Wendy’s Moves Higher But Wait Before You Buy
Shareholders looking for some clarity in Wendy’s (NASDAQ: WEN) earnings release got more than they asked for. The company revealed such a strong quarter it’s raised guidance, decided to start buying back shares and raised the dividend. For those looking for a nice, comfortable place to put some consumer-focused money to work Wendy’s isn’t a bad choice. The only thing we can fault it for is the high valuation but you get what you pay for. With this stock what you get is a firmly entrenched global brand, earnings growth, and secular tailwinds to drive it.
"We are increasing our 2021 financial outlook meaningfully across all key financial metrics, driven by an outstanding first quarter that underscores our continued momentum and the overall strength of our business," President and Chief Executive Officer Todd Penegor said.
Wendy’s Growth Tops Expectations
Wendy’s reported a great quarter and that is on top of a relatively difficult comp. The company reported $460.2 million in net consolidated revenue which is up 13.6% from last year, up 12% from two years ago, and beat the consensus by 340 basis points. The gains were driven by the addition of 10 new stores and strong comps in both operating segments. Sales in the U.S. led with 13.5% YOY growth while the EU experienced a slower 7.9% growth due to lingering COVID-based restrictions.
Moving down, the company’s operating profit improved by 70% to $83 million due to increased traffic, higher franchise fees, and cost-leverage partially offset by higher labor costs. The gains in operating profits helped drive a 186% increase in net income, a 122% increase in adjusted EPS, and a 200% increase in GAAP eps. More importantly, free cash flow improved to nearly $100 million from last year’s -$20 million, and that improvement is expected to stick.
CEO update: "The robust growth in our business continued in the first quarter of 2021 as sales significantly exceeded our expectations and fueled our restaurant economic model, leading to outsized profits. We remain committed to our three long-term growth pillars—significantly building our breakfast daypart, accelerating our digital business, and expanding our footprint across the globe …”
Wendy’s Increases Capital Returns
Wendy’s increased its dividend by 11% to $0.10 quarterly or about 1.75% annually. The company believes its improving financial position and liquidity more than merits the increase and will allow it to continue investing in future growth. At face value, the payout ratio is OK at about 50% of earnings but we have some misgivings about the balance sheet. While the company’s capital position is improving and the outlook is positive the balance sheet still carries some risk in the form of high debt/low coverage investors should be aware of.
As for the buybacks, the company repurchased about $56 million in shares over the quarter, exhausting its limit, and upped the authorization by $50 million so buybacks could continue this quarter. At current share prices, that’s worth about 2.1 million shares or about 1% of the shares outstanding.
The Technical Outlook: Wendy’s Pops But Bears Take Note
Shares of Wendy’s popped on the Q1 results but weren’t able to hold the gains, at least not in early trading. The move caught the attention of sellers who took advantage of the event to take profits and/or close positions. With price action confirming resistance a the top of a long-term range and the all-time high, it looks to us like Wendy’s may remain trapped inside its range for the foreseeable future. Wendy’s is a great stock with a bright future but we suggest waiting before buying into the story.
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