Rising Labor Costs And North American Rivals Will Hinder Performance

Key Takeaways

• Shifts toward health consciousness and fast food scrutiny weaken demand for core offerings and curb revenue growth in a competitive, saturated market.
  
• Persistently rising labor and input costs, plus the disruption from delivery platforms, threaten margins, profitability, and long-term earnings stability.
  
• Strong international growth, digital innovation, and enhanced analytics are driving operational gains, franchisee strength, and global expansion, positioning Wendy's for sustained earnings improvement.

Catalysts

Operates as a quick-service restaurant company in the United States and internationally.

• The ongoing shift in consumer focus toward health and wellness, with increased scrutiny of fast food and processed foods, is expected to diminish demand for Wendy's core menu items and negatively impact same-store sales growth, making top-line revenue growth structurally more difficult.
  
• Escalating labor costs, driven by both mandated minimum wage hikes and persistent labor scarcity, are likely to exert sustained downward pressure on restaurant-level margins and overall profitability, limiting future net earnings expansion.
  
• Wendy's limited international presence relative to larger global peers leaves it overexposed to a saturated and increasingly competitive North American quick-service market, sharply constraining future systemwide revenue growth and diversification opportunities.
  
• The growing dominance of third-party delivery platforms and direct-to-consumer meal solutions is poised to disrupt traditional quick-service restaurant business models, which could erode Wendy's customer loyalty and compress both revenue and margins as commission costs rise.
  
• Intensifying industry competition from both established quick-serve brands and new fast-casual entrants, combined with ever more volatile commodity input prices, threatens Wendy's ability to defend its market share and maintain stable gross margins or predictable earnings over the long term.

Wendy's Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Wendy's compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Wendy's's revenue will decrease by 0.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 8.6% today to 9.0% in 3 years time.
• The bearish analysts expect earnings to reach $206.1 million (and earnings per share of $1.02) by about August 2028, up from $191.6 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 11.1x on those 2028 earnings, up from 10.1x today. This future PE is lower than the current PE for the US Hospitality industry at 22.5x.
• Analysts expect the number of shares outstanding to decline by 5.52% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.32%, as per the Simply Wall St company report.

Wendy's Future Earnings Per Share Growth

Risks

• Wendy's international business is exhibiting strong momentum, evidenced by 8.7% systemwide sales growth and 23.9% adjusted EBITDA growth in the latest quarter, which could lead to higher revenue and earnings if this trend continues and their global footprint further expands.
  
• Significant investment and progress in digital initiatives such as FreshAI, digital menu boards, and loyalty programs are driving higher customer satisfaction and sales mix at company-operated restaurants, suggesting long-term potential for improved net margins and recurring visits as these tools are scaled systemwide.
  
• Net unit growth remains robust, with 2% to 3% targeted annually and new development agreements secured in Europe, Latin America, and other markets, which directly supports higher long-term revenue and earnings through increased restaurant count.
  
• Enhanced data analytics capabilities and granular franchise-level P&L tracking are already enabling operational improvements and targeted marketing, which may help lift same-store sales and boost system profitability over time.
  
• Franchisee EBITDA and sales have shown sustained growth in both the U.S. and Canada, reflecting a strong underlying business model; ongoing initiatives to improve franchisee economics may stimulate additional unit openings and reinforce free cash flow generation and long-term net earnings.

Valuation

• The assumed bearish price target for Wendy's is $10.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Wendy's's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $18.5, and the most bearish reporting a price target of just $10.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $2.3 billion, earnings will come to $206.1 million, and it would be trading on a PE ratio of 11.1x, assuming you use a discount rate of 12.3%.
  
• Given the current share price of $10.09, the bearish analyst price target of $10.0 is 0.9% lower. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.