The Wendy's Company Reports Third Quarter 2020 Results
Company Increases Quarterly Dividend by 40%
The Wendy's Company (Nasdaq: WEN) today reported unaudited results for the third quarter ended September 27, 2020.
"In the third quarter we posted our highest Global same-restaurant sales growth performance in over 15 years on top of outsized growth in the prior year." President and Chief Executive Officer Todd Penegor said. "In addition to these very strong sales, our restaurant economic model continues to strengthen, with Company-operated restaurant margin expansion compared to the prior year, despite significant commodity headwinds. We remain focused on our goal of delivering efficient, accelerated growth behind our three major long-term growth pillars: building our breakfast daypart, growing our digital business, and expanding our International footprint. With the momentum we have in our business, I am more confident than ever that we will achieve our vision of becoming the world's most thriving and beloved restaurant brand."
| Operational Highlights | Third Quarter | Year-to-Date | |||||
| 2020 | 2019 | 2020 | 2019 | ||||
| Systemwide Sales Growth(1) | |||||||
| U.S. | 7.9% | 5.8% | 1.6% | 3.6% | |||
| International(2) | (3.5)% | 4.6% | (9.3)% | 8.3% | |||
| Global | 6.7% | 5.7% | 0.5% | 4.1% | |||
| Same-Restaurant Sales Growth(1) | |||||||
| U.S. | 7.0% | 4.5% | 0.9% | 2.4% | |||
| International(2) | (2.1)% | 3.3% | (7.3)% | 3.3% | |||
| Global | 6.1% | 4.4% | —% | 2.5% | |||
| Restaurant Openings | |||||||
| U.S. - Total / Net | 27 / 12 | 24 / 12 | 73 / 22 | 68 / 15 | |||
| International - Total / Net | 6 / (4) | 16 / 12 | 23 / 4 | 43 / 17 | |||
| Global - Total / Net | 33 / 8 | 40 / 24 | 96 / 26 | 111 / 32 | |||
| Systemwide Sales (In US$ Millions)(3) | |||||||
| U.S. | $2,692 | $2,495 | $7,436 | $7,316 | |||
| International(2) | $291 | $303 | $784 | $877 | |||
| Global | $2,983 | $2,798 | $8,220 | $8,193 | |||
| Global Reimaging Completion Percentage | 62% | 56% | |||||
| (1) Systemwide sales growth and same-restaurant sales growth are calculated on a constant currency basis and include sales by both Company-operated and franchise restaurants. | |||||||
| (2) Excludes Venezuela and Argentina. | |||||||
| (3) Systemwide sales include sales at both Company-operated and franchise restaurants. | |||||||
| Financial Highlights | Third Quarter | Year-to-Date | |||||||||||||||||||
| 2020 | 2019 | B / (W) | 2020 | 2019 | B / (W) | ||||||||||||||||
| (In Millions Except Per Share Amounts) | (Unaudited) | (Unaudited) | |||||||||||||||||||
| Total Revenues | $ | 452.2 | $ | 437.9 | 3.3 | % | $ | 1,259.5 | $ | 1,281.8 | (1.7) | % | |||||||||
| Adjusted Revenues(1) | $ | 367.5 | $ | 351.1 | 4.7 | % | $ | 1,018.0 | $ | 1,027.9 | (1.0) | % | |||||||||
| Company-Operated Restaurant Margin | 16.9 | % | 16.2 | % | 0.7 | % | 13.9 | % | 15.9 | % | (2.0) | % | |||||||||
| General and Administrative Expense | $ | 47.3 | $ | 46.2 | (2.4) | % | $ | 147.6 | $ | 146.3 | (0.9) | % | |||||||||
| Operating Profit | $ | 81.3 | $ | 79.0 | 2.9 | % | $ | 190.7 | $ | 225.9 | (15.6) | % | |||||||||
| Net Income | $ | 39.8 | $ | 46.1 | (13.7) | % | $ | 79.1 | $ | 110.4 | (28.4) | % | |||||||||
| Adjusted EBITDA | $ | 118.8 | $ | 109.9 | 8.1 | % | $ | 305.6 | $ | 329.4 | (7.2) | % | |||||||||
| Reported Diluted Earnings Per Share | $ | 0.17 | $ | 0.20 | (15.0) | % | $ | 0.35 | $ | 0.47 | (25.5) | % | |||||||||
| Adjusted Earnings Per Share | $ | 0.19 | $ | 0.19 | — | % | $ | 0.40 | $ | 0.51 | (21.6) | % | |||||||||
| Cash Flows from Operations | $ | 205.8 | $ | 237.5 | (13.3) | % | |||||||||||||||
| Capital Expenditures | $ | (44.9) | $ | (41.0) | (9.5) | % | |||||||||||||||
| Free Cash Flow(2) | $ | 133.6 | $ | 192.3 | (30.5) | % | |||||||||||||||
| (1) Total revenues less advertising funds revenue. | |||||||||||||||||||||
| (2) Cash flows from operations minus capital expenditures and the impact of our advertising funds. | |||||||||||||||||||||
