The Wendy’s Company

The Wendy’s Company Details

The Wendy’s Company (NASDAQ: WEN) is a major quick-service restaurant chain in the United States; with USD 11.1 billion in systemwide sales in 2021, It overtook Burger King (USD 10.3 billion). The company now only maintains the burger brand, producing revenues throughout a footprint of approximately 7,000 total units in 30 countries after divesting Tim Horton's (2006) and Arby's (2011). The sale of hamburgers, chicken sandwiches, salads, and fries at Wendy's locations controlled by the corporation produces income, franchise royalty and marketing fund payments made by its 94% franchisee-owned restaurants and franchise flipping and advising fees.

Latest News:

• Wendy’ and Tiger Pistol Partnership for Collaborative Advertising: The Wendy's Company and Tiger Pistol, the top collaborative advertising platform that offers local activation at scale, announced a collaboration on June 16, 2022, to fuel each other's national-to-local social advertising campaigns.
• Launch of Products on Customer Demand: On June 6, 2022, Wendy's announced that two delectable berry dishes had been added to the menu, including the return of the seasonal Summer Strawberry Chicken Salad and the limited-time Strawberry Frosty.
• Re-Affirming Outlook: On May 26, 2022, WEN updated its forecast for 2022. This update was motivated by the company's strong momentum, excellent execution of its strategic goals, and increased margin of its company-operated restaurants.

Financial Highlights: Q1FY22

• Decent topline performance: The business's overall revenue increased to USD 488.6 million in Q1FY22 from USD 460.2 million in Q1 FY21, primarily due to stronger sales at restaurants run by the company, which was helped by the fourth-quarter 2021 purchase of 93 franchise-operated locations in Florida.
• Slippage in Profitability: As a result of a decline in operational profit, the net income fell from USD 41.37 million in Q1 FY21 to USD 37.40 million in Q1FY22. Offset by the successful debt restructuring in the second quarter of 2021.
• Robust Financial Position: The company generated significant cash as of April 3, 2022, which was up from USD 249.44 million as of January 2, 2022, to USD 741.22 million, along with an increase in investments and other assets, which led to assets/equity of 12.24 times in Q1FY22 compared to the industry median of 3.72 times. Following a successful debt-raising deal, it raised its share repurchase authorization from USD 150 million to USD 250 million.
  

FY2022 Outlook:

(Source: Company Filings) 

Key Risks

• Third-Party Dependence: The guidelines mentioned in the franchise and other agreements with Wendy's must be followed by franchisees while operating their locations. On the other hand, franchisees are independent contractors over whom WEN has no authority; they own, own, and manage the day-to-day operations of their restaurants. Hence these third parties' breach of their contractual obligations might have a negative financial impact on the business.
• Leveraged Balance Sheet: The company is exposed to balance sheet risk, given higher debt contribution in the total capital. Debt/Equity ratio at the end of Q1FY22 stood at 7.58x an increase from 6.77x at the end of Q4FY21. Further, the Net debt is ~25.60x of EBIDTA at the end of Q1FY22 compared to 11.06x industry median.

Valuation Methodology: Price -to-Earnings Per Share-Based Relative Valuation

(Source: Analysis by Kalkine Group)

Stock Recommendation:

The stock has declined by 22.71% over the past six months and is trailing from the lower end of the 52-week trading range of USD 24.48 to USD 15.76. We have valued the stock using the Price/Earnings-based relative valuation methodology and arrived at a target price of USD 20.62.

Based on the decent revenue matrix, customer demands, strong business model, strong cash position, associated risks, and current valuation, we recommend a "Hold" rating on the stock at the current market price of USD 17.76 as of June 22, 2022, at 09:20 AM PDT.

1-Year Technical Price Chart (as of June 22, 2022, at 09:20 AM PDT). Source: REFINITIV, Analysis by Kalkine Group 

Note 1: The reference data in this report has been partly sourced from REFINITIV.  

Note 2: Investment decision should be made depending on the investors' appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the valuation has been achieved and subject to the factors discussed above. 

Note 3: The report publishing date is as per the Pacific Time Zone.

Disclaimer - This report has been issued by Kalkine Pty Limited (ABN 34 154 808 312) (Australian financial services licence number 425376) (“Kalkine”) and prepared by Kalkine and its related bodies corporate authorised to provide general financial product advice. Kalkine.com.au and associated pages are published by Kalkine.

Any advice provided in this report is general advice only and does not take into account your objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your objectives, financial situation and needs before acting upon it.

There may be a Product Disclosure Statement, Information Statement or other offer document for the securities or other financial products referred to in Kalkine reports. You should obtain a copy of the relevant Product Disclosure Statement, Information Statement or offer document and consider the statement or document before making any decision about whether to acquire the security or product.

You should also seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice in this report or on the Kalkine website. Not all investments are appropriate for all people.

The information in this report and on the Kalkine website has been prepared from a wide variety of sources, which Kalkine, to the best of its knowledge and belief, considers accurate. Kalkine has made every effort to ensure the reliability of information contained in its reports, newsletters and websites. All information represents our views at the date of publication and may change without notice.

Kalkine does not guarantee the performance of, or returns on, any investment. To the extent permitted by law, Kalkine excludes all liability for any loss or damage arising from the use of this report, the Kalkine website and any information published on the Kalkine website (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine hereby limits its liability, to the extent permitted by law, to the resupply of services.

Please also read our Terms & Conditions and Financial Services Guide for further information.

On the date of publishing this report (referred to on the Kalkine website), employees and/or associates of Kalkine and its related entities do not hold interests in any of the securities or other financial products covered on the Kalkine website unless those persons comply with certain safeguards, procedures, and disclosures.

Kalkine Media Pty Ltd, an affiliate of Kalkine Pty Ltd, may have received, or be entitled to receive, financial consideration in connection with providing information about certain entity(s) covered on its website.