Results Aren’t So Hot, What’s The Big Deal?
Wendy’s (WEN) reported results this morning and shares are up more than 6% because of it. At first glance, the report isn’t good. Sales are down, revenue is down, comps are down, guidance is pulled, the company’s long-term outlook no longer applies, and the dividend was cut so not much reason for shares to spike. However, upon digging deeper something becomes evidently clear; Wendy’s is still in good shape and there is a recovery brewing in the fast-food industry.
It Was Not A Good Quarter For Wendy’s
The calendar first quarter was not a good one for Wendy’s. The company is one of the first to be hit by the coronavirus pandemic and it had a far-reaching impact on the business. With 14% of restaurants outside the U.S, the global shutdown is the least of its worries. The U.S. business is operating at a 99% open-rate while International businesses, those more severely impacted by lockdowns, are still only operating at 75%.
The upshot is that revenue only fell -0.9% across the enterprise for the first quarter. That’s not bad considering other industries have seen revenues fall 50% or more. Revenue missed consensus but only by a small margin, about 0.10%, which is another plus. At the bottom line, adjusted EPS is in-line with consensus while GAAP EPS fell short.
A Bad First Quarter But Signs Of Rebound Are Growing
The first quarter was bad but the impact of the virus is already passing. The evidence of this is in the comp figures which, although shy of the forecast, point to a rebound in fast-food. Comps fell -0.2% across the network versus a forecast of +2.0%. The good news is that U.S. comps are flat, 0.0%, and better than expected. The weakness is in the International market, -1.6%, and offset by another factor.
Wendy’s worst week of YOY comp-store sales came the first week of April. That week, comps fell 26.7% across the company’s footprint. Every week since then, the comps have risen on a week-over-week basis and almost back to flat-line. Based on trends within the business, the industry, and country, and the world (I speak of adaptation to the new environment and the slow global reopening) Wendy’s comps should begin growing again within another week or two. If they aren’t already.
One of the reasons to expect Wendy’s comps to begin growing and 2020 results to impress is breakfast. The company rolled out breakfast in March, just before the global lockdown reached its peak, and the first month’s results exceeded the company’s own expectations. Since then, breakfast has continued to do well and has become a profit-center of daily operations. Another reason to expect Wendy’s to continue rebounding is digital. The company was already focusing on eCommerce and saw it grow to 5% of revenue over the last quarter.
Wait, But What About The Dividend?
As part of Wendy’s report, the company announced several cost-cutting/cash-saving measures. Included in the package is a trimmed down SGA budget, suspension of the buyback program, and a dividend reduction. The dividend reduction shaved 58% off the distribution and, frankly, isn’t usually a reason to get bullish on a stock.
Except maybe in this case. In this case, the move is preemptive and not reactive. The company has more than $365 million of cash on hand and free-cash-flow in the range of $4.25 million, plenty to ensure normal operations. The risk the company faces, and there is a risk, is its debt load and they are right to prepare for the worst. The debt-to-free-cash ratio is running a bit high at 13.77 but is mostly long-term in nature without any major maturities coming soon. Assuming the rebound in Wendy’s business continues there shouldn’t be any problems.
The Technical Outlook: A Head&Shoulders Reversal With New All-Time Highs In Sight
The technical outlook for Wendy’s is bullish. The stock is making a nice if elongated, Head&Shoulders reversal that the market appears to be confirming. Today’s news has shares up more than 7% in the pre-market session. The move confirms support above the short-term EMA and forms the right shoulder of the pattern. The next target is the neckline, near $20.50, where resistance may be present. If the stock can push above $20.50 and close there, I see a move to retest and possibly exceed the all-time high coming very soon.
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