Company Reports

Wendy's is the second-largest QSR burger chain in the US behind wide-moat McDonald's, sporting a value proposition built around fresh and craveable products at competitive price points. The banner has benefited from a resurgence over the last few years, driven by the renewed launch of its breakfast platform, store reimaging, and strong value positioning. Stable same-store sales growth and decent cash-on-cash returns have underpinned mid-single-digit annual US revenue growth since 2018, with the firm prioritizing menu development, augmented digital capabilities, and an uptick in unit growth as its key strategic priorities. We continue to view international expansion as the least likely of the firm's initiatives to bear material fruit, but note that sizable development agreements in Asia-Pacific suggest that the Wendy's brand could prove strong enough to make a small foray into emerging international markets—though we still view success as unlikely in those where both wide-moat McDonald's and Burger King already maintain a strong position.

No-moat Wendy's reported decent first-quarter results against a tough backdrop, with digital sales soaring 30% annually and loyalty membership growing 40% to 6 million after a successful March Madness promotion. While online sales still comprise just 17% of total systemwide sales, progress is encouraging, and even incremental changes should help defend a restaurant economic model that has been challenged by surging inflation in commodity, labor, construction, and borrowing costs. Results were in line with our forecasts, and management maintained its full-year guidance, so we expect to lift our $20 fair value estimate by just a low-single-digit percentage, consistent with time value.

As we gear up for the release of first-quarter earnings, our top picks in the restaurant industry remain wide-moat McDonald's and wide-moat Starbucks, trading at 14% and 19% discounts to our $312 and $105 fair value estimates, respectively. While industry traffic has been depressed for two years, both brands boast strong digital platforms that allow them to defend transaction frequency without indiscriminate national discounting, and both benefit from scale-driven cost advantages that should allow them to meet the needs of the increasingly value-sensitive consumer without sacrificing financial performance. These are the two most important factors, in our view, that will distinguish the best and worst performers in our industry coverage over the coming years. The industry looks fairly priced in aggregate, trading at a 3% premium to our market-cap weighted fair value estimates. The aggregate figure masks a very bimodal return distribution: Brands like narrow-moat Wingstop (up 108% annually) and wide-moat Chipotle (74%)—which boast strong unit economics and have taken material industry transaction share—have materially outperformed brands like no-moat Wendy's (down 9%) and narrow-moat Papa John's (down 17%), which have not. Those top-performing brands are fully priced, trading at material premiums to our intrinsic valuation (163% and 52%, respectively), suggestive of meaningful execution risk.

Wendy's is the second-largest QSR burger chain in the U.S. behind wide-moat McDonald's, sporting a value proposition built around fresh and craveable products at competitive price points. The banner has benefited from a resurgence over the last few years, driven by the renewed launch of its breakfast platform, store reimaging, and strong value positioning. Stable same-store sales growth and reasonably competitive cash-on-cash returns have underpinned mid-single-digit annual U.S. revenue growth since 2018, with the firm prioritizing menu development, augmented digital capabilities, and an uptick in unit growth as its key strategic priorities. We continue to view international expansion as the least likely of the firm's initiatives to bear material fruit, but note that sizable development agreements in Asia-Pacific suggest that Wendy's brand could prove strong enough to make a small foray in emerging international markets—though we still view success as unlikely in those where both wide-moat McDonald's and Burger King already maintain a strong position.

We believe it's unlikely that no-moat Wendy's will meet its aggressive 2024 targets for 5%-6% systemwide sales growth, 3%-4% global comparable-store sales growth, and 100 basis points of restaurant margin expansion to 16%-17% in the United States. We agree with management that consumer health is improving, but we view ongoing price sensitivity, strong industry promotional activity, and a sharp difference in inflation between the already cheaper grocery channel and restaurants as pointing in a different direction than the firm's guidance. After digesting fourth-quarter results, which were modestly behind our own and FactSet consensus expectations, we plan to lower our $21 fair value estimate by a mid-single-digit percentage. Our 2024 assumption for $2.2 billion-$2.3 billion in sales is largely intact, though we plan to lower our $1.03 adjusted earnings per share target by about $0.10 to account for higher planned investments in breakfast marketing ($55 million over two years) and digital platforms ($15 million).

On Jan. 18, no-moat Wendy's announced that Kirk Tanner will replace Todd Penegor as CEO, effective Feb. 5. We expect that the incoming CEO's New Year's resolutions will include a laser focus on turning around the firm's comparable-store sales performance, increased emphasis on Wendy's fledgling digital business, and prioritization of store development as smaller competitors are forced to pull back on development aspirations. We don't anticipate making any revisions to our $21 intrinsic valuation for the firm, nor our Standard Morningstar Capital Allocation Rating in light of the transition, particularly since the firm maintained its full-year 2023 guidance.