Third Quarter Financial Highlights
Revenues and Adjusted Revenues
The increase in revenues and adjusted revenues was primarily driven by higher sales at Company-operated restaurants and by an increase in franchisee royalty revenue and fees. These were driven by an increase in same-restaurant sales which benefited from the positive impact of the Company's new breakfast daypart in the U.S.
Company-Operated Restaurant Margin
The increase in Company-operated restaurant margin was primarily the result of a higher average check and lower than expected local advertising spend. The increase was partially offset by customer count declines as a result of the COVID-19 pandemic, higher commodity costs, and labor rate increases.
General and Administrative Expense
The increase in general and administrative expense reflects a $2.8 million reduction in a prior year legal reserve related to the financial institutions case. Excluding this reserve adjustment, general and administrative expense would have decreased by approximately $1.7 million, or 3 percent, primarily driven by a lower incentive compensation accrual and lower travel related expenses as a result of reduced travel due to the COVID-19 pandemic, partially offset by an increase in professional fees.
Operating Profit
The increase in operating profit resulted primarily from higher franchise royalty revenue and fees, lower franchise support and other costs, and an increase in Company-operated restaurant margin, partially offset by an incremental Company investment in breakfast advertising of $6.2 million, higher reorganization and realignment costs and a decrease in net rental income. The higher reorganization and realignment costs relate primarily to a new Operations and Field Realignment Plan that was initiated in September 2020. The plan realigns the Company's restaurant operations team, including transitioning from separate leaders of Company and franchise operations to a single leader of all U.S. restaurant operations. The Company also expects to incur contract termination charges, including the planned closure of certain field offices.
Net Income
The decrease in net income resulted primarily from a higher provision for income taxes due to the impacts of a lower tax rate in the prior year, primarily as the result of a tax reserve release the Company recognized in Q3 2019.
Adjusted EBITDA
The increase in adjusted EBITDA resulted primarily from higher franchise royalty revenue and fees, lower franchise support and other costs, and an increase in Company-operated restaurant margin, partially offset by the incremental Company investment in breakfast advertising.
Adjusted Earnings Per Share
Adjusted earnings per share was flat compared to the prior year. It was impacted by an increase in adjusted EBITDA that was offset by the impact of a higher tax rate primarily as the result of a tax reserve release the Company recognized in Q3 2019.
Year to Date Free Cash Flow
The decrease in free cash flow resulted from a decrease in net cash provided by operating activities which was driven primarily by lower net income, the settlement of the financial institutions case, and a higher incentive compensation payout for the 2019 fiscal period paid in 2020. Excluding the $24.7 million payment related to the settlement of the financial institutions case, free cash flow would have been approximately $158.3 million.
Percent of Operating Restaurants (as of 9/27/2020)
| # of Total | Percent Operating | |
| U.S. | 5,874 | 99.7% |
| International | 940 | 94.5% |
| Global | 6,814 | 99.0% |
Company Increases Quarterly Dividend by 40%
The Company announced today a 40% increase in its regular quarterly cash dividend to 7 cents per share, payable on December 15, 2020 to shareholders of record as of December 1, 2020. The Company believes that its strengthening liquidity position, along with the momentum it is seeing in its business, supports this increase, while still leaving flexibility to invest in growth.
