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The recent Wendy's pump was probably confirmation that we will never see a GameStop like squeeze ever again. But now, people are throwing the baby out with the bath water.
The question that matters is whether Wendy's is fundamentally broken for good…but there’s a lot of evidence to suggest that may not be the case.
For those who haven’t followed closely, the recent figures are ugly. In Q1 this year, global sales went down 5.5%, same-restaurant sales in US were down 7.8%, net restaurant openings in US were -164, and restaurant margin for company-operated US restaurants decreased from 14.8% to 11.4%. The adjusted EBITDA fell 10.6%, adjusted earnings per share were down 40%, & free cash flow dropped from $68 million to $36.5 million.
Overall traffic is weak, food costs are rising, economics for the franchisees are getting worse, and the store count is shrinking.
Someone could look at this and wonder if they are destined to be the next Burger King (or Arby’s!).
Enter Bob Wright and Steve Cirulis as CEO and CFO. In this post, I’m not going to suggest that they are some miracle saviors of the company.
For the unaware, those two guys were instrumental in producing a 500%+ share price increase at Potbelly along with double-digit average unit volume growth, margin improvement, and better return on invested capital.
They phased out or improved weaker stores, pushed digital & loyalty, increased the percentage of franchisees, and improved margins. In 6 months, the numbers demonstrated the locations were more capital efficient. Over the next 2-3 years, they were able to make a complete 180 on the company.
To be clear, Potbelly did not have clean revenues during its turnaround. In 2024, revenues actually declined 5.9%, due to refranchising and 53rd-week comparison. Adjusted EBITDA still increased 14.9%, adjusted earnings per share doubled, & open plus committed shops grew to 727.
For Wendy’s, closing of weak stores, reducing hours that generate no profits and improving economics of the remaining stores will help them despite lower revenue.
Wendy's is ALREADY heading in that direction through its Project Fresh program. Yes some will look at it as pure marketing but it’s a concerted effort for brand revitalization, optimizing their systems, improving service quality, and reallocating capital.
Biggie Deals at prices of $4, $6, and $8 are helping Wendy's show they are dedicated to value offerings. They upgraded core products (buns, sauces, chicken). Like Potbelly they are putting an emphasis on order accuracy, cleanliness, speed, labor allocation, and hours of operations. Recent numbers show breakfast is failing but late night sales are popping off (actually their most profitable), so it’s natural to scale back early hours in favor of late night hours with more employees on the clock.
Digital is another part of the strategy that was a boon at Potbelly. U.S. digital orders increased 8.4% in Q1 and reached 22.7% of U.S. sales mix. Wendy's also introduced an AI-driven recommendation engine in their mobile application. This is important as targeted offers allow driving frequency while not giving the margin away to each customer. People will roll their eyes at AI integration but it should be looked at as more precise target marketing.
Wendy's has a strong brand, royalty-based franchising model, theoretically undervalued stock, Trian involvement, and now has CEO/CFO duo that helped turn around Potbelly and sell it to RaceTrac for $17.12 per share at a 47% premium to the 90-day VWAP.
Private equity doesn't need a GREAT Wendy's, but rather a fixable one. A potential buyer can underwrite a plan where weak stores will get closed or refranchised, franchisees will become healthier, digital sales will keep rising, capital expenditures will be redirected, international growth will continue, and the EBITDA/free cash flows will stabilize.
The private equity interest is real and the new leadership should help them if that’s the path they decide to go down.
The meme pump was a big distraction IMHO. If Wright and Cirulis manage to replicate Potbelly playbook at scale, the stock won't need a pump to rise. It will go up on business becoming cleaner, margins stabilizing, cash flow staying positive, and Wendy's either becoming a turnaround story or take-private candidate.
TL; DR: Wendy's faces serious problems including declining sales in the US, shrinking store count, reduced margins & lower free cash flows. But the newly appointed CEO/CFO duo previously turned around Potbelly by improving unit economics, increasing margins, growing digital/franchise commitments and eventually selling it at a premium. If they can do the same with Wendy's, the upside potential will be not only a pump. It will be a re-rating or a potential take-private story.