Shares of Wendy's Co. continued their post-earnings selloff on Wednesday, following a recommendation from a long-time bullish analyst to stop buying. This advice was based on concerns that price competition within the fast-food industry will become more intense.
Stock Performance: The fast-food chain's stock (WEN, -2.50%) dropped 1.2% in premarket trading, marking a fourth-straight loss and setting it on course to open at a 20-month low. Over the past three sessions since Wendy's reported fourth-quarter results, the stock had decreased by 6.8%, closing at the lowest price since June 22, 2022.
Analyst Downgrade: Analyst John Ivankoe from J.P. Morgan downgraded Wendy's stock rating to neutral after maintaining an overweight rating for at least three years. He also adjusted the price target from $22 to $19, explaining that the stock is expected to "remain rangebound" due to increased competitive pricing and capital intensity.
Consumer Behavior Shift: Ivankoe highlighted how the core consumer base in the fast-food industry is placing a greater emphasis on value. This shift is driven by the fact that grocery prices are now over 4.5 percentage points lower than prices at limited-service restaurants like Wendy's.
Industry Insights
It's worth noting that Walmart Inc. (WMT, +3.23%) indicated in its fiscal fourth-quarter earnings report that food prices have decreased in categories such as eggs, apples, and deli snacks.
Wendy’s and Competitors Shift Back to Pre-COVID Strategies
In response to the changing landscape, Wendy’s and its competitors, such as McDonald’s Corp. and Yum Brands Inc.’s Taco Bell, have reverted to pre-COVID strategies. This includes offering deals for meals or single menu items, a familiar tactic for attracting customers and driving sales.
Concerns Around 'Peak Calorie' and Anti-Obesity Measures
There is a growing concern about the concept of "peak calorie" following years of expansion within the fast-food industry. The trend of "COVID-era indulgence" is now being accompanied by the calorie-reducing effects of anti-obesity medications, signaling a potential shift in consumer behavior and preferences.
Wendy’s Breakfast Push Faces Challenges
Despite Wendy’s strong push into the breakfast market, there have been challenges in driving frequency among its core customer base. Analysts are skeptical about Wendy’s ambitious goal to increase daypart sales by 50% through a $55 million investment in breakfast advertising, considering it a bold and possibly risky move.
Read: Wendy’s Invests Heavily in Breakfast Advertising, Banking on Customer Return.
Positive Outlook on Wendy’s Stock Dividend Yield
On a positive note, Wendy’s stock offers an attractive dividend yield of 5.56%, outperforming competitors like McDonald’s, Yum Brands, and Restaurant Brands International Inc. This favorable dividend yield has caught the attention of investors and analysts alike, highlighting the potential for long-term growth and stability.
Analyst Consensus on Wendy’s Performance
Following recent developments, analyst Mark Ivankoe's cautious stance on Wendy’s stock reflects the sentiment of the majority on Wall Street. Out of the 28 analysts covering Wendy’s, 20 have a neutral outlook, seven are bullish, and one holds a bearish view, indicating a mixed but cautious sentiment towards the company's future performance.
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