We're Frosty on Wendy's International Expansion Plans

We initiate coverage of Wendy's WEN with a no moat rating, Standard capital allocation, and fair value estimate of $21.50 per share. While we take a positive view of the firm's recent domestic investments, we struggle to identify meaningful competitively advantaged features in the firm's business model and balk at the chain's third foray into the U.K. market. Our forecast anticipates low-single-digit to mid-single-digit sales growth, operating margin expansion (largely attributable to lower pass-through advertising revenue in the firm's franchising agreement with ghost kitchen operator REEF and modest operating leverage), and low-single-digit share repurchases, underpinning high-single-digit to low-double-digit EPS growth through 2030. Typically, restaurant operators carve out moats through some combination of a brand intangible asset or scale-driven pricing power. In our view, Wendy's has amassed neither, despite an impressive string of 10 consecutive years of comparable store sales, or CSS, growth in the U.S.--a record that neither wide-moat McDonald's nor Burger King can match. Nevertheless, Wendy's trailing 10-year CSS clocked in at just 1.9% annually during that period, well below food-away-from-home inflation of 2.7%, suggesting an inability to raise prices or attract volume in excess of category inflation. Further, while the firm maintains payback periods (six years) and cash-on-cash returns (midteens) roughly in line with industry benchmarks, we don't foresee unit economics underpinning an enduring competitive advantage, considering Wendy's is forced to compete for franchisee capital with wide-moat quick-service operators with more compelling returns, like Domino's, Starbucks, and McDonald's. Finally, while investments in breakfast, reimaging, and digital properties look sound, we wrestle with the firm's newest international campaign, considering McDonald's and Burger King's well-established presence in the largest, most profitable international markets.

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