Executive Summary / Key Takeaways

• Wendy's faces near-term pressure from a challenging consumer environment and inflationary costs, reflected in a lowered 2025 outlook for systemwide sales, EBITDA, and EPS.
• Despite headwinds, the company is accelerating a strategic pivot focused on global unit growth, digital transformation, and operational excellence, supported by an updated capital allocation policy that prioritizes investment and share repurchases.
• Key technological advancements like Fresh AI and enhanced digital platforms are driving efficiency and customer experience improvements, forming a crucial part of the competitive strategy.
• System optimization, including the closure of underperforming restaurants in 2024, is strengthening the base for accelerated net unit growth targeting 2-3% in 2025 and 3-4% long-term.
• The investment thesis hinges on Wendy's ability to execute its long-term growth strategy and operational improvements effectively, offsetting macro challenges and intense competition while leveraging its differentiated quality positioning.

Setting the Scene: A Quality Foundation Meets Strategic Evolution

The Wendy's Company, founded in 1969 with a commitment to "fresh, never frozen" beef and quality ingredients, has grown into the third largest quick-service restaurant chain globally, holding the second position in the U.S. hamburger segment by traffic and dollar share. From its origins focused on customizable burgers, the menu has expanded to include a diverse range of offerings, solidifying its place in the competitive QSR landscape.

Over its history, Wendy's has strategically evolved, notably shifting towards a predominantly franchised model. Through system optimization initiatives involving acquisitions, dispositions, and franchisee transfers, Company-operated restaurants now constitute approximately 5% of the total system as of March 2025. This asset-light model underpins its financial structure, with revenues primarily derived from franchise royalties, fees, and rental income, alongside sales from its smaller base of Company-operated locations.

The company's overarching strategy is built on three pillars: delivering fresh, famous food; providing an exceptional customer experience; and accelerating global net unit growth. This framework guides its response to market dynamics and competitive pressures, aiming to drive long-term profitable growth.

A critical, though often less visible, differentiator for Wendy's lies in its accelerating adoption of technology, particularly in enhancing the customer experience and driving operational efficiency. The company is making significant investments in its digital ecosystem and restaurant technology.

The Technological Edge: Driving Efficiency and Experience

Wendy's is increasingly leveraging technology as a core component of its strategy and a competitive advantage. Key initiatives include:

• Fresh AI Voice Ordering: This technology is being deployed, with a target of over 500 restaurants by the end of 2025. While specific quantitative metrics on efficiency gains were not detailed, management indicates it increases productivity and allows crew members to focus more on hospitality. It also provides curated suggestions, aiming to increase check size.
• Digital Menu Boards: These are being rolled out across the system, enhancing the visual appeal and flexibility of menu presentation.
• Mobile App and Loyalty Program: Significant investment has gone into enhancing the mobile app and loyalty platform. This focus has driven global digital sales mix to a record 20.3% in the first quarter of 2025, up from approximately 16.8% a year prior. The loyalty program has grown to over 45 million members, building a direct connection with customers.
• Order Accuracy Tools: Tools like item label printers and smart delivery scales are being implemented. Management states these tools have significantly improved order accuracy in restaurants where they are utilized.

The investment in these technologies is substantial. The company anticipates capital expenditures between $100 million and $110 million in 2025, with a portion dedicated to technology investments. An analyst view suggests approximately $150 million in CapEx over the next four years is allocated to scaling digital capabilities and modernizing the tech stack.

For investors, this technological push is significant. It aims to create a more seamless and personalized customer experience, which can drive loyalty and frequency. Furthermore, technologies like Fresh AI and digital menu boards are intended to improve restaurant-level economics by increasing average check and enhancing labor efficiency, directly impacting profitability for both the company and its franchisees. This focus on operational technology provides a potential competitive moat, differentiating Wendy's from rivals who may lag in specific areas of digital or AI implementation within the restaurant environment.

