The Wendy's Company Results

The Wendy's Company Reports Third Quarter 2017 Results

North America same-restaurant sales increase 2.0% (+3.4% on a two-year basis); 19th consecutive quarter of positive same-restaurant sales

The Wendy's Company

The Wendy's Company (NASDAQ:  WEN) yesterday reported unaudited results for the third quarter ended October 1, 2017.

"We have now recorded 19 consecutive quarters of positive same-restaurant sales, a streak that is unmatched in the current QSR hamburger category and speaks to the strength and relevance of our brand," President and Chief Executive Officer Todd Penegor said. "We also remain encouraged by the progress being made on our global footprint expansion with 110 year-to-date openings, which is almost 30 restaurants ahead of our pace at this point in 2016. As we lap the effects from system optimization, our improved quality of earnings continues to provide positive benefits through significantly increased cash flows and resiliency in our bottom line. Our relentless focus on executing every element of The Wendy's Way by providing food our customers love, friendly service, value, and an inviting atmosphere will continue to drive growth in the future."

Third Quarter 2017 Summary

Operational Highlights

Three Months Ended

Nine Months Ended

October 1, 

2017

October 2, 

2016

October 1, 

2017

October 2, 

2016

(Unaudited)

(Unaudited)

North America Same-Restaurant Sales 

Growth(1)

2.0%

1.4%

2.3%

1.8%

Global Restaurant Openings (Total / Net)

North America

29 / 12

28 / 13

57 / 7

65 / 19

International

13 / 10

5 / 0

53 / 42

17 / 5

Global Restaurant Openings

42 / 22

33 / 13

110 / 49

82 / 24

Global Systemwide Sales (In US$ Millions)(2)

North America

$2,506.0

$2,426.8

$7,365.3

$7,129.0

International(3)

$119.4

$106.9

$351.6

$309.6

Global Systemwide Sales

$2,625.4

$2,533.7

$7,716.9

$7,438.6

 

Operational Highlights (Continued)

Three Months Ended

Nine Months Ended

October 1, 

2017

October 2, 

2016

October 1, 

2017

October 2, 

2016

(Unaudited)

(Unaudited)

Global Systemwide Sales Growth(1)

North America

3.0%

1.8%

3.2%

2.9%

International(3)

13.4%

9.0%

15.0%

4.1%

Global Systemwide Sales Growth

3.4%

2.1%

3.7%

3.0%

(1) Same-restaurant sales growth and systemwide sales growth are calculated on a constant currency basis and include sales by both Company-operated and franchise restaurants.

(2) Systemwide sales include sales at both Company-operated and franchise restaurants. Sales by franchise restaurants are not recorded as Company revenues. However, the Company's royalty revenues are computed as percentages of sales made by 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.

(3) Excludes Venezuela.

The Company estimates that the hurricanes in the U.S. negatively impacted North America system same-restaurant sales by approximately 30 to 40 basis-points in the third quarter.

Financial Highlights

  • Total revenues were $308.0 million in the third quarter of 2017, compared to $364.0 million in the third quarter of 2016. The 15.4 percent decrease resulted primarily from the ownership of 249 fewer Company-operated restaurants at the end of the third quarter 2017 compared to the beginning of the third quarter 2016, which resulted in fewer sales at Company-operated restaurants and a year-over-year decrease in franchise fees, partly offset by higher franchise royalty revenue and franchise rental income. The year-over-year decrease in franchise fees resulted primarily from prior year system optimization activity, including the sale of 156 Company-operated restaurants and 18 Buy and Flips, with no similar activity occurring in the third quarter of 2017. 
  • Company-operated restaurant margin was 16.7 percent in the third quarter of 2017, compared to 18.4 percent in the third quarter of 2016. The 170 basis-point decrease was primarily the result of higher commodity costs. 
  • General and administrative expense was $53.0 million in the third quarter of 2017, compared to $58.9 million in the third quarter of 2016. The 10.1 percent decrease resulted primarily from lower professional fees and cost savings related to the Company's system optimization initiative. 
  • Operating profit was $61.7 million in the third quarter of 2017, compared to $106.1 million in the third quarter of 2016. The 41.9 percent decrease resulted primarily from a year-over-year decrease in gains from the Company's system optimization initiative, in addition to the items discussed above. 
  • Net income was $14.3 million in the third quarter of 2017, compared to net income of $48.9 million in the third quarter of 2016. The year-over-year decrease of 70.8 percent resulted primarily from the items discussed above, in addition to an increase in the effective tax rate. 
  • Adjusted EBITDA was $96.9 million in the third quarter of 2017, compared to $100.2 million in the third quarter of 2016. The 3.3 percent decrease resulted primarily from lower franchise fees due to the significant amount of system optimization and Buy and Flip transactions that occurred in the prior year and a year-over-year decrease in Company-operated restaurant margin, partially offset by general and administrative expense savings. 
  • Adjusted EBITDA margin (adjusted EBITDA divided by total revenues) was 31.5 percent in the third quarter of 2017, compared to 27.5 percent in the third quarter of 2016. The 400 basis-point improvement reflects the positive impact of the Company's system optimization initiative. 
  • Reported diluted earnings per share were $0.06 in the third quarter of 2017, compared to $0.18 in the third quarter of 2016. 
  • Adjusted earnings per share were $0.09 in the third quarter of 2017, compared to $0.11 in the third quarter of 2016. The 18.2 percent decrease resulted primarily from the items discussed above and reflects a 4.9 percent year-over-year reduction in the weighted average diluted shares outstanding. 
  • Year-to-date cash flows from operations through the third quarter of 2017 were $176.7 million, compared to $137.3 million through the third quarter of 2016. The 28.7 percent increase was the result of an increase in net income adjusted for non-cash expenses and a favorable change in working capital. 
  • Year-to-date capital expenditures through the third quarter of 2017 were $53.7 million, compared to $108.7 millionthrough the third quarter of 2016. 
  • Year-to-date free cash flow (cash flows from operations minus capital expenditures) through the third quarter of 2017 was $123.0 million, compared to $28.6 million through the third quarter of 2016. The 330.6 percent increase resulted primarily from a year-over-year decrease in capital expenditures, in addition to the items discussed above.