As we survey the U.S. restaurant landscape looking toward 2024, the largest, chained restaurants with durable cost advantages look best positioned to outperform. We expect industry growth to remain low—just 1.3% annually in real terms through 2025, versus a long-term average of 2.5%. The sharp slowdown is predominantly attributable to slowing consumption spending, with pressured U.S. consumers already limiting restaurants’ ability to further increase prices and likely driving an uptick in industry promotional activity.

Wendy's is the second-largest QSR burger chain in the U.S. behind wide-moat McDonald's, sporting a value proposition built around fresh and craveable products at competitive price points. The banner has benefited from a resurgence over the last few years, driven by the renewed launch of its breakfast platform, store reimaging, and strong value positioning. Stable same-store sales growth and reasonably competitive cash-on-cash returns have underpinned high-single-digit U.S. revenue growth since 2018, with the firm prioritizing menu development, augmented digital capabilities, and a renewed international push as its three key growth drivers moving forward. We continue to view international expansion as the least likely of the firm's initiatives to bear material fruit, but note that sizable development agreements in Asia-Pacific suggest that Wendy's brand could prove strong enough to make a small foray in emerging international markets—though we still view success as unlikely in those where both wide-moat McDonald's and Burger King already maintain a strong position.

We don't expect to make any material changes to our $21.50 fair value estimate for no-moat Wendy's after digesting third-quarter earnings. The firm posted solid results, with $551 million in revenue and $0.27 in adjusted EPS edging our $538 million and $0.24 estimates, respectively, but with the firm maintaining its full-year guidance, we expect only a modest upward revision to our prior $2.14 billion and $0.95 diluted EPS full-year estimates. Shares trade at about an 11%-12% discount to our intrinsic valuation after a modest uptick in trading after the release.

The restaurant industry looks cheap to us for the first time since fall 2022, with the recent market correction creating a buying opportunity for long-term investors. Our coverage trades at a 7% cap-weighted discount to our intrinsic valuations, with wide-moat companies like Yum Brands, Starbucks, and McDonald's looking unusually alluring, each trading at a 10%-12% discount to our respective $139, $103, and $285 fair value estimates. We recognize that slowing same-store sales pose a near-term risk, but believe that large, quick-service operators with scale-driven cost advantages and strong digital touchpoints look poised to capture market share in this dynamic environment. Restaurants are more resilient than many investors realize, with companies that outperform on the basis of "value for the money" like McDonald's and wide-moat Chipotle even posting comparable-store sales growth over the course of the 2007-09 downturn. While we expect consumer spending to slow in 2024, we continue to maintain that the U.S. will avoid an outright recession and believe that investors seeking consumer cyclical exposure would do well to consider turning toward the restaurant industry at current prices.

Wendy's is the second-largest QSR burger chain in the U.S. behind wide-moat McDonald's, sporting a value proposition built around fresh and craveable products at competitive price points. The banner has benefited from a resurgence over the last few years, driven by the renewed launch of its breakfast platform, store reimaging, and strong value positioning. Stable same-store sales growth and reasonably competitive cash on cash returns have underpinned high-single-digit U.S. revenue growth since 2018, with the firm prioritizing menu development, augmented digital capabilities, and a renewed international push as its three key growth drivers moving forward. We continue to view international expansion as the least likely of the firm's initiatives to bear fruit, but note that sizable development agreements in Asia-Pacific suggest that Wendy's brand could prove strong enough to make a small foray in emerging international markets—though we still view success as unlikely in those where both wide-moat McDonald's and Burger King already maintain a strong position.

No-moat Wendy's second-quarter earnings fell short of expectations, with $538 million in sales and $0.22 in diluted EPS missing our respective $574 million and $0.28 estimates. The principal culprit was slowing comparable store sales growth in the U.S., with the firm's 5.1% print falling short of our 7.5% forecast as traffic (down 1%) posed a headwind. Slightly more concerning was the margin of Wendy's underperformance relative to category peers, with Burger King and McDonald's posting 8.3% and 10.2% U.S. same-store sales growth, respectively, in the most recent quarter. We suspect that Wendy’s relative underperformance is attributable to its lower-income clientele and predominately suburban footprint, and view cautious pricing—up just 5%—as sensible against that backdrop. As evidence, restaurateurs that increased prices more aggressively over the past few quarters, like narrow-moat Papa John's, have seen sharper drops in transaction volume, and we expect consumer restaurant occasions to become increasingly value-driven over the next few quarters. On balance, as we juggle the firm's earnings miss and the likely implications of an increasingly price-sensitive consumer—slower comparable store sales growth and increasing promotional volume—we expect to lower our $23 fair value estimate for the firm by a mid-single-digit percentage. Shares continue to look fairly valued.

Wendy's is the second-largest QSR burger chain in the U.S. behind wide-moat McDonald's, sporting a value proposition built around fresh and craveable products at competitive price points. The banner has benefited from a resurgence over the last few years, driven by the renewed launch of its breakfast platform, store reimaging, and strong value positioning. Stable same-store sales growth and reasonably competitive cash on cash returns have underpinned high-single-digit U.S. revenue growth since 2018, with the firm prioritizing menu development, augmented digital capabilities, and a renewed international push as its three key growth drivers moving forward. We continue to view international expansion as the least likely of the firm's initiatives to bear fruit, but note that sizable development agreements in Asia-Pacific suggest that Wendy's brand could prove strong enough to make a small foray in emerging international markets—though we still view success as unlikely in those where both wide-moat McDonald's and Burger King already maintain a strong position.

