Wendy’s: Overvalued Until Digitalization Benefits Kick In

Picture Courtesy: The Wendy's Company Website

Since opening its first outlet nearly 50 years ago in Columbus, Ohio, the Wendy’s Company (NASDAQ:WEN) has gone through many transitions. Despite a slight deviation in its menu to first drive consumer traffic through value items before upselling them to higher-margin products, its mission to serve the consumer with quality fresh, never frozen hamburgers remains unchanged. Meanwhile, its competitors in the quick service restaurant (QSR) industry, McDonald’s Corporation (NYSE:MCD) and Restaurant Brands International, Inc. (NYSE:QSR) are leaving “complex” menus in favor of value-based offerings to drive traffic through affordability, speed, and convenience.

While the premium-based strategy makes WEN vulnerable to a slowdown in consumer spending, a higher volume of value sales will pressure its margins. The efforts in digitalization and mobile ordering, however, will bring in better consumer insights for personalized service in addition to process efficiencies. As these processes are still ongoing, the resultant benefits of higher same-store sales and better margins will take time to impact the bottom line. Until then, WEN, which is currently trading at nearly 20 percent of premium to peers in terms of forward PE, remains overvalued.

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Disclosure: I/We have no investments in the stocks mentioned in the above article and don’t intend to open any within the next 72 hours. I wrote this article for myself, and it expresses my opinion. I/We receive no compensation, nor do I/We have any business relationship with any companies whose stocks are mentioned in the article.

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