The Wendy’s Company Results

The Wendy's Company Reports Preliminary 2016 Results

16th consecutive quarter of positive same-restaurant sales; North America system same-restaurant sales increase 0.8% in 4Q and 1.6% in 2016 (+5.6% and +4.9% on a two-year basis, respectively)

The Wendy’s Company

The Wendy's Company (NASDAQ:  WEN) today reported preliminary unaudited results for the fourth quarter and full year ended January 1, 2017. The Company plans to file its audited financial results on or before March 2, 2017.

"We have now recorded 16 consecutive quarters of positive same-restaurant sales and total new restaurant openings have accelerated in both North America and International with nearly 150 new restaurants opened globally in 2016," President and Chief Executive Officer Todd Penegor said. "As a result of our brand transformation efforts and with the support from our franchise partners, the Wendy's® system has never been stronger."

"As we look to 2017 and beyond, we are poised for strong global growth," Penegor said. "We believe we can grow the Wendy's system by approximately 1,000 restaurants and $2 billion in sales by 2020, resulting in a global system of about 7,500 restaurants generating $12 billion in sales. Importantly, this growth will be achieved in a profitable manner for both the Company and franchisees, which will help carry the momentum beyond 2020."

Preliminary fourth quarter and full year 2016 results 

A summary of the Company's preliminary fourth quarter and full year 2016 results is provided below. The fourth quarter and full year 2015 results include the favorable impact of a 53rd operating week, which affects all comparisons to 2015. Due to the May 2015 sale of its bakery business, the Company has presented its bakery results as discontinued operations for all periods presented in its consolidated financial statements. See "Disclosure Regarding Non-GAAP Financial Measures" and the reconciliation tables that accompany this release for a discussion and reconciliation of certain non-GAAP financial measures included in this release (i.e., adjusted EBITDA, adjusted EBITDA margin, adjusted earnings per share, adjusted tax rate and free cash flow). As used in this release, the terms adjusted EBITDA and adjusted earnings per share refer to adjusted EBITDA from continuing operations and adjusted earnings per share from continuing operations, respectively.

Preliminary fourth quarter summary

  • Same-restaurant sales increased 0.8 percent at North America system restaurants in the fourth quarter of 2016, or 5.6 percent on a two-year basis. 
  • Revenues were $309.9 million in the fourth quarter of 2016, compared to $464.4 million in the fourth quarter of 2015. The 33.3 percent decrease resulted primarily from the ownership of 522 fewer Company-operated restaurants at the end of the 2016 fourth quarter compared to the beginning of the 2015 fourth quarter. 
  • Franchise royalty revenue and fees were $95.7 million in the fourth quarter of 2016, compared to $100.8 million in the fourth quarter of 2015. The 5.1 percent decrease primarily resulted from a decrease in franchise fees resulting from a year-over-year reduction in the number of restaurants sold through the Company's system optimization initiative. 
  • Franchise rental income was $40.7 million in the fourth quarter of 2016, compared to $26.4 million in the fourth quarter of 2015. The 54.2 percent increase resulted primarily from the Company's system optimization initiative. 
  • Company-operated restaurant margin was 18.8 percent in the fourth quarter of 2016, compared to 19.2 percent in the fourth quarter of 2015. The 40 basis-point decrease was primarily the result of higher other operating costs and increased labor rates, partly offset by lower commodity costs and the favorable impact from the Company's Image Activation program. 
  • General and administrative expense was $61.2 million in the fourth quarter of 2016, compared to $72.4 million in the fourth quarter of 2015. The 15.5 percent decrease resulted primarily from cost savings related to the Company's system optimization initiative, as well as lower incentive compensation. 
  • Operating profit was $79.2 million in the fourth quarter of 2016, compared to $116.3 million in the fourth quarter of 2015. The 31.9 percent decrease resulted primarily from a year-over-year decrease in System optimization gains, net, partly offset by a year-over-year decrease in Impairment of long-lived assets, in addition to the items discussed above. 
  • Interest expense was $29.3 million in the fourth quarter of 2016, compared to $28.2 million in the fourth quarter of 2015. 
  • Income from continuing operations was $28.9 million in the fourth quarter of 2016, compared to $88.7 million in the fourth quarter of 2015. The decrease resulted from the year-over-year decrease in Investment income, net and System Optimization gains, net, partly offset by a year-over-year decrease in income taxes. 
  • Net income was $28.9 million in the fourth quarter of 2016, compared to $85.9 million in the fourth quarter of 2015. 
  • Adjusted EBITDA from continuing operations was $91.1 million in the fourth quarter of 2016, compared to $107.6 million in the fourth quarter of 2015. The 15.3 percent decrease resulted primarily from the ownership of 522 fewer Company-operated restaurants at the end of the 2016 fourth quarter compared to the beginning of the 2015 fourth quarter. 
  • Adjusted EBITDA margin (adjusted EBITDA divided by total revenues) was 29.4 percent in the fourth quarter of 2016, compared to 23.2 percent in the fourth quarter of 2015. The 620 basis-point improvement reflects the positive impact of the Company's system optimization initiative. 
  • Reported diluted earnings per share from continuing operations were $0.11 in the fourth quarter of 2016, compared to $0.32 in the fourth quarter of 2015. 
  • Reported diluted earnings per share were $0.11 in the fourth quarter of 2016, compared to $0.31 in the fourth quarter of 2015. 
  • Adjusted earnings per share from continuing operations were $0.08 in the fourth quarter of 2016, compared to $0.12 in the fourth quarter of 2015.

