Wendy’s/Arby’s International Inc., a subsidiary of Wendy’s/Arby’s GroupInc.(WEN) recently announced that it has entered into a development agreement with Higa Industries Co. Ltd. to expand in Japan. Per the deal, Higa Industries will develop and operate Wendy’s restaurants throughout the country in the coming years. The terms of the deal were not disclosed. The first location is expected to open in Tokyo later this year.
The latest deal with Higa Industries will mark Wendy’s return to the Japanese market after it called off its franchise agreement in that country back in 2009. Wendy’s had decided against renewing its contract, citing its franchiser’s tardy development. This resulted in the closure of 71 restaurants in that country.
Higa Industries, led by Ernest Higa, boasts of local market knowledge and has a proven track record of venturing into industries as diverse as lumber, medical and the restaurant, within the Japanese market. It had owned and operated 180 stores of Domino’s Pizza Inc. (DPZ) in Japan before selling this business in February 2010.
The deal affirms management’s intent to make Japan one of the prime markets for international expansion, considering its stepped up economy and status of being the second largest quick-service restaurant market in the world. The company seeks to capitalize the country’s potential in full.
In an attempt to strengthen its international presence, last month, Wendy’s announced two long-term development agreements to expand in Argentina and the Philippines. Apart from these, Atlanta-based Wendy’s is in a long-term development agreement with franchisees in the Middle East and North Africa, Singapore, Turkey, Russia and the Eastern Caribbean.
Additionally, the company is exploring growth opportunities in China, Brazil and other key international markets. Fulfillment of the company’s current expansion plans would widen its global presence considerably, to as many as 1,000 restaurants.
Beginning 2012, management expects the Wendy’s chain to drive annual increases of 10% to 15% in EBITDA. The expansion program includes20 company-operated and 45 franchised domestic stores as well as 50 international franchised stores, all with a 2011 launch target.
Management believes that Wendy’s provides high growth opportunities with 6,500 restaurants in more than 20 countries. However, the company will face heightened competition from its peer McDonald’s Inc. (MCD). With a much wider scale of operation, McDonald’s is a prominent name in Japan where McDonald’s registered 4.5% comparable sales growth in 2010 buoyed by the value-based breakfast launched mid-year and the re-launch of popular Texas Burger in December.
A sharp rise in commodity costs also remains a concern. Wendy’s/Arby’s currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. We also maintain our long-term “Neutral” recommendation on the stock.
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