Performance Under Pressure: Navigating a Challenging Macro Environment

The first quarter of 2025, which ended March 30, 2025 (with results reported on May 2, 2025), highlighted the impact of a challenging external environment on Wendy's performance. Global systemwide sales decreased 1.1% to $3.39 billion compared to $3.45 billion in the prior year period. This was driven by a 2.1% decline in global same-restaurant sales, with the U.S. experiencing a 2.8% decrease and international markets seeing a 2.3% increase (excluding Argentina). Management attributed the U.S. decline to adverse weather in January and February, compounded by a weaker-than-expected consumer environment throughout March, leading to reduced traffic.

Total revenues decreased 2.1% to $523.5 million in Q1 2025 from $534.8 million in Q1 2024. This decline was primarily due to lower sales at Company-operated restaurants (down $5.8 million to $219.5 million) and a decrease in franchise royalty revenue (down $4.0 million to $121.7 million), partially offset by an increase in franchise fees (up $2.5 million to $23.4 million) driven by higher fees for IT services.

Profitability metrics also reflected the pressures. Operating profit increased slightly by $1.9 million to $83.1 million, but income before income taxes decreased 4.4% to $54.9 million. Net income fell 6.6% to $39.2 million, resulting in diluted earnings per share of $0.19, down from $0.20 in the prior year. Adjusted EBITDA decreased 2.6% to $124.5 million.

Restaurant-level margins faced headwinds. Global Company-operated restaurant margin was 14.3% in Q1 2025, a decrease of 40 basis points year-over-year. U.S. Company-operated restaurant margin was 14.8%, a contraction of 50 basis points, primarily driven by sales deleveraging, higher commodity costs, and wage rate inflation, partially offset by labor efficiencies. Cost of sales as a percentage of sales increased to 85.7% from 85.3%, mainly due to higher commodity costs and labor rates outpacing price increases and efficiencies.

General and administrative expenses increased by $4.4 million to $68.2 million, primarily due to higher employee compensation and benefits, reflecting investments in the organization. Depreciation and amortization also increased, partly due to technology investments.

Liquidity remains adequate, with cash, cash equivalents, and restricted cash totaling $389.0 million as of March 30, 2025. Cash flow from operations decreased in Q1 2025 compared to the prior year, mainly due to the timing of payments for advertising funds. Cash used in financing activities increased significantly, primarily driven by a substantial increase in share repurchases. The company ended Q1 2025 with a net leverage ratio of 4.5x adjusted EBITDA, within its target range.

Strategic Responses and Future Outlook

In response to the challenging consumer backdrop, particularly the pressure on lower-income households observed in March 2025, Wendy's has updated its full-year 2025 financial outlook. The revised guidance assumes the current consumer environment persists throughout the year. Global systemwide sales are now expected to range from flat to down 2% year-over-year, a notable reduction from the prior outlook of 2% to 3% growth. Consequently, Adjusted EBITDA is projected between $530 million and $545 million, and Adjusted EPS between $0.92 and $0.98.

Despite the lowered top-line and profit guidance, management remains committed to its strategic growth initiatives. A key focus is accelerating global net unit growth. The company added 68 net new restaurants in Q1 2025, with over 60% internationally, aligning with its long-term strategy. The target for full-year 2025 net unit growth remains unchanged at 2% to 3%. This follows a year of approximately flat net unit growth in 2024, which included the strategic closure of around 220 underperforming restaurants with low AUVs (~$1.1 million) to strengthen the system. The new restaurants being built are expected to have significantly higher AUVs (over $2 million), positioning the system for accelerated growth targeting 3-4% annually in the long term. Development commitments are in place to support the 2025 goal.

International expansion is a significant driver of this unit growth, with record openings in Canada in Q1 2025 and continued momentum in the APMEA region, Europe (entering Ireland and Romania in 2025), and Latin America (new commitments in Mexico and Chile).

On the menu front, Wendy's is emphasizing a balanced approach combining core offerings, impactful innovation, and relevant value. The "100 Days of Summer" campaign is planned to feature compelling offers across all dayparts, including breakfast beverage deals and collaborations like the upcoming Takis partnership targeting Gen Z. Innovation off core platforms like Frosty (new swirls and fusions, including Oreo and Pop-Tart collaborations) and a focus on the chicken category later in the year are key initiatives to drive traffic and differentiation. The Biggie Bag remains a core value offering, seen as providing industry-leading quality.