Preliminary full year 2016 summary

  • Same-restaurant sales increased 1.6 percent at North America system restaurants in 2016, or 4.9 percent on a two-year basis. 
  • Revenues were $1,435.4 million in 2016, compared to $1,870.3 million in 2015. The 23.3 percent decrease resulted primarily from the ownership of 627 fewer Company-operated restaurants at the end of the 2016 compared to the beginning of 2015. 
  • Franchise royalty revenue and fees were $371.5 million in 2016, compared to $344.5 million in 2015. The 7.8 percent increase primarily resulted from the Company's system optimization initiative, in addition to higher same restaurant sales at franchised restaurants. 
  • Franchise rental income was $143.1 million in 2016, compared to $87.0 million in 2015. The 64.5 percent increase resulted primarily from the Company's system optimization initiative. 
  • Company-operated restaurant margin was 19.1 percent in 2016, compared to 17.7 percent in 2015. The 140 basis-point increase was primarily the result of lower commodity costs and the favorable impact from the Company's Image Activation program, partly offset by higher other operating costs and increased labor rates. 
  • General and administrative expense was $245.9 million in 2016, compared to $256.6 million in 2015. The 4.2 percent decrease resulted primarily from cost savings related to the Company's system optimization initiative, as well as lower incentive compensation, partly offset by higher professional fees and legal fees related to the unusual payment card activity. 
  • Operating profit was $314.8 million in 2016, compared to $274.5 million in 2015. The 14.7 percent increase resulted primarily from a year-over-year decrease in Depreciation and amortization expense, General and administrative expense and Reorganization and realignment costs. 
  • Interest expense was $114.8 million in 2016, compared to $86.1 million in 2015. The 33.3 percent increase resulted primarily from higher total debt levels related to the Company's debt restructuring completed in the second quarter of 2015. 
  • Income from continuing operations was $129.6 million in 2016, compared to $140.0 million in 2015. The 7.4 percent decrease resulted from the year-over-year decrease in Investment income, net, partly offset by a year-over-year decrease in Depreciation and amortization expense, General and administrative expense, Reorganization and realignment costs and income taxes. 
  • Net income was $129.6 million in 2016, compared to $161.1 million in 2015. 
  • Adjusted EBITDA from continuing operations was $391.9 million in 2016, compared to $392.4 million in 2015, despite the ownership of 627 fewer Company-operated restaurants at the end of the 2016 compared to the beginning of 2015. 
  • Adjusted EBITDA margin (adjusted EBITDA divided by total revenues) was 27.3 percent in 2016, compared to 21.0 percent in 2015. The 630 basis-point improvement reflects the positive impact of the Company's system optimization initiative. 
  • Reported diluted earnings per share from continuing operations were $0.49 in 2016, compared to $0.43 in 2015. The increase reflects an 18.9 percent year-over-year reduction in the weighted average diluted shares outstanding. 
  • Reported diluted earnings per share were $0.49 in 2016, compared to $0.49 in 2015. 
  • Adjusted earnings per share from continuing operations were $0.40 in 2016, compared to $0.33 in 2015.

