Wendy's Remodeling Program Is A Worthwhile Investment

Apr.17.14 | About: The Wendy's (WEN)

Summary

Wendy's plans to remodel half of its 600 company-owned stores by the end of 2015.

Wendy's stock is down over 10% from its high, creating a desirable entry-point.

Wendy's recently announced a $275 million stock buyback plan.

There are growth stocks, there are value stocks, and then there are transformation stocks. Wendy's (NASDAQ:WEN) is in a multi-year transformation; remodeling and modernizing its restaurants; these renovations include flat-screen televisions, WiFi, fireplaces, lounge seating, and digital menus. Research has shown that remodeling a restaurant in this fashion has a direct correlation to increasing sales by an estimated 25%. However, the project would cost each restaurant roughly $700,000. The average Wendy's restaurant sees $1,456,000 in sales, so a 25% increase means $364,000 in additional revenue. So it would take about two years for this remodeling program to break even, with a profit beginning in year three. While this does require patience, those profits will certainly add up over time.

Mobile Payment Systems: Wendy's has begun to roll out a mobile payment system, which will allow customers to submit their payments by tapping into an attachment on their phones. This is consistent with its image activation program to modernize its business, and it is an excellent way to reach out to younger customers and tech-savvy clientele.

Product Innovation: Last year, Wendy's experienced a significant turnaround, going from a loss to a profit, thanks to its rollout of the Pretzel Burger. While the company has since revoked this item from its menu, this may be part of its strategy, as it was simply intended as a seasonal item, which created a lot of short-term excitement. If it had simply kept the item on the menu year-round, it may not have been perceived to be such a novelty, and therefore, may not have sold as well. While having the Pretzel Burger return on a seasonal basis in the future may be a possibility, there are also plans to roll out other new products, such as a Brioche Bun Sandwich. Wendy's has also demonstrated product innovation when it started to expand the flavors of Frosties, and even offering them in a waffle-cone. This shows that Wendy's has the ability to generate new ideas and products on a continuous basis, and that will be a valuable asset for the company in years to come.

Movement to hire better employees: A Michigan Wendy's Franchise has announced it is undergoing a major human resources push to "hire better employees." It is part of creating a "whole new brand," consistent with its image activation program. While this is easier said than done, it can be achieved through an increased focus on training, and possibly other incentives, such as higher pay. With high employee turnover and unsatisfied workers being the norm of the fast food industry, this can help Wendy's stand out from its peers. If this plays out successfully with this particular franchise, there is a possibility that this movement could spread company-wide as it proves to be a successful approach.

Cost Management: While inflation has forced some prices to rise, Wendy's has effectively transitioned from a "dollar menu" to a "Right-Price-Right-Size" menu, with prices ranging from $0.99 to $1.99. This has given budget-minded consumers more options to choose from, while giving Wendy's more flexibility in its pricing.

Wendy's has total assets of $4.32 billion, which exceeds its total liabilities of $2.4 billion. The company also has $1.92 billion in total equity.

Insider Confidence: In January, Wendy's announced a $275 million buyback plan. This shows that the insiders have faith and confidence in its plan to succeed.

Risks: Wendy's removing its popular seasonal items like the Pretzel Burger could hurt sales short-term. Wendy's is also trading at a frothy PE ratio of 74, which could make it vulnerable to a market pullback. While spending $700,000 to remodel restaurants may be a plausible idea for the corporate restaurants, it may be difficult to persuade franchise owners to do the same, as they tend to have fewer resources and less money to make such a transition work smoothly. There is also no guarantee that the estimated 25% increase in sales will happen as intended, as consumers can sometimes behave in unpredictable ways. Sometimes, consumers even resort to criminal behavior that may hurt the chain's reputation, which is exactly what happened in 2005, when a customer planted a human finger inside a bowl of Wendy's chili, generating media attention that ultimately hurt the chain's sales by $1.5 million.

While there are a lot of unknowns in this equation, I believe its effort to modernize will do a lot of good with its brand-imaging, and deliver a net positive effect on its profits.

Wendy's actions and renovation efforts have been very consistent with its mission statement, which provides a set of key guidelines to follow. Perhaps the guideline that is most fundamental to its success is:

  • QUALITY IS OUR RECIPE - We don't cut corners on our products, service, or employees!

Disclosure: I am long WEN. 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.