Wendy’s Needs More Clarity Than an Earnings Report Can Provide

Wendy’s (NASDAQ:WEN) will report earnings on May 12 before the market opens. The whisper number suggests the company will narrowly beat on the bottom line with earnings per share (EPS) coming in at 15 cents per share which is a penny higher than the consensus estimate of 14 cents. The company is also projected to deliver $443.90 million in revenue. That would be a year-over-year gain of nearly 10%.  

However, WEN stock has made two runs at cracking the $23 per share level and been beaten back both times. Will the earnings report spark a third run that could be the charm? Or is the stock priced fairly right now? Those are questions that I’m not sure investors will get clarity on in tomorrow’s report.  

A Crystal Ball Would Come in Handy 

The post-pandemic society is changing the definition of take-out food. I suppose some could say we should have seen this coming. Food delivery services such as  DoorDash (NYSE:DASH) and GrubHub (NYSE:GRUB) were pandemic winners as takeout became the only option available. 

And the pandemic was particularly bad timing for Wendy’s because it had just begun competing in the breakfast space. But as the morning commute became non-existent so too did demand for the company’s offerings.  

The point that I’m making is that it will take a few quarters until investors get a better picture of what the landscape looks like for traditional fast-food restaurants. And inflation may play a key role in that. From the consumer side, rising inflation may lower the average consumer’s purchasing power, making the fast-food restaurants more appealing.  

On the other hand, if pressure continues for a company like Wendy’s to increase the minimum wage that will be at the very least a drag on profits. And if a rise in labor costs is offset by rising prices any market share gains would be elusive. But a larger issue is that inflation would likely put a crimp in the company’s expansion plans.  

In 2020, Wendy’s reported net new unit growth across the world. Some of that is due to the company’s embrace of the franchise model. However, that growth could be threatened if franchisees balk at making new commitments.  

Betting Hard on Breakfast 

When you read the transcript of last quarter’s earnings report it’s hard to downplay how much Wendy's is depending on the success of its breakfast menu. The company is projecting that breakfast will make up 10% of revenue by the end of 2022. And if you were paying attention during the recent NCAA Men’s Basketball Tournament, you can see that this is where the company is focusing its advertising.  

Breakfast is going to need to be a winner because the company has invested a lot into it. And from a fundamental viewpoint, overhanging debt is one area where Wendy’s does not shine.  

Wendy’s Is a Hold  

If you subscribe to the “what have you done lately” mindset, then WEN stock is almost certainly not for you. So far in 2021, the stock has been rangebound although it did break to the upside in April. And for traders who want a technical signal, the chart does appear to have a bullish flag in place as the company prepares to deliver earnings. 

However, throughout its long history, Wendy’s has been a solid growth stock. In fact, if you had bought and held shares 10 years ago, you would be sitting on a gain of approximately 359%. And that includes the stock price being cut more than 50% at the onset of the pandemic. 

I’ll admit, the dividend is nothing to get overly excited about. However, the company’s 1.58% dividend yield is higher than the industry average of 1.30%. And the company did raise its dividend by two cents per share in the last quarter. This was after slashing the dividend during the pandemic. While some investors might see this as risky, it seems to be supported by the company’s projection of free cash flow in 2021 and beyond.