Share Repurchases
The Company repurchased 0.1 million shares for $1.7 million in the third quarter of 2020 and has repurchased 0.1 million shares for $2.0 million thus far in the fourth quarter of 2020. As of the date of this release, approximately $81.7 million remains available under the Company's existing $100M share repurchase authorization that expires in February 2022.
Outlook
As previously announced, due to the current unprecedented global market and economic conditions, the Company withdrew its outlook for the 2020 fiscal year and its 2021-2024 long-term outlook. The Company intends to provide an updated financial outlook when it can reasonably estimate the impact of the COVID-19 pandemic or when more stable market conditions resume.
About Wendy's
Wendy's® was founded in 1969 by Dave Thomas in Columbus, Ohio. Dave built his business on the premise, "Quality is our Recipe®," which remains the guidepost of the Wendy's system. Wendy's is best known for its made-to-order square hamburgers, using fresh, never frozen beef*, freshly-prepared salads, and other signature items like chili, baked potatoes and the Frosty® dessert. The Wendy's Company (Nasdaq: WEN) is committed to doing the right thing and making a positive difference in the lives of others. This is most visible through the Company's support of the Dave Thomas Foundation for Adoption® and its signature Wendy's Wonderful Kids® program, which seeks to find every child in the North American foster care system a loving, forever home. Today, Wendy's and its franchisees employ hundreds of thousands of people across more than 6,800 restaurants worldwide with a vision of becoming the world's most thriving and beloved restaurant brand.
| The Wendy's Company and Subsidiaries | |||||||||||||||
| Three Months Ended | Nine Months Ended | ||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||
| Revenues: | |||||||||||||||
| Sales | $ | 191,946 | $ | 181,977 | $ | 522,961 | $ | 530,724 | |||||||
| Franchise royalty revenue and fees | 116,820 | 109,155 | 321,645 | 320,233 | |||||||||||
| Franchise rental income | 58,721 | 59,918 | 173,434 | 176,931 | |||||||||||
| Advertising funds revenue | 84,755 | 86,830 | 241,468 | 253,923 | |||||||||||
| 452,242 | 437,880 | 1,259,508 | 1,281,811 | ||||||||||||
| Costs and expenses: | |||||||||||||||
| Cost of sales | 159,545 | 152,425 | 450,170 | 446,096 | |||||||||||
| Franchise support and other costs | 5,960 | 9,739 | 19,427 | 19,823 | |||||||||||
| Franchise rental expense | 32,426 | 32,364 | 93,024 | 92,842 | |||||||||||
| Advertising funds expense | 92,048 | 87,883 | 253,353 | 257,031 | |||||||||||
| General and administrative | 47,322 | 46,169 | 147,553 | 146,266 | |||||||||||
| Depreciation and amortization | 32,966 | 33,306 | 98,726 | 97,975 | |||||||||||
| System optimization gains, net | (23) | (1,040) | (2,333) | (1,162) | |||||||||||
| Reorganization and realignment costs | 3,375 | 403 | 10,196 | 4,771 | |||||||||||
| Impairment of long-lived assets | 23 | — | 4,727 | 1,684 | |||||||||||
| Other operating income, net | (2,748) | (2,392) | (6,076) | (9,377) | |||||||||||
| 370,894 | 358,857 | 1,068,767 | 1,055,949 | ||||||||||||
| Operating profit | 81,348 | 79,023 | 190,741 | 225,862 | |||||||||||
| Interest expense, net | (29,086) | (27,930) | (86,696) | (86,943) | |||||||||||
| Loss on early extinguishment of debt | — | — | — | (7,150) | |||||||||||
| Other income, net | 181 | 2,218 | 1,113 | 7,165 | |||||||||||
| Income before income taxes | 52,443 | 53,311 | 105,158 | 138,934 | |||||||||||
| Provision for income taxes | (12,690) | (7,184) | (26,060) | (28,527) | |||||||||||