Operational excellence is being prioritized through the "model of excellence" vision, supported by increased investment in field resources to enhance training and restaurant-level execution. Technology deployment, as discussed, is integral to this, aiming to improve speed, accuracy, and productivity.

The updated capital allocation policy, announced in February 2025, reflects a shift to support these growth initiatives. The quarterly dividend was adjusted to $0.14 per share starting in Q2 2025 (targeting a 50-60% adjusted EPS payout ratio), providing flexibility to increase investment in CapEx and the build-to-suit program ($65 million included in the new FCF definition for 2025). Concurrently, the company plans to repurchase up to $200 million in shares in 2025, signaling confidence in the stock's value and returning excess cash to shareholders. Total cash return to shareholders is expected to increase to up to $325 million in 2025.

Competitive Positioning and Risks

Wendy's operates in a highly competitive QSR market dominated by larger players like McDonald's (MCD), Restaurant Brands International (TICKER:QSR - Burger King), and Yum! Brands (TICKER:YUM - KFC, Taco Bell). While Wendy's is smaller in scale and global presence compared to MCD and YUM, it differentiates itself through its "quality" positioning, particularly its fresh, never frozen beef.

Comparing key financial metrics based on recent TTM data highlights some differences:

• Gross Margin: WEN (34.7%) trails MCD (57%), QSR (36%), and YUM (47%).
• Operating Margin: WEN (14.7%) is significantly lower than MCD (45%), QSR (29%), and YUM (32%).
• Net Margin: WEN (9.9%) is also lower than MCD (32%), QSR (12%), and YUM (20%).
• Debt/Equity: WEN (31.3x) has a substantially higher leverage ratio than MCD (-13.7x), QSR (5.1x), and YUM (-1.6x), reflecting its securitized financing structure.
• Valuation Multiples (P/E, P/S, P/B): WEN trades at lower multiples (P/E 12.6x, P/S 1.2x, P/B 18.5x) compared to its larger rivals (MCD P/E 25.3x, P/S 8.0x; QSR P/E 20.4x, P/S 2.5x; YUM P/E 25.5x, P/S 5.0x), potentially indicating a lower growth premium or perceived higher risk/lower profitability.

Despite lower margins and higher leverage, Wendy's has demonstrated the ability to compete effectively, holding traffic and dollar share in the U.S. QSR burger category in recent quarters, even amidst intense value competition and a challenging consumer. Its technological investments, particularly in digital and AI-driven ordering, offer a potential edge in efficiency and customer experience compared to rivals who may be at different stages of deployment. The focus on breakfast continues to be a tailwind, growing faster than the category and contributing incrementally to profitability.

Key risks to the investment thesis include the persistence of the weak consumer environment, which could further pressure sales and traffic beyond current assumptions. Continued inflation in commodity and labor costs could erode margins if pricing power is limited by competitive pressures. Execution risk on strategic initiatives, particularly the ambitious unit growth targets and the successful implementation and adoption of new technologies and operational standards, is also present. Litigation and supply chain disruptions represent ongoing potential challenges.

Conclusion

The Wendy's Company is at a pivotal juncture, actively implementing a strategic plan aimed at accelerating global growth and enhancing operational efficiency. While the first quarter of 2025 results and the subsequent downward revision of the full-year outlook underscore the immediate challenges posed by a strained consumer and inflationary environment, the underlying narrative is one of proactive strategic evolution.

The company is leveraging its foundational commitment to quality, investing significantly in technology to improve the customer experience and drive productivity, and undertaking system optimization to build a stronger base for future expansion. The shift in capital allocation signals management's confidence in its ability to execute these initiatives and generate long-term value, even as it acknowledges near-term headwinds. The investment thesis for Wendy's centers on its capacity to navigate the current macro pressures and intense competitive landscape by successfully executing its strategy, particularly its accelerated unit growth, digital transformation, and operational excellence initiatives, ultimately translating into sustained profitable growth.