Why Wendy’s Stock Got Torched Today

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What happened

Shares of Wendy’s (NASDAQ: WEN) were taking a dive today after the fast-food chain announced a relaunch of breakfast next year and slashed its 2019 earnings forecast due to investments associated with the new plan.

Investors seemed to dislike the new strategy, and the stock was down 10.7% as of 10:48 a.m. EDT.

The sign on a Wendy's

Image source: Wendy’s.

So what

Wendy’s said last night that it would expand its breakfast menu from a test in just 300 restaurants currently to the entire U.S. system. The menu will include items like Breakfast Baconator and Honey Butter Chicken Biscuit.

CEO Todd Penegor said:

Launching breakfast in our U.S. restaurants nationwide provides incredible growth opportunities. We are well-positioned to pursue it. We believe we have the right team and structure in place, and we put Wendy’s fan favorites on our breakfast menu to set us apart from the competition.

Wendy’s also said it would make one-time investments totaling $20 million to launch breakfast, and as a result cut its guidance for the year, a move that displeased investors.

The company now sees adjusted earnings per share falling 3.5% to 6.5%, which compares to a prior forecast for growth of between 3.5% and 7%. It maintained its expectation for comparable sales growth of 3% to 4% for the year.

Now what

In the aftermath of the announcement, Guggenheim Securities downgraded the stock to neutral as the research firm thinks the breakfast launch is risky. Analyst Matthew DiFrisco called it “a potentially risky way to add top-line growth” as the company has several times before tried and failed to add breakfast and the daypart has become increasingly competitive.

Nonetheless, with the right marketing and quality product, the launch could work, and it seems like a mistake for Wendy’s to not even compete for breakfast dollars when its closest competitors McDonald’s and Burger King have long offered the morning meal.

While the guidance cut may be disappointing, the move could pay off over the long term.

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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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