| Net income | $ | 39,753 | $ | 46,127 | $ | 79,098 | $ | 110,407 | |||||||
| Net income per share: | |||||||||||||||
| Basic | $ | .18 | $ | .20 | $ | .35 | $ | .48 | |||||||
| Diluted | .17 | .20 | .35 | .47 | |||||||||||
| Number of shares used to calculate basic income | 223,907 | 230,723 | 223,521 | 230,779 | |||||||||||
| Number of shares used to calculate diluted income | 228,317 | 235,718 | 227,833 | 235,901 | |||||||||||
| The Wendy's Company and Subsidiaries | |||||||
| September 27, 2020 | December 29, | ||||||
| ASSETS | |||||||
| Current assets: | |||||||
| Cash and cash equivalents | $ | 313,187 | $ | 300,195 | |||
| Restricted cash | 38,460 | 34,539 | |||||
| Accounts and notes receivable, net | 100,125 | 117,461 | |||||
| Inventories | 4,604 | 3,891 | |||||
| Prepaid expenses and other current assets | 34,825 | 15,585 | |||||
| Advertising funds restricted assets | 116,535 | 82,376 | |||||
| Total current assets | 607,736 | 554,047 | |||||
| Properties | 922,717 | 977,000 | |||||
| Finance lease assets | 207,933 | 200,144 | |||||
| Operating lease assets | 827,123 | 857,199 | |||||
| Goodwill | 749,670 | 755,911 | |||||
| Other intangible assets | 1,229,343 | 1,247,212 | |||||
| Investments | 43,422 | 45,949 | |||||
| Net investment in sales-type and direct financing leases | 259,588 | 256,606 | |||||
| Other assets | 115,492 | 100,461 | |||||
| Total assets | $ | 4,963,024 | $ | 4,994,529 | |||
| LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||
| Current liabilities: | |||||||
| Current portion of long-term debt | $ | 35,358 | $ | 22,750 | |||
| Current portion of finance lease liabilities | 11,438 | 11,005 | |||||
| Current portion of operating lease liabilities | 44,677 | 43,775 | |||||
| Accounts payable | 18,014 | 22,701 | |||||
| Accrued expenses and other current liabilities | 124,143 | 165,272 | |||||
| Advertising funds restricted liabilities | 126,620 | 84,195 | |||||
| Total current liabilities | 360,250 | 349,698 | |||||
| Long-term debt | 2,226,243 | 2,257,561 | |||||
| Long-term finance lease liabilities | 498,584 | 480,847 | |||||
| Long-term operating lease liabilities | 869,161 | 897,737 | |||||
| Deferred income taxes | 276,273 | 270,759 | |||||
| Deferred franchise fees | 88,834 | 91,790 | |||||
| Other liabilities | 122,144 | 129,778 | |||||
| Total liabilities | 4,441,489 | 4,478,170 | |||||
| Commitments and contingencies | |||||||
| Stockholders' equity: | |||||||
| Common stock, $0.10 par value; 1,500,000 shares authorized; 470,424 shares | 47,042 | 47,042 | |||||
| Additional paid-in capital | 2,896,767 | 2,874,001 | |||||
| Retained earnings | 215,635 | 185,725 | |||||
| Common stock held in treasury, at cost; 246,343 and 245,535 shares, respectively | (2,578,943) | (2,536,581) | |||||
| Accumulated other comprehensive loss | (58,966) | (53,828) | |||||
| Total stockholders' equity | 521,535 | 516,359 | |||||
| Total liabilities and stockholders' equity | $ | 4,963,024 | $ | 4,994,529 | |||
| The Wendy's Company and Subsidiaries | |||||||
| Nine Months Ended | |||||||
| 2020 | 2019 | ||||||
| Cash flows from operating activities: | |||||||
| Net income | $ | 79,098 | $ | 110,407 | |||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
| Depreciation and amortization | 98,726 | 97,975 | |||||
| Share-based compensation | 15,112 | 13,989 | |||||
| Impairment of long-lived assets | 4,727 | 1,684 | |||||
| Deferred income tax | 5,878 | 5,524 | |||||
| Non-cash rental expense, net | 19,967 | 18,722 | |||||
| Change in operating lease liabilities | (29,539) | (31,481) | |||||
| Net receipt of deferred vendor incentives | 5,061 | 2,269 | |||||