"We are very proud that we were able to hold adjusted EBITDA flat year-over year despite selling a significant number of Company-operated restaurants during 2016," Chief Financial Officer Gunther Plosch said. "We look forward to realizing the positive benefits of our brand transformation in 2017 and beyond, with higher franchise revenues driving a higher quality of earnings."

Third phase of system optimization now complete The Company has completed its plan to reduce its Company-operated restaurant ownership to approximately 5 percent of the total system. The Company sold a total of 310 restaurants to franchisees during 2016, which is in addition to the 227 restaurants that were sold in the second half of 2015. In total, the third phase of system optimization generated pretax proceeds and fees of $435 million.

"Our system is stronger following the completion of the third phase of our system optimization initiative," Penegor said. "All markets were awarded to strong operators who have demonstrated a commitment to restaurant reimaging and opening new restaurants which will be imperative to our future growth."

"Going forward, we will continue to strategically buy and sell restaurants in order to further strengthen our franchisee base, drive new restaurant development and accelerate Image Activation," Penegor said. "By also facilitating franchisee-to-franchisee restaurant transfers ("Buy and Flips") we ensure that we are putting restaurants in the hands of well capitalized franchisees that are committed to long-term growth. During 2016 we facilitated 144 Buy and Flips and expect to complete around 400 in 2017, which includes approximately 50 Buy and Flips that were originally scheduled to close in late 2016."

Global Image Activation and new restaurant openings momentum continues The Company and its franchisees reimaged 521 North America system restaurants and built 99 new North America restaurants and 50 new International restaurants in 2016. Global net new restaurant openings totaled 58 in 2016. At the end of 2016, approximately 32 percent of the global system features our new image.

Board authorizes increase in quarterly dividend rate and new share repurchase program In 2016, the Company repurchased 29.5 million shares for $335.0 million at an average price of $11.34 per share. The number of shares outstanding at the end of the fourth quarter of 2016 was approximately 246.6 million.

The Company announced today that its Board of Directors has authorized an increase of 0.5 cents per share in its quarterly dividend rate. The Company's new quarterly dividend rate of 7 cents per share will be effective with its next dividend payment on March 15, 2017to shareholders of record as of March 1, 2017. This increase is in addition to the 0.5 cents per share increase that was authorized in the fourth quarter of 2016.

The Company also announced today that its Board of Directors authorized a new share repurchase program for up to $150 million of the Company's common stock through March 4, 2018. The Company intends to repurchase shares with existing cash on its balance sheet and cash flow from operations.

Company issues 2017 outlook This release includes forward-looking guidance for certain non-GAAP financial measures, including adjusted EBITDA, adjusted earnings per share and adjusted tax rate. The Company excludes certain expenses and benefits from adjusted EBITDA, adjusted earnings per share and adjusted tax rate, such as impairment of long-lived assets, reorganization and realignment costs and system optimization gains, net. Due to the uncertainty and variability of the nature and amount of those expenses and benefits, the Company is unable without unreasonable effort to provide projections of net income, earnings per share or reported tax rate or a reconciliation of projected adjusted EBITDA, adjusted earnings per share or adjusted tax rate to projected net income, earnings per share or reported tax rate.

