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The Wendy's Company (NASDAQ:WEN) is in the midst of a transformation. Earlier, the company was known for its best-tasting burgers, salads and chicken sandwiches. However, over the past decade, the company has lost ground to its competitors. In order to gain back some of the lost market share it launched its "Image Activation Program" in 2011 and is going to continue with it in 2013 to attract more customers to its stores. The launch of a "Right Price and Right Size" menu is also a step toward providing higher-quality products in the value segment. It is also making strategic changes in its menu with dual pricing methodology, which will provide more flexibility to the customer to choose from the options of different price ranges. These are some crucial steps, which were sales drivers for the company in 1Q13 and will continue to have a positive impact on the sales. Here's a look at some of these points in detail.

Image Activation Program can be a significant long-term positive as it is rolled out across all the stores

Image Activation Program is a part of the company's rebranding process and "Recipe to Win" strategy, which also includes Wendy's new logo, updated menu boards, stylish uniforms, restaurant signage new innovative products and packaging. Wendy's launched its "Image Activation Program" in 2011 to upgrade its interiors and exteriors. It has re-imaged 60 stores in 2012 and is targeting to renovate 100 company owned stores by the end of 2013. It is expecting image activation of 20% of the total system and half of the company owned stores by 2015. This re-imaging is fit for the "cut above" positioning of the brand and will attract new customers to the stores. The company has witnessed an almost 25% increase in sales in the stores that have undergone image reactivation. This image transformation with improved exteriors and interiors will be traffic drivers for the company as it is rolled out in the remaining stores.

"Right Price Right Size" menu with dual pricing is a right step to attract value customers

The company has refocused on the "Value" product offering to drive sales this year. It has launched the "Right Price Right Size" menu in the first quarter. This launch was critical after inconsistent execution and poor performance of its value offerings in 2012. In this new menu it is following a dual pricing strategy where six products are priced at $0.99 and eight items ranged between $1.19 and $1.79. This price flexibility will allow the company to offer higher-quality products in the value segments. This will differentiate its offerings and will help the company to achieve higher margins.

Recent menu changes will increase profitability

The management has taken a decision of discontinuing the breakfast from most of its stores. From the profitability point of view, breakfast has been removed from the menu in most of the non-performing markets but will continue in 370-400 stores where there is a demand for breakfast. It has tried to come up with a different menu in the last couple of years but many stores were still losing money in the morning. Discontinuing breakfast will help improve profitability of these stores. In addition to discontinuing breakfast, the company continues to make menu changes to cater to customer requirements. Late in 1Q13, it successfully introduced Flat Bread Grilled Chicken Sandwiches to its menu and it is expected to have a positive impact on the sales.

Peer Analysis

Burger King Worldwide (BKW) and McDonald's (NYSE:MCD) are two immediate competitors of Wendy's. Burger King Worldwide is moving toward a franchise business model for better operating margin in the future. It is targeting 100% franchise stores by the end of 2013. The management of the company is also encouraging franchisees to undergo a low-cost remodeling program. It is also going for global opportunities by entering into JVs. In 2012, it signed JVs in China, Mexico, South Africa, Russia and Central America. It has also issued seven master franchise contracts in the emerging markets and Europe. On the menu, Burger King is offering a good mix of value and premium products. In 4Q12, new product launches such as Chicken Parmesan sandwich, Cinnabon Minibon Rolls and a digital menu board introduction were sales drivers.

McDonald's is another big player in the Burger segment. McDonald's is promoting its value offerings in the sluggish European market. It has introduced value products such as Mc Deal and combo offers with a "Casse croute" menu in Europe. In the APMEA market, the company is focusing on store growth and customized local offerings to increase its presence in the region. In the U.S., new product launches like Fish Mc bites, Filet-O-fish sandwich and Chicken Wings in some markets is expected to drive sales for it in 2H13. In the value products, its "dollar menu" will help it to increase footfalls in the stores.

Here's a look at some of the key valuation metrics for these companies:

Company

Dividend yield

P/S ratio

Forward P/E

The Wendy's

2.77%

0.91

27.33

Burger King

1.28%

3.34

20.65

McDonald's

3.05%

3.67

16.12

Source: Google Finance

From the investment perspective, McDonald's has been a consistent performer suited for investors with a low-risk appetite while Burger King's investors are betting on its transformation toward the franchisee model. Wendy's is more suitable for investors with a high-risk, high-return appetite. Its price-to-sales ratio is lowest among its peers and the stock can see a good upside if its turnaround is successful.

Conclusion

Wendy's is trying hard to regain its "Cut above" brand positioning. The company has taken several steps in the right direction like improving interior and exteriors, pulling off breakfast from all non-performing markets, and the introduction of "Right Price Right Size" menu in 1Q13. These decisions are expected to drive top line and bottom line growth of the company over the next several quarters. I recommend the stock for the investors with a high-risk, high-return appetite and a medium-term horizon.

Source: ImageActivation

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.

Source: Why You Should Bet On Wendy's Turnaround