| System optimization gains, net | (2,333) | (1,162) | |||||
| Distributions received from joint ventures, net of equity in earnings | 1,187 | 2,926 | |||||
| Long-term debt-related activities, net | 4,866 | 12,386 | |||||
| Changes in operating assets and liabilities and other, net | 3,009 | 4,261 | |||||
| Net cash provided by operating activities | 205,759 | 237,500 | |||||
| Cash flows from investing activities: | |||||||
| Capital expenditures | (44,876) | (40,984) | |||||
| Acquisitions | — | (5,052) | |||||
| Dispositions | 3,570 | 2,038 | |||||
| Proceeds from sale of investments | 169 | 130 | |||||
| Notes receivable, net | 138 | (1,834) | |||||
| Net cash used in investing activities | (40,999) | (45,702) | |||||
| Cash flows from financing activities: | |||||||
| Proceeds from long-term debt | 153,315 | 850,000 | |||||
| Repayments of long-term debt | (174,959) | (883,564) | |||||
| Repayments of finance lease liabilities | (5,850) | (5,178) | |||||
| Deferred financing costs | (2,122) | (14,008) | |||||
| Repurchases of common stock | (46,667) | (76,948) | |||||
| Dividends | (49,176) | (69,280) | |||||
| Proceeds from stock option exercises | 15,540 | 24,069 | |||||
| Payments related to tax withholding for share-based compensation | (5,409) | (8,447) | |||||
| Net cash used in financing activities | (115,328) | (183,356) | |||||
| Net cash provided by operations before effect of exchange rate changes on cash | 49,432 | 8,442 | |||||
| Effect of exchange rate changes on cash | (1,715) | 2,755 | |||||
| Net increase in cash, cash equivalents and restricted cash | 47,717 | 11,197 | |||||
| Cash, cash equivalents and restricted cash at beginning of period | 358,707 | 486,512 | |||||
| Cash, cash equivalents and restricted cash at end of period | $ | 406,424 | $ | 497,709 | |||
| Supplemental non-cash investing and financing activities: | |||||||
| Capital expenditures included in accounts payable | $ | 4,789 | $ | 7,582 | |||
| Finance leases | 24,617 | 34,084 | |||||
| September 27, 2020 | December 29, 2019 | ||||||
| Reconciliation of cash, cash equivalents and restricted cash at end of period: | |||||||
| Cash and cash equivalents | $ | 313,187 | $ | 300,195 | |||
| Restricted cash | 38,460 | 34,539 | |||||
| Restricted cash, included in Advertising funds restricted assets | 54,777 | 23,973 | |||||
| Total cash, cash equivalents and restricted cash | $ | 406,424 | $ | 358,707 | |||
| The Wendy's Company and Subsidiaries | |||||||||||||||||
| Three Months Ended | Nine Months Ended | ||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||
| Net income | $ | 39,753 | $ | 46,127 | $ | 79,098 | $ | 110,407 | |||||||||
| Provision for income taxes | 12,690 | 7,184 | 26,060 | 28,527 | |||||||||||||
| Income before income taxes | 52,443 | 53,311 | 105,158 | 138,934 | |||||||||||||
| Other income, net | (181) | (2,218) | (1,113) | (7,165) | |||||||||||||
| Loss on early extinguishment of debt | — | — | — | 7,150 | |||||||||||||
| Interest expense, net | 29,086 | 27,930 | 86,696 | 86,943 | |||||||||||||
| Operating profit | 81,348 | 79,023 | 190,741 | 225,862 | |||||||||||||
| Plus (less): | |||||||||||||||||
| Advertising funds revenue | (84,755) | (86,830) | (241,468) | (253,923) | |||||||||||||
| Advertising funds expense (a) | 85,895 | 87,883 | 245,015 | 257,031 | |||||||||||||
| Depreciation and amortization | 32,966 | 33,306 | 98,726 | 97,975 | |||||||||||||
| System optimization gains, net | (23) | (1,040) | (2,333) | (1,162) | |||||||||||||
| Reorganization and realignment costs | 3,375 | 403 | 10,196 | 4,771 | |||||||||||||
| Impairment of long-lived assets | 23 | — | 4,727 | 1,684 | |||||||||||||