Image Activation

Image Activation, which includes reimaging existing restaurants and building new restaurants, remains an integral part of our global growth strategy. With 39 percent of the global system featuring the new image, the Company continues to expect that approximately 42 percent of the global system will be image activated by the end of 2017. The Company is now expecting 2017 net new unit growth of approximately 0.5 percent to 1 percent in North America and approximately 14 percent internationally.

Franchisee-to-franchisee restaurant transfers

The Company continues to facilitate franchisee-to-franchisee restaurant transfers ("Buy and Flips") to ensure that restaurants are operated by well-capitalized franchisees that are committed to long-term growth. During the third quarter, the Company did not facilitate any Buy and Flips but has facilitated 410 year-to-date and now expects to complete approximately 500 to 550 in 2017, which is an increase from the previous outlook of approximately 475.

Company repurchases 2.5 million shares for $38.4 million in third quarter

The Company repurchased 2.5 million shares for $38.4 million in the third quarter at an average price of $15.25 per share. As of the end of the quarter, the Company had approximately $59 million remaining on its existing $150 million share repurchase authorization, which expires March 4, 2018.

2017 outlook

During 2017, the Company now expects:

  • Same-restaurant sales growth of approximately 2.0 to 2.5 percent for the North America system. 
  • Company-operated restaurant margin of approximately 17.5 to 18.0 percent. 
  • An adjusted tax rate of approximately 34 to 36 percent. 
  • Adjusted earnings per share of approximately $0.43 to $0.45, an increase of approximately 7.5 to 12.5 percent compared to 2016. 
  • Cash flows from operations of approximately $250 to $265 million. 
  • Capital expenditures of approximately $80 to $85 million. 
  • Free cash flow of approximately $170 to $180 million, an increase of greater than 400 percent compared to 2016.

In addition, the Company continues to expect:

  • Commodity cost inflation of approximately 3 to 4 percent compared to 2016. 
  • Labor inflation of approximately 4 percent. 
  • General and administrative expense at the low end of its previously issued range of approximately $210 to $220 million. 
  • Net franchise rental income of approximately $100 to $105 million (gross rental income of approximately $190 to $195 million). 
  • Adjusted EBITDA of approximately $404 to $410 million, an increase of approximately 3 to 5 percent compared to 2016. 
  • Adjusted EBITDA margin of approximately 32 to 34 percent. 
  • Interest expense of approximately $115 to $120 million. 
  • Depreciation and amortization expense of approximately $120 to $125 million, including accelerated depreciation of approximately $1 million.

Company on track to achieve 2020 goals

The Company continues to expect to achieve the following goals by the end of 2020:

  • Global systemwide 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).

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

Condensed Consolidated Statements of Operations

Three and Nine Month Periods Ended October 1, 2017 and October 2, 2016

(In Thousands Except Per Share Amounts)

(Unaudited)

 

 

 

Three Months Ended

Nine Months Ended

2017

2016 (a)

2017

2016 (a)

Revenues:

Sales

$

158,843

$

228,644

$

467,914

$

747,211

Franchise royalty revenue and fees

98,882

98,039

306,120

275,886

Franchise rental income

50,275

37,329

140,127

102,420

308,000

364,012

914,161

1,125,517

Costs and expenses:

Cost of sales

132,387

186,546

385,154

603,836

Franchise rental expense

24,076

17,534

64,841

49,684

General and administrative

52,960

58,938

156,690

184,708

Depreciation and amortization

31,216

29,362

91,690

92,456

System optimization losses (gains), net

106

(37,756)

39,749

(48,106)

Reorganization and realignment costs

2,888

2,129

20,768

7,866

Impairment of long-lived assets

1,041

361

1,804

12,991

Other operating expense (income), net

1,669

810

5,294

(13,483)

246,343

257,924

765,990

889,952

Operating profit

61,657

106,088

148,171

235,565

Interest expense

(29,977)

(28,731)

(87,887)

(85,483)

Other (expense) income, net

(125)

498

3,108

1,036

Income before income taxes

31,555

77,855

63,392

151,118

Provision for income taxes

(17,298)

(28,965)

(28,639)

(50,385)

Net income

$

14,257

$

48,890

$

34,753

$

100,733

Net income per share:

Basic

$

.06

$

.19

$

.14

$

.38

Diluted

.06

.18

.14

.37

Number of shares used to calculate basic income 

    per share

243,354

260,976

245,073

265,702

Number of shares used to calculate diluted income 

    per share

251,737

264,808

253,176

269,941

(a) 2016 condensed consolidated statements of operations reflect reclassifications to conform to the current year presentation.

