What To Make Of Wendy's Breakfast Expansion

Shares of Wendys Co WEN lost more than 12% Tuesday after the company announced a nationwide expansion of its breakfast menu and lowered its guidance.

Here is a summary of what some of the Street's top analysts are saying.

Stephens: The Launch

Wendy's will launch nationwide breakfast options, which marks a reversal from 2014 when it phased out morning meals, Stephens analyst Will Slabaugh wrote in a note. This time around the company's breakfast menu will likely be more targeted and high quality with a lower break-even than before.

For the time being, Slabaugh said the breakfast launch will negatively impact free cash flow through 2020 if not beyond as it will be increasingly important to advertise the new offering.

SunTrust: Last Player To The Game

Wendy's is the only national hamburger quick service restaurant chain that has yet to offer breakfast nationwide, SunTrust Robinson Humphrey analyst Jake Bartlett wrote in a note. As such, breakfast will be a difficult battleground, but any obstacles can be overcome and Wendys' can see success similar to Taco Bell.

"While WEN's past failures to launch breakfast nationally pressured EBITDA and crowded out other opportunities, the prize of breakfast is worth the risk, in our view," Bartlett wrote.

Related Link: Analyst Breaks Down Popeye's Chicken Sandwich, Impact On Rivals

BTIG: Not Worth The Risk

Wendys' expansion to breakfast will likely prove to be an "uphill battle" even though a morning food offering was a "major hole" in the overall menu, BTIG analyst Peter Saleh wrote in a downgrade note. The company's $20 million upfront investment will also be followed up with additional labor requirements at a time when the supply of workers is low.

Wendys' management failed to explain why its expansion to breakfast will be different this time after multiple attempts in the past: "Our skepticism inclines us to move to the sidelines," Saleh wrote.

Wells Fargo: Unexpected But Not A Surprise

Wendy's unexpectedly announced its push into breakfast although it shouldn't come as a surprise, Wells Fargo analyst Jon Tower wrote in a note. Same-store sales should accelerate next year although at the expense of unit growth as franchisees may prioritize capital on breakfast at the expense of opening new stores.

"We continue to believe that WEN needs to demonstrate improved visibility into core fundamental, LT growth drivers (particularly units) in order for the shares to see greater multiple expansion from here," Tower wrote.

Credit Suisse: Surprised Announcement

Wendys' expansion to breakfast is a surprise given the amount of time and resources required to succeed, Credit Suisse analyst Lauren Silberman wrote in a note. The company will be up against heavy competition, which could pressure earnings and margins.

"Given failed past attempts, we remain cautious with limited visibility into the path to a more successful rollout," Silberman wrote.

MKM: Convince Us First

Wendys' management needs to make the case as to why it can win share in the breakfast space, MKM Partners analyst Brett Levy wrote in a note. The restaurant chain sells compelling items that include bacon and chicken and this could translate well to the daypart.

"We need some convincing as we believe the competitive challenges might be a bit more severe this time around," Levy wrote.

Ratings And Price Targets

• Stephens maintains at Overweight, unchanged $22 price target.
• SunTrust maintains at Buy, price target lifted from $22 to $24.
• BTIG downgraded from Buy to Neutral, removed $22 price target.
• Wells Fargo maintains at Market Perform, price target lifted from $19 to $20.
• Credit Suisse maintains at Neutral, unchanged $21 price target.
• MKM Partners maintains at Neutral, unchanged $20 price target.

Price Action

Shares of Wendy's traded lower by more than 12.6% Tuesday at $19.18.