After a solid but unspectacular quarter that saw no-moat Wendy's maintain its full-year guidance and the medium-term targets it laid out on its fourth-quarter earnings call, we don't expect any material changes to our $23.50 fair value estimate, leaving shares fairly priced.

The restaurant industry has proven surprisingly resilient despite stout macroeconomic headwinds, but between normalizing consumer spending patterns, a widening value gap with the grocery channel, and early signs of price sensitivity, we believe that 2023 is shaping up to be challenging. Despite early indications of a strong first quarter, we continue to expect a softer second half of the year, limiting near-term margin recovery as restaurants are reluctant to outprice their core customer. To this effect, traffic and items per check have declined in each of the past 10 months industrywide—through February 2023—and we continue to view exclusively price-driven comparable store sales growth as a tenuous long-term strategy. We sport a carb-heavy value menu in the industry, with wide-moat Domino's and narrow-moat Toast representing our top picks, trading at 16% and 18% discounts to our $397 and $21.50 fair value estimates, respectively.

We believe that prudent adoption of digital ordering, restaurant software, and loyalty programs can yield meaningful benefits for the restaurateurs we cover as well as for astute investors who can identify today's digital leaders. We expect investments in technology to pave the way for food-service establishments to gain share from the grocery channel, settling just north of 55% of U.S. consumer food spending, ahead of our prior 50% estimate, as technology-driven cost savings enable restaurateurs to narrow the value gap with the cheaper grocery channel. The largest chains in our coverage are poised to disproportionately benefit from technology adoption; we forecast their share of total restaurant sales to grow by 200 basis points over the next five years, with wide-moat firms like Chipotle, Starbucks, and Domino's looking particularly well positioned. Investors looking for immediate-term opportunities should consider Domino's and narrow-moat Toast, which trade at roughly 16% and 17% discounts to our $397 and $21.50 intrinsic valuations, though we'd remain eager buyers of leaders like Chipotle and Starbucks at prices below our $1,550 and $103 fair value estimates.

Wendy's is the second-largest QSR burger chain in the U.S. behind wide-moat McDonald's, sporting a value proposition built around fresh and craveable products at competitive price points. The banner has benefited from a resurgence over the last few years, driven by the renewed launch of its breakfast platform, store reimaging, and strong value positioning. Stable same-store sales growth and reasonably competitive cash on cash returns have underpinned high-single-digit U.S. revenue growth since 2018, with the firm prioritizing menu development, augmented digital capabilities, and a renewed international push as its three key growth drivers moving forward. We continue to view international expansion as the least likely of the firm's initiatives to bear fruit, but note that sizable development agreements in Asia-Pacific suggest that Wendy's brand could prove strong enough to make a small foray in emerging international markets—though we still view success as unlikely in those where both wide-moat McDonald's and Burger King already maintain a strong position.

Given that no-moat Wendy's pre-released its fourth-quarter and full-year earnings in January, there was little in the backwards-looking results that upended our expectations. The firm reported ongoing strength in comparable store sales at home and abroad, with a modest uptick on a three-year stacked basis (relative to prepandemic) in both segments, suggesting remarkable sales durability considering macroeconomic headwinds. While 2023 guidance was conservative, with 6%-8% systemwide sales growth in line with our 7% estimate but $0.95-$1.00 in adjusted EPS missing our $1.07 forecast, we still expect to raise our $22 fair value estimate by a mid-single-digit percentage—consistent with an uptick in medium-term unit growth and royalty rates, and slightly lower capital expenditure needs than initially contemplated. We also plan to raise our Uncertainty Rating to High from Medium for the restaurant operator.

We expect sluggish sales growth to represent the key issue for the restaurant industry in 2023, following a year of investor concern regarding inflated input costs and margin compression. Though we see modest upside in wide-moat Domino's and view wide-moat Chipotle shares as fairly valued, the industry trades at a 5% market-cap weighted premium to our fair value estimates, suggesting that current entry prices are less than salient.

If investors take one thing from no-moat Wendy's preliminary fourth-quarter earnings release, it is that the firm's activist investor saga is set to end with modest concessions rather than an acquisition, with the burger chain planning to make modest administrative cost cuts and materially increase its dividend. The firm's planned $0.25 quarterly cash dividend represents a 100% increase and will consume almost the entirety of our projected $1.02 in diluted earnings per share for 2023, while representing a mid-4% yield at Jan. 13—among the best in the industry. As we digest the results, we don't expect any consequential changes to our $22 fair value estimate. We see little near-term risk to the firm's maintenance of the dividend, given the $780 million in cash and equivalents on the balance sheet at year-end.