During 2017, the Company expects:

  • Adjusted EBITDA of approximately $396 to $404 million, an increase of approximately 1 to 3 percent compared to 2016. 
  • Adjusted earnings per share of approximately $0.45 to $0.47, an increase of approximately 13 percent to 18 percent compared to 2016. 
  • Same-restaurant sales growth of approximately 2 to 3 percent for the North America system. 
  • Flat Company-operated restaurant margin compared to 2016. 
  • Flat commodity costs compared to 2016. 
  • Labor inflation of approximately 4 percent. 
  • General and administrative expense of approximately $210 to $220 million. 
  • Interest expense of approximately $115 million. 
  • Depreciation and amortization expense of approximately $120 million, including accelerated depreciation of approximately $2 million. 
  • Cash flows from operations of approximately $240 to $275 million. 
  • Capital expenditures of approximately $80 to $90 million. 
  • Free cash flow (cash flows from operations minus capital expenditures) of approximately $160 to $185 million. 
  • An adjusted tax rate of approximately 32 to 34 percent.

"After achieving solid results in 2016, we are pleased to turn the page with a strong outlook for 2017," Plosch said. "This will be the final year of transition after completing the third phase of system optimization. Our ability to grow earnings and cash flow despite owning fewer Company-operated restaurants is compelling. We look forward to focusing on our core business model and driving growth even further."

Company announces updated 2020 goals The Company now expects to achieve the following goals by the end of 2020:

  • Global restaurant sales (in constant currency and excluding Venezuela) of ~$12 billion. 
  • Global restaurant count of ~7,500. 
  • Global Image Activation of at least 70 percent. 
  • Adjusted EBITDA Margin of 38 to 40 percent. 
  • Free Cash Flow of ~$275 million (capital expenditures of ~$65 million).

"All of the updated 2020 goals revolve around growth, both in North America and International," Penegor said. "We must build upon our current operating momentum by growing our customer base, expanding brand access, enhancing restaurant level profitability and implementing a more efficient cost structure."

"In order to achieve our 2020 adjusted EBITDA margin and free cash flow commitments, G&A and capital spending efficiency will improve," Penegor said. "In that spirit, we plan to accelerate our G&A savings efforts and expect that we will be able to reduce G&A to approximately 1.5 percent of global restaurant sales by 2020. We are still in the planning stages and will provide a more detailed update on how we expect to achieve these savings on or before our first-quarter earnings call in May."

Key Business Measures The Company tracks its results of operations and manages its business using certain key business measures, including North America system same-restaurant sales.  North America system same-restaurant sales includes sales by both Company-operated restaurants and franchise restaurants located in the U.S. and Canada. The Company reports same-restaurant sales for new restaurants after they have been open for 15 continuous months and for reimaged restaurants as soon as they reopen. This methodology is consistent with the metric used by management for internal reporting and analysis. Prior to the first quarter of 2016, the Company reported same-restaurant sales for reimaged restaurants after they had been open for three continuous months. Same-restaurant sales exclude the impact of currency translation.

Same-restaurant sales is a commonly used statistical measure in the quick-service restaurant industry that is important to understanding Company performance. The Company believes North America system same-restaurant sales data is useful in assessing consumer demand for the Company's products, the overall strength of the Wendy's brand and, ultimately, the performance of the Company. Sales by franchise restaurants to their customers are not recorded as Company revenues and are not included in the Company's consolidated financial statements. However, the Company's royalty revenues are computed as percentages of sales made by Wendy's franchisees and, as a result, sales by franchisees have a direct effect on the Company's royalty revenues and therefore on the Company's profitability.

About The Wendy's Company The Wendy's Company is the world's third-largest quick-service hamburger company. The Wendy's system includes approximately 6,500 franchise and Company-operated restaurants in the United States and 30 countries and U.S. territories worldwide.

