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Analysts are mixed on Wendy’s $20 million breakfast bet

Pamela Granda
Producer

Wendy’s ( WEN ) shares extended their decline at the open on Wednesday, after falling more than 10% on Tuesday following the company’s announcement to launch a breakfast menu nationwide. The investment is expected to cost $20 million, and while the company reiterated its sales guidance, it cut its 2020 outlook.

Analyst reaction to Wendy’s fourth attempt at breakfast is mixed, though primarily cautious. Although there is opportunity for profit, some analysts are unsure the chain’s hefty investment will pay off.

Wendy’s currently serves breakfast in roughly 300 restaurants but will add it to more than 5,000 U.S. stores in 2020.

“We are surprised by the announcement given the resources and time required to launch the daypart, a tight labor market, high levels of competition, ongoing reimage program, and previous commentary noting other sales opportunities exist outside of the breakfast daypart,” wrote Lauren Silberman of Credit Suisse.

“We are cautious on execution, as this will mark the fourth time Wendy’s has attempted breakfast, and believe incremental company and franchise investments could pressure margins and earnings,” she added.

Silberman laid out Wendy’s three previous attempts at breakfast, all of which have been unsuccessful.

  • 1985: Initial launch, discontinued less than a year later in most of its stores

  • 2006: Breakfast tested again but ended in 2009

  • 2009 : Breakfast tested in three concentrated markets but ended by 2013.

This Jan. 29, 2012 photo, shows signage promoting breakfast is at a Wendy's restaurant in Culver City, Calif. (AP Photo/Reed Saxon)

Still, Silberman added if the rollout is successful, breakfast could be a meaningful sales driver given the fact that Wendy’s has historically indicated breakfast could represent about 10% of sales.

However, she noted that Wendy’s “requires more preparation, and more labor, relative to competitors given its use of fresh ingredients, which has likely been a headwind in profitability at breakfast.”

As part of the rollout, Wendy’s said it intends to hire 20,000 new employees to support its initiative.

But Wells Fargo analyst Jon Tower is not as bearish on the company’s renewed endeavor.

“Wendy’s unexpected move into breakfast should not be all that surprising, in our view,” he wrote.

Tower cited a note from November 2018 in which he argued why breakfast should be re-examined by the company:

  1. The category represents about 22% of fast-food restaurant traffic and the brand’s absence from the space left Wendy’s at a significant competitive disadvantage

  2. Franchisees may benefit (and prefer) focusing on an initiative that improves store-level productivity, as opposed to adding new capacity to an already crowded field

  3. Wendy’s could approach this daypart with a less labor-intensive option (i.e., drive-thru only) and could disrupt the space through value & innovation (i.e., free coffee with every food purchase).

Wells Fargo has a $20 price target on the stock, with a Market Perform rating.

“We continue to believe that Wendy’s needs to demonstrate improved visibility into core fundamental, long-term growth drivers in order for the shares to see greater multiple expansion from here,” wrote Tower.

Meanwhile, Guggenheim Securities and BTIG downgraded shares from Buy to Neutral.

As of Tuesday’s close, the consensus rating on Wendy’s stock was 13 Buys, 14 Holds and 1 Sell, according to Bloomberg data.

Looking ahead, Wendy’s said in a statement it intends to update its guidance at its Investor Day on October 11. More details regarding the expected financial impact of entering the breakfast daypart are expected to be announced then as well.

Pamela Granda is a producer on Yahoo Finance’s closing bell show, The Final Round. Follow her on Twitter .

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