With an EPS of $.05 and their stock price at $4.26, Wendy’s (WEN) is clearly in need of a turnaround. Through their current “Image Activation” project, Wendy’s is updating its restaurants with natural lighting, Wi-Fi, flat screen TVs, fireplaces and different seating options. Wendy’s has also unveiled a new modern logo, which will be implemented in March 2013.
Customers will soon be able to choose from flat breads and whole-wheat buns as Wendy’s tries to push into the “top end” fast-food niche in an effort to compete with restaurants such as Panera (PNRA) and Chipotle (CMG). Wendy’s CEO Emil Brolic has noted a 25% increase in sales at renovated restaurants and plans to improve half of the 1,425 company owned locations by 2015.
Wendy’s new advertising campaigns featuring Wendy Thomas and “Red” are also creating some buzz with consumers. Meanwhile, Wendy’s has claimed the title for fastest drive through service with an average time of 129.75 seconds.
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Although Wendy’s has made some smart strategic moves with its advertising and rebranding efforts, this won’t translate to the bottom line immediately. Wendy’s investments will increase the already growing cost of sales and cause larger depreciation expenses, both lowering net income. Sales increases won’t materialize until after construction but the expenses will hit the income statement over this next year.
Operating income already decreased by $10.46 million in 2011 with costs outgrowing revenues, and Wendy’s operating margin is only 3.88% compared to 27.05% of its peers. In the short run, Wendy’s doesn’t jump out as a good buy given their low metrics and a P/E ratio of 122.4x. However, they do deserve to be watched over the next few years to see if their investments are successful and they start to capture more market share while reigning in costs.
Written by Nick Sousa