 

The Wendy's Company and Subsidiaries Consolidated Statements of Operations Three and Twelve Months Ended January 1, 2017 and January 3, 2016 (In Thousands Except Per Share Amounts)

 
 

Three Months Ended

 

Twelve Months Ended

 

2016

 

2015 (a)

 

2016

 

2015 (a)

 

(Unaudited)

Revenues:

             

Sales

$

173,547

   

$

337,170

   

$

920,758

   

$

1,438,802

 

Franchise royalty revenue and fees

95,659

   

100,771

   

371,545

   

344,523

 

Franchise rental income

40,695

   

26,424

   

143,115

   

86,972

 
 

309,901

   

464,365

   

1,435,418

   

1,870,297

 

Costs and expenses:

             

Cost of sales

140,865

   

272,316

   

744,701

   

1,184,073

 

Franchise rental expense

18,076

   

14,043

   

67,760

   

47,779

 

General and administrative

61,161

   

72,401

   

245,869

   

256,553

 

Depreciation and amortization

30,248

   

33,751

   

122,704

   

145,051

 

System optimization gains, net

(23,825)

   

(59,258)

   

(71,931)

   

(74,009)

 

Reorganization and realignment costs

2,217

   

5,264

   

10,083

   

21,910

 

Impairment of long-lived assets

3,250

   

11,533

   

16,241

   

25,001

 

Other operating income, net

(1,306)

   

(1,997)

   

(14,789)

   

(10,531)

 
 

230,686

   

348,053

   

1,120,638

   

1,595,827

 

Operating profit

79,215

   

116,312

   

314,780

   

274,470

 

Interest expense

(29,319)

   

(28,185)

   

(114,802)

   

(86,067)

 

Loss on early extinguishment of debt

   

   

   

(7,295)

 

Investment income, net

375

   

52,035

   

723

   

52,214

 

Other income, net

301

   

260

   

989

   

806

 

Income from continuing operations before income taxes

50,572

   

140,422

   

201,690

   

234,128

 

Provision for income taxes

(21,681)

   

(51,741)

   

(72,066)

   

(94,149)

 

Income from continuing operations

28,891

   

88,681

   

129,624

   

139,979

 

Discontinued operations:

             

Income from discontinued operations, net of income taxes

   

1,323

   

   

10,494

 

(Loss) gain on disposal of discontinued operations, net of income taxes

   

(4,148)

   

   

10,669

 

Net (loss) income from discontinued operations

   

(2,825)

   

   

21,163

 

Net income

$

28,891

   

$

85,856

   

$

129,624

   

$

161,142

 
               

Basic income (loss) per share:

             

Continuing operations

$

.11

   

$

.32

   

$

.49

   

$

.43

 

Discontinued operations

   

(.01)

   

   

.07

 

Net income

$

.11

   

$

.31

   

$

.49

   

$

.50

 
               

Diluted income (loss) per share:

             

Continuing operations

$

.11

   

$

.32

   

$

.49

   

$

.43

 

Discontinued operations

   

(.01)

   

   

.06

 

Net income

$

.11

   

$

.31

   

$

.49

   

$

.49

 
               

Number of shares used to calculate basic income (loss) per share

251,730

   

273,292

   

262,209

   

323,018

 
               

Number of shares used to calculate diluted income (loss) per share

257,026

   

278,024

   

266,712

   

328,725

 
               

(a) 2015 consolidated statements of operations reflect reclassifications to conform to the current year presentation.

               
         

January 1, 2017

 

January 3, 2016

         

(Unaudited)

 

(Audited)

Balance Sheet Data:

             

Cash and cash equivalents

       

$

198,240

   

$

327,216

 

Total assets

       

3,939,314

   

4,108,720

 

Long-term debt, including current portion

       

2,512,282

   

2,426,113

 

Total stockholders' equity

       

527,736

   

752,914

 

 

Reconciliation of Net Income to Adjusted EBITDA from Continuing Operations (In Thousands) (Unaudited)

               
 

Three Months Ended

 

Twelve Months Ended

 

2016

 

2015

 

2016

 

2015

               

Net income

$

28,891

   

$

85,856

   

$

129,624

   

$

161,142

 

Net loss (income) from discontinued operations

   

2,825

   

   

(21,163)

 

Income from continuing operations

28,891

   

88,681

   

129,624

   

139,979

 

Provision for income taxes

21,681

   

51,741

   

72,066

   

94,149

 

Income from continuing operations before income taxes

50,572

   

140,422

   

201,690

   

234,128

 

Other income, net

(301)

   

(260)

     

(989)

     

(806)

 

Investment income, net

 

