Wendy’s Earnings: Earnings Miss but Strategic Roadmap Looks Sensible

No-moat Wendy’s WEN 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 has been astutely managed throughout the pandemic, and we expect that the firm’s cautious approach to pricing, investments in operations, and recent emphasis on digital capabilities will drive mid-single-digit (5%-6%) growth in systemwide sales through 2027 despite possible near-term macroeconomic headwinds. The firm’s revamped store format and development incentive programs render an inflection point in unit development viable, and we continue to forecast meaningful operating margin expansion (into the mid-20s) as Wendy’s total revenue shifts toward asset-light international markets.