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The Ohio-based hamburger chain, best known for Frostys, rolled out its new breakfast menu this week. It makes its way to the breakfast wars with a Baconator-themed egg and sausage sandwich, a frosty coffee drink and chicken sandwiches.
But will it be enough to take some of the lucrative breakfast audience away from McDonald’s (NYSE: MCD), Starbucks (NASDAQ: SBUX) or Dunkin Brands (NASDAQ: DNKN)?
There is reason to be skeptical.
Wendy’s stock at a glance
Let’s first look at Wendy’s stock. WEN has declined by about 12% so far this year, largely due to the coronavirus from China, which completely flashed the market in the past week. But as of February 21, it was trading at a 52-week high of close to $ 24 per share.
In addition, earnings for the fourth quarter last month included earnings per share (EPS) of 11 cents per share on revenue of $ 427.2 million. This is an increase from 8 cents per share and $ 397.8 million a year ago, along with the company’s revenue that beat Wall Street estimates for the quarter.
But the guidance was disappointing. Wendy’s stated that they expect an adjusted EPS of 60 cents to 62 cents per share by 2020. With that said, analysts expect 62 cents per share.
“Our focus remains on efficient, accelerated growth behind our three major growth pillars: entering the breakfast segment, growing our digital business and expanding our international footprint,” said President and CEO Todd Penegor in a statement. “We are well positioned to drive growth by 2020 and I am more confident than ever that we will achieve our vision of becoming the world’s most prosperous and beloved restaurant brand.”
In addition, SunTrust has ranked Wendy’s stock as a “buy” and set the price target at $ 26. MKM Partners also rated WEN as “neutral” with a fair value estimate of $ 23.
Will breakfast help Wendy’s warehouse?
Despite the excitement over Wendy’s new menu, the company does not have a good result in its breakfast range. You may remember that Wendy’s first gave breakfast a shot in the 1980s, when it offered French toast, pancakes and ordered omelets.
But it was too expensive and time consuming to maintain, especially for a company that thrived as a run-through restaurant.
In 2006, the company gave it another go – this time by adding yogurt and granola to a breakfast menu. But it pulled out of contact after customers rejected the low-quality products.
In 2012, WEN tried breakfast for the third time. This time the menu included a craft egg sandwich, panini-grilled sourdough bread and hot oatmeal. But the effort failed again, as analysts called it “too little, too late” to compete with well-established contributions from McDonald’s and Starbucks.
What is different this time?
Wendy’s current entry into the breakfast arena has a number of interesting things. The menu includes a chicken biscuit with honey butter, a breakfast bacon that contains a fresh egg, bacon, sausage, cheese and Hollandaise sauce and a Frosty ccino – which is Wendy’s answer to the Starbucks Frappuccino drink.
In total, there are two chicken sandwiches on the menu and seven egg sandwiches. And everyone has freshly cracked eggs in an attempt to provide customers with higher quality sandwiches.
However, the company also tries to keep costs down for its franchisees. The limited menu is designed to be easy to assemble, and breakfast is only available from 6:30 to 10:30. And the company states that the break time for breakfast “depends on which Wendy’s place you order from.”
It sounds good on the surface, but investors need to realize that there are some downsides to that strategy.
Offering food for specific hours per day will severely limit sales, so Wendy’s opportunities are extremely limited. With some of the canteens not opening until later in the morning, Wendy’s rejects some of the walk-in crowds that often gather at McDonald’s, Starbucks or Dunkin ‘.
Also, there is no guarantee that a Wendy’s will be the first stop for busy morning commuters either. Think about it: If you drive to work, you already have a routine that works for you. You will be much less likely to stop at Wendy’s if it’s on the left side of the road and there’s a McDonald’s on the right.
When WEN franchisees located their restaurants, they did not consider plans for commuting in the morning. So places that force customers to go through oncoming traffic during the morning speed will have a harder time attracting customers who are in a hurry.
The conclusion of Wendy’s warehouse
In total, Penegor says it wants to see $ 1 billion in breakfast sales for Wendy’s in a year. It is a real goal that can be unattainable.
With limited hours and limited availability, Wendy’s can earn enough money from breakfast to cover its costs and its employees on the skeleton morning. But it is unlikely that it will generate enough sales in the immediate future to damage MCD or SBUX, or drive Wendy’s inventory higher.
Patrick Sanders is a freelance writer and editor in Maryland, and was from 2015 to 2019 head of the Investment Advisory Department at US News & World Report. Follow him on Twitter at @ 1patricksanders. At the time of writing, he had no position in any of the above-mentioned securities.