Wendy’s Stock: Why Does It Continue to Fall?

  • Wendy’s shares were trading close to 7% lower in the pre-market session on Tuesday.
  • The guidance cut is taking a toll on Wendy’s stock.

Wendy’s (WEN) stock was trading about 9% lower in the pre-market session as its fiscal guidance cut irked investors. On Monday, Wendy’s announced that it would invest $20 million to expand its breakfast menu across the nation in 2020. Notably, the breakfast menu is available in about 300 stores in the US.

The company’s CEO, Todd Penegor, said that “launching breakfast in our U.S. restaurants nationwide provides incredible growth opportunities.”

Expanding the breakfast menu nationwide may or may not help Wendy’s drive more traffic amid heightened competition. However, the guidance cut due to the one-time investment related to the expansion didn’t sit well with investors.

Wendy’s lowered its profit outlook. The company expects its adjusted EBITDA to stay flat or fall 2% due to the one-time investment. Previously, Wendy’s expected its adjusted EBITDA to increase 2.5%–4.5% in 2019. The company also lowered its fiscal EPS outlook.

Wendy’s adjusted EPS will likely fall 3.5% to 6.5%. Earlier, the company expected 3.5%–7.0% growth in its adjusted EPS. Wendy’s free cash flow will likely fall 2.5%–7.0%.

However, the company reiterated its sales guidance. Wendy’s expects its global systemwide sales to increase 3.0%–4.0%. To support the expansion, the company plans to hire about 20,000 employees.

Notably, Starbucks (SBUX) also reduced its earnings growth outlook.

Analysts downgraded Wendy’s stock

A few analysts downgraded Wendy’s stock following the reduced outlook. Guggenheim and BTIG downgraded the stock to “neutral” from “buy.” In contrast, SunTrust Robinson raised its target price on the stock to $24 from $22.

On average, analysts maintained a target price of $21.48 on Wendy’s stock, which is about 2% lower than its closing price of $21.95 on Monday. Meanwhile, 15 of the 28 analysts covering Wendy’s stock recommend a “buy,” 12 recommend a “hold,” and one recommends a “sell.”

YTD stock performance

Wendy’s stock has risen 40.6% on a YTD (year-to-date) basis due to the sustained momentum in same-store sales growth and better-than-expected earnings in the last four quarters. In comparison, Starbucks, Dunkin’ Brands (DNKN), and McDonald’s (MCD) stocks also marked healthy gains on a YTD basis.

Starbucks, Dunkin’ Brands, and McDonald’s shares have risen 46.2%, 25.2%, and 22.4%, respectively, on a YTD basis as of Monday.