Wendy's rejects a takeover offer, scales back breakfast and still sees its stock surge

By Bill Peters

Wendy's plans to go it alone, and analysts say the company has 'significant work ahead'

Wendy's last week rejected a takeover offer from Nelson Peltz's Trian Fund Management.

Even as Wendy's falls behind in the battle for burger superiority, Wall Street, for now, appears to like the company just the way it is.

Wendy's shares have surged 37% over the last 11 trading days, without logging a loss in any of those sessions. The stock finished regular trading hours unchanged on Wednesday, hovering at around $8. The rally has essentially wiped out Wendy's year-to-date loss, though shares remain well below peaks of more than $20 reached earlier this decade.

The gains in November come after last week's better-than-expected quarterly results, signs of progress from a new a multiyear turnaround plan and the rejection of a takeover offer from activist investor Nelson Peltz.

When the chain reported third-quarter results last Thursday, its same-store sales fell 5.2% in the third quarter. But performance on that key metric, which measures sales at older, established locations, wasn't as bad as Wall Street expected. Management touted improvements from the turnaround strategy, called Dave's Way, focused on strengthening restaurant traffic and profits.

"Our third-quarter results reflect a business that is not yet where it needs to be, but one where our early actions under Dave's Way are beginning to show progress," CFO Steve Cirulis said on the company's post-earnings-report conference call last week.

That plan, new CEO Bob Wright said on the call, involves a new menu-board design in the U.S., a new advertising campaign, and a decision to make breakfast service optional for U.S. restaurants - after sales and profits proved to be uneven at that time of day. Wendy's will also try to rebuild its menu with a focus on fresher and higher-quality ingredients for its main menu items.

Also Thursday, Wendy's announced that a committee of independent directors rejected a $1.4 billion takeover offer from Peltz's Trian Fund Management and other investors. Wendy's said the offer "substantially undervalues" the chain and the "significant upside" expected from the turnaround plan named for founder Dave Thomas. The company also adopted a shareholder-rights plan, often referred to as a "poison pill," intended to fend off a hostile takeover.

Peltz, in making the offer, said that Wendy's "sits at a critical juncture," as people think twice about dining out while juggling a higher cost of living. He said fixing the company would require significant investment.

Earlier this year, Wright called out "quality degradation" in its menu, an overdependence on one-off promotions and a value menu that had gotten too complicated. He said he would "rebuild the menu at the ingredient level" and rethink how Wendy's prices its items.

Analysts said progress in the turnaround effort was encouraging but observed that Wendy's still had its work cut out. "The new management team is moving with urgency on [its] turnaround efforts, dropping the breakfast effort, refocusing the menu on the core offering, adding talent where needed and emphasizing the quality message," BTIG analyst Peter Saleh said in a research note on Friday.

"While encouraged by the early progress, we would like to see more tangible evidence that traffic will turn positive, and these efforts will resonate against larger, emerging and revitalized competitors before becoming more constructive," he added.

KeyBanc analyst Christopher Carril, in a note on Sunday, echoed those remarks.

"In our view, there remains significant work ahead for [Wendy's], and at a time when the macro remains uncertain," he said.

-Bill Peters

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11-12-26 0805ET