Quick service is the place to be. That was the sentiment shared by Wendy’s president and chief executive officer Todd Penegor in the company’s February 22 fourth quarter and fiscal 2017 earnings call. With the segment accounting for more than 80 percent of total restaurant traffic in the U.S., and nine out of 10 Americans eating at least a burger a month, Wendy’s wasn’t shy about providing a rosy three-year picture that places it among the largest and most profitable companies in foodservice. But the short-term picture is proving a bit more challenging.
The company’s fourth-quarter revenue of $309.2 million lagged Zacks Consensus’ estimate of $315.3 million by 1.9 percent, and same-store sales climbed 1.3 percent year-over-year. The sales comps aren’t quite as investor pleasing as those put forth by competitors McDonald’s and Burger King in recent reports. McDonald’s posted same-store sales growth of 4.5 percent in the fourth quarter versus the year-ago period, while Burger King’s comps lifted 4.6 percent.
These figures, however, need to be approached from different angles. To start, Wendy’s low single-digit sales growth is a product of its own consistency.
“We put positive same-restaurant sales on top of quarter after quarter after quarter,” he said. It’s actually 20 consecutive quarters of positive same-store sales, which is not a common theme in the burger segment.
Wendy’s potential and present success has multiple layers. The brand’s average-unit volumes in North America hit company records in 2017 at $1.61 million. For the first time in Wendy’s history, global systemwide sales growth, at 3.5 percent, outpaced same-store sales (2 percent in the U.S.), driven by new restaurant development, which boosted AUVs in turn. Global systemwide sales eclipsed the $10 billion mark at $10.3 billion.
This AUV conversation is a promising work in progress. Wendy’s Image Activation program closed 2017 with 43 percent of the entire system updated, slightly ahead of schedule, the company said. Wendy’s and its franchisees reimaged 551 restaurants in North America in 2017, an increase from the 521 reimages that were completed in 2016, and built 174 global restaurants. About 10 percent of the global system is expected to be image activated on an annual basis through 2020, Wendy’s added, with 70 percent-plus on the books for 2020.
Image Activation added 70 basis points to North America same-store sales, Penegor said, and the company expects a 60-basis-point lift in 2018. New restaurants are opening with AUVs around $1.8 million. Understandably, the company is eager to quicken the pace, and started offering a reimaging solution for restaurants with AUVs lower than $1.3 million “in order to unlock potential and mitigate unnecessary closures,” he said.
This new option costs about half as much as the traditional refresh. “We have great confidence in our 2020 target as more than half of the total new restaurants that we plan to open over the next three years are covered by a development commitment. Between our prioritization to partner with our franchisees, our flexible design options, and financial support, we have the foundation in place to continue to grow,” Penegor said.
There are designs to support all trade areas, known as the Smart Suite designs.
“We've got 55 seaters, we've got 40 seaters, we've got 28 to 30 seaters, we've got options that you can flex in between. They can fit on smaller footprints, so we got more access to real estate,” Penegor said. “And the great news is as we've learned into these different options during the course of 2017 we're still seeing the same AUVs through those restaurants, a little smaller square footage footprint in a lot of cases but for some trade areas, we're still heavy drive through and we want to have more proximity as you start to support delivery over time.”
This versatility has allowed Wendy’s to pinpoint what works and what doesn’t, remove and replace as needed, and start leveraging the technology initiatives and value propositions the company believes fuels long-term growth.
Digital innovation remains a top-line issue for Wendy’s. In the fourth quarter, the company started offering delivery through DoorDash and had more than 20 percent of its North American restaurants on the platform by year’s end. Wendy’s said it is looking to add additional delivery partners in an effort to expand the service faster. “The economics have proven to be worthwhile as early reads indicate that delivery orders are highly incremental, especially in the evening daypart and result in higher average checks, both of which are positives for our restaurant economic model,” Penegor said.
At the end of 2017, 80 percent of Wendy’s North American system was capable of accepting mobile orders. In the quarter, Wendy’s also introduced mobile offers, which drove downloads of the brand’s app. The chain’s rewards pilot is currently underway as well.
And like many quick-service chains, notably McDonald’s and Taco Bell, Wendy’s is accelerating its roll out of self-order kiosks, the chain said. At year’s end, Wendy’s had kiosks in about 150 restaurants and plans to keep growing. “Noteworthy benefits of kiosks include: the opportunity for incremental throughput during busier day-parts; higher-average checks; and an ability to leverage labor costs,” Penegor said.
In addition to tech, Wendy’s isn’t taking its finger off the value button.
“Offers like the 4 for $4 and other price pointed deals are important, but we also have to be focused on making sure all prices across the menu are reasonable, and we are working hard with our franchisees on this topic day-in and day-out,” he added.
Wendy’s added chicken tenders with a $5 three-piece combo in 2017 and started offering cookies as an add-on to any combo meal for 99 cents. The Double Stack returned to the 4 for $4 as well as an expanded offering launched in 2018 to up the choices to eight entrees.
"We're playing a little different game," Penegor said. "I'm trying to make sure we not only have a strong value offering, but we also want to have good premium offerings out there. You're seeing that with our promotional calendar, really focusing on our fresh beef with the Dave's Double. You're seeing that right now with the Smoky Mushroom Bacon Cheeseburger in the market, but we'll also continue to make sure that we've got strong value programs that will resonate with the consumer."
Wendy’s expects to have 7,250 global units (6,400 in North America) and $12 billion in systemwide sales by 2020. This is slightly down from the company’s previous target of 7,500 stores but the drop is the product of some ongoing changes, including the “buy and flip” strategy Wendy’s is now calling “Franchise Flips.”
During the fourth quarter, Wendy’s facilitated 130 buy and flips, bringing the full year total to 540. “The company will continue to facilitate franchisee-to-franchisee restaurant transfers to ensure that restaurants are operated by well-capitalized franchisees that are committed to long-term growth,” the company said. The name change is due to the fact Wendy’s plans to be more selectively involved in the related real estate, and expects to complete about 200 Franchise Flips in 2018.
“Going back to 2015, when you take into account sales at company restaurants, Buy and Flips and franchise-to-franchise transfers, almost 40 percent of the North American system has changed hands. We view this as healthy turnover as it allows us to strengthen our system by ensuring restaurants are in the hands of strong operators with access to capital that are committed to growth with a long-term focus,” Penegor said.
Wendy’s grew its global footprint by 1.5 percent in 2017, opening 174 total restaurants and 97 net new units. The company expects global growth to be about 2 percent in 2018, including 1 percent in North American and about 16 percent internationally.
“The entire Wendy's system is inspired by a clear vision,” Penegor said. “Together with our franchisees and the many thousands of Wendy's team members across the globe, I'm confident that Wendy's will become the world's most thriving and beloved restaurant brand. Our vision is powerful, and it will guide us to build a stronger Wendy's for future generations.”