will start paying off. In 4Q12, the company's EBITDA increased by ~19% to ~$95.9 million, which was due to the high restaurants margins. I think the company's three-step plan, which it will focus on till 2016, will further enhance its EBITDA. It includes achieving 3% SSS growth in North America, the brand re-imaging campaign to continue and further expansion of new restaurants. To sum up, I believe with the above discussed strategies, Wendy's will be able to achieve its EPS target, estimated to be between 18 cents to 20 cents, which is a ~23% increase year/year.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.