| Legal reserve for Financial Institutions case | — | (2,829) | — | (2,829) | |||||||||||||
| Adjusted EBITDA | $ | 118,829 | $ | 109,916 | $ | 305,604 | $ | 329,409 | |||||||||
| Revenues | $ | 452,242 | $ | 437,880 | $ | 1,259,508 | $ | 1,281,811 | |||||||||
| Less: | |||||||||||||||||
| Advertising funds revenue | (84,755) | (86,830) | (241,468) | (253,923) | |||||||||||||
| Adjusted revenues | $ | 367,487 | $ | 351,050 | $ | 1,018,040 | $ | 1,027,888 | |||||||||
| (a) | For the three and nine months ended September 27, 2020, excludes advertising funds expense of $6,153 and $8,338, respectively, related to the expected Company funding of incremental advertising during 2020. |
| The Wendy's Company and Subsidiaries | |||||||||||||||
| Three Months Ended | Nine Months Ended | ||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||
| Net income | $ | 39,753 | $ | 46,127 | $ | 79,098 | $ | 110,407 | |||||||
| Plus (less): | |||||||||||||||
| Advertising funds revenue | (84,755) | (86,830) | (241,468) | (253,923) | |||||||||||
| Advertising funds expense (a) | 85,895 | 87,883 | 245,015 | 257,031 | |||||||||||
| System optimization gains, net | (23) | (1,040) | (2,333) | (1,162) | |||||||||||
| Reorganization and realignment costs | 3,375 | 403 | 10,196 | 4,771 | |||||||||||
| Impairment of long-lived assets | 23 | — | 4,727 | 1,684 | |||||||||||
| Loss on early extinguishment of debt | — | — | — | 7,150 | |||||||||||
| Legal reserve for Financial Institutions case | — | (2,829) | — | (2,829) | |||||||||||
| Total adjustments | 4,515 | (2,413) | 16,137 | 12,722 | |||||||||||
| Income tax impact on adjustments (b) | (868) | 951 | (4,566) | (2,621) | |||||||||||
| Total adjustments, net of income taxes | 3,647 | (1,462) | 11,571 | 10,101 | |||||||||||
| Adjusted income | $ | 43,400 | $ | 44,665 | $ | 90,669 | $ | 120,508 | |||||||
| Diluted earnings per share | $ | .17 | $ | .20 | $ | .35 | $ | .47 | |||||||
| Total adjustments per share, net of income taxes | .02 | (.01) | .05 | .04 | |||||||||||
| Adjusted earnings per share | $ | .19 | $ | .19 | $ | .40 | $ | .51 | |||||||
| (a) | For the three and nine months ended September 27, 2020, excludes advertising funds expense of $6,153 and $8,338, respectively, related to the expected Company funding of incremental advertising during 2020. |
| (b) | The provision for (benefit from) income taxes on "System optimization gains, net" was $6 and $319 for the three months ended September 27, 2020 and September 29, 2019, respectively, and $(728) and $108 for the nine months ended September 27, 2020 and September 29, 2019, respectively. The benefit from income taxes on all other adjustments (excluding the advertising funds adjustments) was calculated using an effective tax rate of 25.72% and 26.08% for the three months ended September 27, 2020 and September 29, 2019, respectively, and 25.72% and 25.32% for the nine months ended September 27, 2020 and September 29, 2019, respectively. |
| The Wendy's Company and Subsidiaries | |||||||
| Nine Months Ended | |||||||
| 2020 | 2019 | ||||||
| Net cash provided by operating activities | $ | 205,759 | $ | 237,500 | |||
| Less: | |||||||
| Capital expenditures | (44,876) | (40,984) | |||||
| Advertising funds impact (a) | (27,297) | (4,202) | |||||
| Free cash flow | $ | 133,586 | $ | 192,314 | |||
| (a) | Represents the net change in the restricted operating assets and liabilities of our advertising funds, which is included in "Changes in operating assets and liabilities and other, net," and the excess of advertising funds expense over advertising funds revenue, which is included in "Net income." |
SOURCE The Wendy’s Company
