Wendy’s Development Long-Term Guidance Looks Positive After Year-End Results

Given that no-moat Wendy’s WEN pre-released its fourth-quarter and full-year earnings in January, there was little in the backward-looking results that upended our expectations. The firm reported ongoing strength in comparable store sales at home and abroad, with a modest uptick on a three-year stacked basis (relative to prepandemic) in both segments, suggesting remarkable sales durability considering macroeconomic headwinds. While 2023 guidance was conservative, with 6%-8% systemwide sales growth in line with our 7% estimate but $0.95-$1.00 in adjusted EPS missing our $1.07 forecast, we still expect to raise our $22 fair value estimate by a mid-single-digit percentage—consistent with an uptick in medium-term unit growth and royalty rates, and slightly lower capital expenditure needs than initially contemplated. We also plan to raise our Uncertainty Rating to High from Medium for the restaurant operator.

More concretely, the firm’s guidance suggests a move away from non-traditional units—which we view as prudent—as well as heightened interest from franchisees in the firm’s Global Next Generation Design stores. The firm guided to 2%-3% net unit growth over the next two years, stepping up to 3%-4% by 2025, marking a step down from its prior 8,000-8,500 store guidance (hitting 7,700 stores in that year instead) but featuring a much lower drag on store-level productivity from the nontraditional units. Development agreements in India (400) and the Philippines (200) suggest reasonable international upside, even if the firm’s foray in the U.K. fails to bear fruit, and should underpin margin expansion, given the heavily franchised model in those regions.

On balance, we view the firm’s three growth pillars—digital acceleration, incentivizing unit development with near-term incentives through its “Pacesetter” program, and emphasizing durable same-store sales growth—are prudent and should drive mid-single-digit (3.9%) annual sales growth over the decade to come.