Just when it seemed that Quick Service Restaurant (QSRs) chains were recovering from the COVID-19 pandemic-induced restrictions, fear of the new Omicron variant and other challenges have hit these restaurants.
These challenges include supply chain bottlenecks leading to rising commodity costs and labor shortages.
Amidst these challenges, let us compare stocks in the QSR space, Wendy’s and McDonald’s, which are pursuing different growth strategies, using the TipRanks stock comparison tool, and see what Wall Street analysts are saying about these stocks.
The Wendy’s Co. (NASDAQ: WEN)
QSRs like Wendy’s are facing several challenges including rising commodity and labor costs, general economic trends, and increasing price competition. This was also reflected in the restaurant chain’s Q3 results.
The company primarily earns its revenues from sales at company-operated restaurants and franchise-related revenues.
In Q3, while the company’s same-restaurant sales (SRS) grew 2.1% year-over-year in the United States, according to Stifel Nicolaus analyst Christopher O’Cull, on a two-year comparable basis, there was a quarter-on-quarter deceleration from approximately 11% to 9.1%.
The analyst stated that this was largely due to labor shortages in Q3, but staffing levels are anticipated to improve in the near term. O’Cull expects that as staffing levels improve, dine-in utilization at Wendy’s restaurants should also see an uptick.
O’Cull added, “Late-night also remains an opportunity for improvement as customer mobility continues to recover, and staffing levels support normalized evening hours.”
Wendy’s is targeting a long-term growth strategy built on three pillars. This includes building its breakfast daypart business, expanding its national and international footprint, and increasing its digital sales. In the restaurant industry, dayparting refers to dividing the business day into parts.
In March last year, Wendy’s introduced a variety of breakfast items, including croissants, breakfast sandwiches, and biscuits. These seemed to be well-accepted, as the company exited Q3 with the “highest monthly mix of 2021 [when it comes to breakfast] at 7.5% of sales.”
However, Todd A. Penegor, President and CEO of Wendy’s commented on the breakfast business, “While we saw growth in our breakfast business, mobility continues to shift and be depressed during this day part. As a result, we now expect our year-over-year breakfast sales to grow approximately 20% to 30% in 2021.” That represents a moderation in management’s growth expectations.
When it comes to its digital business in the U.S., at the end of Q3, the digital sales mix was “north of 8%.” The company’s total loyalty program members increased 10% quarter-on-quarter to around 19 million members.
Additionally, Wendy’s opened several restaurants in the U.K. in the second quarter and, according to the company’s management, is “seeing extremely strong sales across all of our U.K. restaurants.” The company anticipates opening 10 more restaurants in the U.K. by the end of the year, and expects to reach 7,000 restaurants by the end of this year.
Penegor added in the Q3 earnings call, “Our development foundation is extremely strong and we have a robust pipeline of almost 200 potential franchisee, which gives us confidence that we’ll reach our goal of 8,500 to 9,000 global restaurants by the end of 2025.”
Analyst O’Cull, while acknowledging that “the company’s future growth profile is compelling,” also stated that Wendy’s current valuation seemed to have factored in this growth.
As a result, the analyst remained sidelined with a Hold rating and a price target of $25 (13.3% upside) on the stock.
However, other analysts on the Street are cautiously optimistic with a Moderate Buy consensus rating based on 9 Buys and 6 Holds. The average Wendy’s price target of $26.65 implies 20.8% upside potential to current levels.
McDonald’s Corp. (NYSE: MCD)
McDonald’s was in the news recently, as Reuters cited two analysts as saying that the fast-food giant was contemplating expanding the trial of its plant-based burger with Beyond Meat (BYND) to more locations in the U.S. next year.
The report stated that the two companies began testing the plant-based burger in 8 McDonald’s restaurants in the U.S. in November. These restaurants have been doing brisk sales, selling as many as 70 sandwiches per day, and resulting in the expansion of the trial.
This was again reinforced by BTIG analyst Peter Saleh, whose channel checks indicated the same. The analyst added that MCD expects to expand the trial of the plant-based burger to “approximately 700 restaurants in several markets through a 6-8 week limited-time offer in February/March.”
However, Saleh pointed out that a national launch of the McPlant sandwich was unlikely in 2022, “given the current marketing calendar and scale of the McDonald’s system.”
Moreover, according to the analyst, the uptick in sales for the McPlant was entirely driven by “in-store promotion and word of mouth, as the company has not allocated any advertising resources to support this initial test.”
It is important here to note that Wendy’s, discussed earlier in this article, differentiates itself from the competition by offering fresh-cut vegetables and fresh, not frozen, ground beef.
In contrast, the rising popularity of the McPlant at McDonald’s restaurants in the trial, despite a lack of advertising support, indicates that there could possibly be a shift in McDonald’s business strategy. Through the McPlant trial, it appears that MCD is targeting consumer groups with specific dietary preferences.
It remains to be seen who will race ahead from here, but for now, analyst Saleh is bullish on MCD. The analyst reiterated a Buy and raised the price target from $255 to $295 on the stock.
Saleh believes that “the brand is taking market share from many of its quick-service peers and is poised to capitalize on that share gain by building more restaurants in favorable geographies.”
Other analysts echo Saleh and are upbeat about McDonald’s, with a Strong Buy consensus rating based on 19 Buys and 4 Holds. The average McDonald’s stock price prediction of $273.27 implies 4.1% upside potential to current levels.
Bottom Line
It is obvious that both the QSR chains are pursuing different strategies to bolster growth amidst rising competition. While Wendy’s is looking at the breakfast business and expanding its sales through the digital channel and internationally, McDonald’s is targeting customers with specific dietary preferences.
While analysts are cautiously optimistic about Wendy’s and bullish about McDonald’s, based on the upside potential over the next 12 months, Wendy’s seems to be a better Buy.
Disclosure: At the time of publication, Shrilekha Pethe did not have a position in any of the securities mentioned in this article.
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