(375)

   

(52,035)

   

(723)

   

(52,214)

 

Loss on early extinguishment of debt

   

   

   

7,295

 

Interest expense

29,319

   

28,185

   

114,802

   

86,067

 

Operating profit

79,215

   

116,312

   

314,780

   

274,470

 

Plus (less):

             

Depreciation and amortization

30,248

   

33,751

   

122,704

   

145,051

 

System optimization gains, net

(23,825)

   

(59,258)

   

(71,931)

   

(74,009)

 

Reorganization and realignment costs

2,217

   

5,264

   

10,083

   

21,910

 

Impairment of long-lived assets

3,250

   

11,533

   

16,241

   

25,001

 

Adjusted EBITDA from continuing operations

$

91,105

   

$

107,602

   

$

391,877

   

$

392,423

 
               

Adjusted EBITDA margin

29.4

%

 

23.2

%

 

27.3

%

 

21.0

%

                                   

 

Reconciliation of Income and Diluted Earnings Per Share from Continuing Operations to Adjusted Income and Adjusted Earnings Per Share from Continuing Operations (In Thousands Except Per Share Amounts) (Unaudited)

       
 

Three Months Ended

 

2016

 

2015

       

Income from continuing operations

$

28,891

   

$

88,681

 

Plus (less):

     

Depreciation of assets that will be replaced as part of the Image Activation initiative

(332)

   

2,029

 

System optimization gains, net

(23,825)

   

(59,258)

 

Reorganization and realignment costs

2,217

   

5,264

 

Impairment of long-lived assets

3,250

   

11,533

 

Other than temporary loss on investment

   

3,150

 

Dividend from Arby's

   

(54,911)

 

Total adjustments

(18,690)

   

(92,193)

 

Income tax impact on adjustments1

10,236

   

36,620

 

Total adjustments, net of income taxes

(8,454)

   

(55,573)

 
       

Adjusted income from continuing operations

$

20,437

   

$

33,108

 
       

Diluted earnings per share from continuing operations

$

.11

   

$

.32

 

Total adjustments per share, net of income taxes

(.03)

   

(.20)

 

Adjusted earnings per share from continuing operations

$

.08

   

$

.12

 
       
 

Twelve Months Ended

 

2016

 

2015

       

Income from continuing operations

$

129,624

   

$

139,979

 

Plus (less):

     

Depreciation of assets that will be replaced as part of the Image Activation initiative

2,598

   

8,607

 

System optimization gains, net

(71,931)

   

(74,009)

 

Reorganization and realignment costs

10,083

   

21,910

 

Impairment of long-lived assets

16,241

   

25,001

 

Loss on early extinguishment of debt

   

7,295

 

Other than temporary loss on investment

   

3,150

 

Dividend from Arby's

   

(54,911)

 

Total adjustments

(43,009)

   

(62,957)

 

Income tax impact on adjustments1

19,479

   

32,799

 

Total adjustments, net of income taxes

(23,530)

   

(30,158)

 
       

Adjusted income from continuing operations

$

106,094

   

$

109,821

 
       

Diluted earnings per share from continuing operations

$

.49

   

$

.43

 

Total adjustments per share, net of income taxes

(.09)

   

(.10)

 

Adjusted earnings per share from continuing operations

$

.40

   

$

.33

 
 

1 The provision for income taxes on "System optimization gains, net" was $12,218 and $28,664 for the three months ended January 1, 2017 and January 3, 2016, respectively, and $30,643 and $41,822 for the twelve months ended January 1, 2017 and January 3, 2016, respectively. The provision for income taxes on "System optimization gains, net" includes the impact of non-deductible goodwill disposed of in connection with our system optimization initiative, changes to state deferred taxes, changes to valuation allowances on state net operating loss carryforwards and adjustments related to prior year tax matters. The provision for income taxes on the dividend from Arby's was calculated using an effective tax rate of 29.72%. The benefit from income taxes on all other adjustments was calculated using an effective tax rate of 38.6% for the year ended January 1, 2017 and 38.42% for the year ended January 3, 2016.



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