Should You Avoid Wendy's Stock, Even After a 66% Decline?
Key Points
Wendy's sales have been dropping.
It has fallen to third place among burger chains.
The new CEO has laid out his plan to turn around the company.
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Wendy's (NASDAQ: WEN) stock has fallen out of favor for the last several years, to put it mildly. The share price lost 66% over the last five years through Sept. 14. Meanwhile, the S&P 500 (SNPINDEX: ^GSPC) moved in the opposite direction, gaining 70.5%.
Does this represent a value opportunity or a value trap (a company that appears undervalued but has more serious fundamental issues)? It's time to take a closer look at the fast-food company.
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Wendy's troubles go beyond broad economic issues affecting consumer spending. In fact, the company has lost ground to rivals, with Burger King (part of Restaurant Brands International) recently surpassing Wendy's as the No. 2 burger chain by U.S. sales. McDonald's has the leading share.
Wendy's same-store sales (comps) have fallen for several straight quarters. U.S. comps dropped 7% in the second quarter, while international restaurants saw a 2.3% decrease in comps.
Recognizing the company needed a change in direction, the board of directors hired Bob Wright as CEO a few months ago. A restaurant industry veteran, he has experience that includes a stint at Wendy's.
Wright quickly outlined a five-point plan that includes revamping the menu with a focus on prices and quality. The other parts of his plan are marketing, operational excellence (processes, procedures, and performance standards), enhancing the digital experience, and focusing on the restaurants as "an engine of growth" (high-return projects and expansion opportunities).
It's positive that Wright laid out a clear vision, and he certainly has a wealth of industry experience. However, with Wendy's facing intense competition, I'd avoid buying shares.
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Lawrence Rothman, CFA has no position in any of the stocks mentioned. The Motley Fool recommends Restaurant Brands International and recommends the following options: long January 2028 $320 calls on McDonald's and short January 2028 $340 calls on McDonald's. The Motley Fool has a disclosure policy.
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