Wendy’s breakfast? Analysts say ‘Eh.’
Wendy’s announced a $20 million investment in a breakfast program that the company hopes will expand the business by tapping into the explosive breakfast day part. It makes a lot of sense for the company to do it: the breakfast period is one of regular traffic, habitual purchasing and generally carries a decent margin, especially breakfast drinks such as coffee. And it works with a core product at Wendy’s, bacon, which will be featured prominently on the Breakfast Baconator for one.
“Launching breakfast in our U.S. restaurants nationwide provides incredible growth opportunities,” said Todd Penegor, president and CEO of Wendy’s. “We are well-positioned to pursue it.
But alas, upon the news, the stock tanked by more than 10 percent based on some other news. Because of the $20 million investment, EBITDA is expected to be flat to down 2 percent, earnings per share will be down 3.5 to 6.5 percent, and free cash flows are expected to be down 2.5 to 7 percent. None of that is great, but investing in the business wouldn’t be all that bad if Wendy’s hadn’t tried this before.
The company has tried breakfast a few times. But the most recent iteration of a breakfast was in 2011 and it was a scrambled mess. Customers panned the unhealthy food, operators didn’t like the complexity and it meant staffing up in hopes traffic would come. It was shut down in 2012.
The new program looks frighteningly similar, including some of the very same gut-busting menu items and not much strategy shared about how it will work.
“While breakfast remains a major hole in the concept’s offering, we believe this launch could prove to be an uphill battle much like the previous attempts,” wrote BTIG restaurant analyst Peter Saleh. “We are cautious on the prospects given the required upfront investment but uncertain payoff, additional labor needs at a time of already low availability, necessity to take market share from established competitors like McDonald’s and general difficulty of day part expansion in the industry.”
Others have shown that it can work, like Taco Bell. And franchisees seem to be excited about the potential new sales thus far. But in the intense battle for QSR market share and growing competition at breakfast, it’s going to be a difficult egg to crack.