Wendy’s Slumps as Wall Street Jeers a Fourth Breakfast Revamp

(Bloomberg) -- Wendy’s Co. shares sank Tuesday by the most in almost six years as the burger chain reduced its earnings outlook, blaming increased investment in expanding its breakfast offerings nationwide. The forecast cut was a disappointment, leaving analysts mixed on Wendy’s fourth attempt at making breakfast palatable.

Wendy’s had tried its hand at breakfast three other times, the first time being more than three decades ago. “The question on everyone’s mind is will it be different this time? Time will tell,” said Gordon Haskett analyst Jeff Farmer in a note. Still, he and SunTrust Robinson Humphrey analysts are hopeful that management gets it right this time.

On the other hand, BTIG, Guggenheim and Bloomberg Intelligence were more cautious, with BTIG and Guggenheim analysts downgrading the stock. Competition, free cash flow and margin hits were some of the reasons cited.

Shares plunged more than 10%, the most since late 2013, on more than twice the average daily trading volume. Today’s slump lowers the year-to-date gain to 27%, just narrowly outperforming the S&P 1500 Restaurants Index’s 26% gain.

Here’s more of what analysts had to say.

BTIG, Peter Saleh

• Downgrades to neutral from buy; “while breakfast remains a major hole in the concept’s offering, we believe this launch could prove to be an uphill battle much like the previous attempt”
• The analyst is cautious given the required upfront investment plus “uncertain payoff, additional labor needs at a time of already low availability, necessity to take market share from established competitors like McDonald’s and general difficulty of daypart expansion in the industry”
• Also notes Wendy’s “brief release that didn’t elaborate on why this time will be different”

Bloomberg Intelligence, Michael Halen

• “Stiff competition, especially from McDonald’s, and real estate locations that are better suited to attract lunch and dinner customers will limit the benefits from Wendy’s breakfast expansion,” according to Halen
• Same-store sales and average unit volume will get a boost beginning in 2020, but restaurant-level margin will likely contract further

Gordon Haskett, Jeff Farmer

• Wendy’s blamed a “flawed menu design and ineffective testing” for its first two breakfast failures; the company pointed to shortfalls in “local execution and local marketing” for the third failure, also noting that its coffee offering failed to impress customers
• The analyst is “optimistic” about Wendy’s latest breakfast attempt given its “far more concentrated franchise ownership base and our view that the franchisee system recognizes that even a modestly successful breakfast launch is the highest return investment it can make”
• With just “modest” breakfast success, Farmer sees a “healthy upward” comparable sales revision opportunity that Wendy’s shares aren’t discounting; in a bull case scenario, Farmer envisioned a low single-digit comparable sales tailwind from 2020 to 2022
• Rates buy; price target $23 per share

SunTrust Robinson Humphrey, Jake Bartlett

• The breakfast roll out could drive “meaningful upside” to same-store sales and Ebitda estimates in 2020 and beyond and is “worth the risk”
• Investors are likely to be skeptical given past failures at breakfast; Wendy’s management must have made a strong case for its latest effort in order to get what Bartlett said is “apparent buy-in” from franchisees, which is “encouraging”
• Rates buy; boosted his price target to $24 from $22 on a lower interest rate environment

Stephens, Will Slabaugh

• While weary of the “highly competitive nature and brand loyalty” associated with breakfast, Slabaugh expects the new launch to have a “more targeted and high quality menu (we assume drive-thru only) and lower break-even than before”
• The company contribution of $20 million in investments likely eased franchisee concerns and encouraged participation
• The launch is likely to weigh on free cash flow in 2020, and possibly beyond, as marketing spending for lunch/dinner is likely maintained and breakfast messaging becomes incremental
• Rates overweight, price target $22

Guggenheim, Matthew DiFrisco

• Downgrades to neutral from buy on belief that entering breakfast adds “risk to shares” and dilutes the near-term free cash flow generation
• While breakfast could lead to longer term system sales, DiFrisco views the day-part expansion as “a sign of slowing near-term momentum in the core lunch and dinner business”

To contact the reporter on this story: Janet Freund in New York at jfreund11@bloomberg.net

To contact the editors responsible for this story: Catherine Larkin at clarkin4@bloomberg.net, Scott Schnipper

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