Wendy's Franchising Plan Could Free Up Cash For Capital Returns To Shareholders

Wendys Co WEN reported its Q2:16 results on August 10, with adjusted EPS of $0.10, up from the $0.08 a year ago and beating the consensus forecast.

Argus’ John Staszak reiterated a Hold rating on the company.

“Share repurchases, remodeled stores and unit expansion led to the positive earnings surprise,” Staszak mentioned.

Restaurant Closures

Wendy’s intends to decrease its company-owned restaurants by only 5 percent by the end of 2016, planning to sell 315 restaurants through the year.

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“Following the sale of company-owned restaurants, free cash flow is likely to increase as franchisees bear the brunt of capital expenditures. This should also allow for additional share buybacks and dividend increases,” the analyst stated.

Staszak noted that the company is working on strengthening its brand through increased marketing, restaurant remodeling and new product launches.

Concerns

However, the analyst also pointed out that revenue had been declining in recent times, partly driven by the impact of refranchising.

Staszak believes that “revenue growth will need to rebound before investors become more positive about the shares.”

The analyst also expressed concerns regarding the timing, cost and eventual effectiveness of the restaurant remodeling plans.

“If the company’s revenue initiatives and store remodeling and refranchising efforts prove more effective than we anticipate, we would consider returning WEN to our BUY list,” Staszak added.

Full ratings data available on Benzinga Pro.