Wendy’s Growth Story Has Come To An End

Wendy’s Falls On Weak Results And Guidance 

Wendy’s (NASDAQ: WEN) is still growing but the growth story propelling the stock has come to an end. The company’s Q1 earnings report reveals that not only is revenue growth slowing in the face of a growing store count but inflation continues to cut into the bottom line. The company’s FCF fell more than 50% this quarter on a combination of factors that include higher commodity costs, higher labor costs, and a lower comp-customer count that suggest higher prices are having an impact on demand, be it higher prices for Wendy’s burgers, higher prices for gas, or higher prices for groceries. The takeaway for us is that Wendy’s share price is going to have a tough time in the months ahead. 

Wendy’s Misses On The Top And Bottom Lines 

Wendy’s would have had a good quarter if not for those pesky analysts and their estimates. The company reported $488.6 million in net revenue for a gain of 6.2% over last year, the problem is that growth missed the Marketbeat.com consensus figure by 135 basis points and there is other bad news as well. 

On a segment basis, sales are up 2.4% in the US on a 1.1% comp while international sales are up 19.2% on a 14% comp. Digital, one of the pillars of the growth story, grew as well and is now more than 10% of the net. Higher prices played a part in the gains as did new store openings. The company opened 90 new stores this quarter to set a record and is on track for 5% to 6% restaurant growth this fiscal year. 

Moving down to the earnings, the news gets worse. The company reported a 540 basis point contraction in restaurant margin that left earnings down 15% from last year and contributed to a 54% decline in FCF. On the bottom line, the GAAP $0.17 missed the consensus by $0.02 and contributed to the weak guidance. Management is expecting 6% to 8% revenue growth which sounds great until you factor in 6% restaurant growth and it starts to look a little tepid. As for earnings, the EPS is expected in a range of $0.82 to $0.86 which is in line with the consensus of $0.84 and no catalyst for share prices. As for risks, we view the risks as balanced although we are biased toward the downside right now. 

Wendy’s Capital Returns Are Still Expected 

Wendy’s is a relatively high-yielding dividend growth stock and one that buys back shares as well. The stock yields about 3.0% after the post-release decline in share prices and it comes with an outlook for growth. The company has been steadily increasing the payout over the past two years and just got it above the pre-pandemic level while payout out about 55% of earnings. The balance sheet doesn’t have any red flags either but debt is on the rise. The company just raised another $500 million that it is using to shore up its cash balance and repurchase stock. The repurchase authorization was increased by $150 million bringing the total to $250 million, $23 million of which has been used. 

The Technical Outlook: Wendy’s Market Capitulates 

Price action in Wendy’s fell more than 10% in the wake of the earnings release and has the look of capitulation. If so, this means the bottom is in for the stock and a base will soon start to form. In that scenario, we see the stock forming support at the $16.00 level and moving sideways over the next few months. If no, and Wendy’s continues to fall, price action should move below $16 fairly soon and could then move down to the $12.50 range where it would become an even better buy.