We have been discussing the many headwinds currently impacting the fast food sector.

A recent survey found that one in eight U.S. adults (12%) admits to using glucagon-like peptide-1 (GLP-1) drugs.

GLP-1 drugs work by mimicking the effects of a naturally occurring hormone called glucagon-like peptide-1, which is released after eating and signals feelings of fullness.

These drugs slow the movement of food from the stomach into the small intestine, making people feel full faster and for longer durations so that they end up eating less.

This appetite-reducing and calorie-cutting effect is revolutionary for human physiology and will likely impact many businesses in the food industry over the long run.

By decreasing overall food consumption, wider adoption of GLP-1 drugs may gradually erode sales at restaurants, packaged food companies, and supermarkets.

Furthermore, The Federal Reserve has been aggressively raising interest rates to slow inflation, but Fed Chair Jerome Powell acknowledges that achieving the long-term 2% target will be challenging.

One of the clearest indicators of shifting consumer behavior comes from Amazon (AMZN). In a recent conference call, Amazon CEO Andy Jassy noted customers are increasingly looking for deals and trading down to less expensive products.

This trend of “trading down” is impacting many industries as inflation eats into household budgets.

The food industry in particular has been impacted negatively by inflation. Food prices rose nearly 10% in 2022, the highest rate since 1979. As the cost of dining out increases, consumers are trading for cheaper alternatives.

Recently, we have seen proof of these headwinds as McDonald’s earnings disappointed.

During Q2 2024, McDonald’s reported adjusted diluted earnings per share came in at $2.97, below the $3.07 that analysts had predicted. Global comparable sales also declined by 100 bps.

Another company that could potentially face similar struggles to McDonald’s is Wendy’s (WEN).

Like McDonald’s, Wendy’s same-store sales are also likely feeling pressure from weight loss drugs curbing appetite long-term and inflation driving short-term trading down behaviors. 

Additionally, if macroeconomic conditions do not improve, the company’s earnings may disappoint similar to McDonald’s as well due to customers trading down and looking for cheaper alternatives.

Furthermore, with a highly competitive industry facing numerous headwinds, it will be difficult for Wendy’s to significantly increase sales or market share.

The company’s recent earnings show it is already facing these issues. Global systemwide sales growth decreased by 430 bps and U.S. restaurant margins decreased 80 bps YoY.

With a lack of strong growth drivers and exposure to industry headwinds, Wendy’s business could potentially face the same fate as McDonald’s in the current environment.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Strategist &
Director of Research
at Valens Research

This analysis of Wendy’s (WEN)’s credit outlook is the same type of analysis that powers our macro research detailed in the member-exclusive FA Alpha Pulse.