Longbow Research: Wendy's Could Fall Short Of Consensus In Q4

Longbow Research upgraded Wendys Co WEN  to Buy in September. Four months later, the firm is reversing its call. 

The Analyst

Longbow Research's Alton Stump downgraded Wendys' stock rating from Buy to Neutral with an $18 price target.

The Thesis

Conversations with multiple domestic Wendys' franchisees revealed that it's likely the fast food burger chain's fourth-quarter same-store sales rose 1-1.5 percent, below the consensus estimate of 2 percent and Longbow's 2.6-percent projection, Stump said in a note. (See the analyst's track record here.) 

On a two-year stacked basis, 1-1.5 percent comp growth in Q4 implies a gain of 1.8 to 2.3 percent, a 100-basis-point deceleration at the midpoint sequentially, Stump said. Evaluating on a three-year stacked basis implies growth of 6.8 to 7.2 percent, which marks an uptick from a reported three-year stack of 6.5 percent in the third quarter, he said. 

Franchised comps did improve "significantly" after the chain added the Double Stack back to its four/$4 combo in early December, the analyst said. Same-store sales were likely running at flat-to-0.5 percent during the first two months of the fourth quarter, he said. 

"We now expect Wendy's to miss consensus comp forecasts for 4Q17," Stump said. "However, we are encouraged by the fact trends have improved since early December and expect the company's expanded four/$4 offering as of last week to drive meaningful same-store sales growth upside over the course of 2018." 

Price Action

Shares of Wendys were trading higher by around 0.7 percent midday Friday at $17.36. 

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