Analyst Sees Wendy's Playing Catch-Up, Needs Stronger Focus on Tech, Talent & Global Expansion

J.P. Morgan analyst Rahul Krotthapalli reiterated a Neutral rating on the shares of Wendy’s Co WEN with a price target of $17.00.

Wendy’s first in-person investor update since 2019 featured CEO Kirk Tanner reflecting on his first year and outlining a strategy for the brand’s turnaround.

With 7,240 units and under $15 billion in global sales, Wendy’s lags behind competitors like McDonald’s Corp, KFC, and others, said the analyst.

The company has a less developed international presence, with around 82% of units and 87% of sales in the U.S. This, coupled with a sub-1x sales/investment ratio, has hindered growth.

Wendy’s international markets, excluding Canada, have struggled to sustain the necessary investments for scaling.

The total free cash flow (FCF) generation for the next four years, accounting for the full capital intensity of the business, is expected to be over $650 million, compared to a comparable outlook of around $700-800 million or the company’s CFO estimate of $1.1-1.2 billion based on base capital expenditure definitions.

The analyst would have appreciated a more thorough discussion on improving the sales/investment ratio and unit economics, as well as a deeper focus on the crucial role of technology and talent in Wendy’s brand turnaround.

The focus was on boosting the equity story by revitalizing the business and brand momentum through various topline and operational initiatives.

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According to the analyst, Technology is becoming more standardized, while talent is still scarce in the industry, which is quickly adapting to upskill and enhance all areas of the business using AI.

Attracting and retaining highly skilled engineers and data scientists is challenging, especially when competing with QSR peers with much larger global sales.

Around $150 million in capital expenditure over the next four years is allocated to scaling digital capabilities and modernizing the tech stack to restart growth.

This is also supported by a significant increase in general and administrative (G&A) investments, including a ~$25 million increase in F25, with limited near-term leverage, per the analyst.

The analyst highlighted that investments are being made to speed up the deployment of digital menu boards (currently in ~300 stores), Voice AI-enabled drive-thrus (in ~100 stores), and digital kiosks (handling ~75% of in-store dining transactions).

A new performance matrix is being implemented across the U.S. system, focusing on customer visits/frequency, customer satisfaction, operations, people, and financial excellence, with increased oversight on franchise accountability.

Customer segmentation is driving menu innovation, with new lemonade flavors and formats planned for this summer, targeting the Hispanic (23% of QSR traffic) and Gen Z (21%) cohorts.

The analyst further noted that Families (35% of QSR traffic) are another area of focus as Wendy’s has lost share in the past few years, which will be a focus area.

Canada leads the international segment, accounting for over 45% of its sales and about 35% of its units. The international business currently represents around 13% of system sales and 18% of units, with plans to grow at an 11% unit CAGR, reaching approximately 2,000 locations (24% of system units) by 2028.

The update lacked a deeper discussion on improving the sales/investment ratio and technology and talent investments, which are crucial for the brand’s future success and confidence in its growth plans, similar to its modest 3-4% global unit growth target, noted the analyst.

Price Action: WEN shares traded lower by 2.54% at $15.19 at last check Tuesday.

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