 

 

The Wendy's Company and Subsidiaries

Condensed Consolidated Balance Sheets

As of October 1, 2017 and January 1, 2017

(In Thousands Except Per Share Amounts)

(Unaudited)

 

 

 

October 1,

 2017

January 1, 

2017 (a)

ASSETS

Current assets:

Cash and cash equivalents

$

186,629

$

198,240

Restricted cash

34,042

57,612

Accounts and notes receivable, net

115,390

98,825

Inventories

2,895

2,851

Prepaid expenses and other current assets

23,762

19,244

Advertising funds restricted assets

58,163

75,760

Total current assets

420,881

452,532

Properties

1,252,246

1,192,339

Goodwill

743,508

741,410

Other intangible assets

1,332,130

1,322,531

Investments

58,171

56,981

Net investment in direct financing leases

213,649

123,604

Other assets

69,688

49,917

Total assets

$

4,090,273

$

3,939,314

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Current portion of long-term debt

$

29,359

$

24,652

Accounts payable

25,776

27,635

Accrued expenses and other current liabilities

121,124

102,034

Advertising funds restricted liabilities

58,163

75,760

Total current liabilities

234,422

230,081

Long-term debt

2,696,520

2,487,630

Deferred income taxes

419,293

446,513

Other liabilities

277,443

247,354

Total liabilities

3,627,678

3,411,578

Commitments and contingencies

Stockholders' equity:

Common stock, $0.10 par value; 1,500,000 shares authorized;

     470,424 shares issued; 242,565 and 246,574 shares outstanding, respectively

47,042

47,042

Additional paid-in capital

2,883,504

2,878,589

Accumulated deficit

(305,703)

(290,857)

Common stock held in treasury, at cost; 227,859 and 223,850 shares, respectively

(2,117,232)

(2,043,797)

Accumulated other comprehensive loss

(45,016)

(63,241)

Total stockholders' equity

462,595

527,736

Total liabilities and stockholders' equity

$

4,090,273

$

3,939,314

(a) January 1, 2017 condensed consolidated balance sheet reflects reclassifications to conform to the current year presentation.

 

 

The Wendy's Company and Subsidiaries

Condensed Consolidated Statements of Cash Flows

Nine Month Periods Ended October 1, 2017 and October 2, 2016

(In Thousands)

(Unaudited

 

 

 

Nine Months Ended

2017

2016

Cash flows from operating activities:

Net income

$

34,753

$

100,733

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

91,690

94,056

Share-based compensation

16,356

14,260

Impairment of long-lived assets

1,804

12,991

Deferred income tax

945

(17,024)

Non-cash rental income, net

(8,348)

(5,138)

Net receipt of deferred vendor incentives

4,547

4,110

System optimization losses (gains), net

39,749

(48,106)

Gain on sale of investments, net

(1,807)

Distributions received from TimWen joint venture

5,524

8,451

Equity in earnings in joint ventures, net

(6,113)

(6,495)

Accretion of long-term debt

927

914

Amortization of deferred financing costs

5,954

5,668

Reclassification of unrealized losses on cash flow hedges

2,170

2,170

Other, net

2,395

4,229

Changes in operating assets and liabilities:

Restricted cash

233

181

Accounts and notes receivable, net

(14,193)

(29,118)

Inventories

(44)

126

Prepaid expenses and other current assets

(1,281)

(3,958)

Accounts payable

(1,557)

(6,412)

Accrued expenses and other current liabilities

3,039

5,677

Net cash provided by operating activities

176,743

137,315

Cash flows from investing activities:

Capital expenditures

(53,711)

(108,744)

Acquisitions

(86,788)

(2,209)

Dispositions

80,058

173,849

Proceeds from sale of investments

3,282

Payments for investments

(375)

(172)

Notes receivable, net

(4,174)

(2,282)

Changes in restricted cash

23,624

1,912

Other, net

103

Net cash (used in) provided by investing activities

(38,084)

62,457

Cash flows from financing activities:

Repayments of long-term debt

(20,291)

(18,678)

Deferred financing costs

(1,069)

(1,017)

Repurchases of common stock

(90,065)

(161,194)

Dividends

(51,464)

(47,793)

Proceeds from stock option exercises

10,419

10,623

Payments related to tax withholding for share-based compensation

(4,484)

(4,142)

Net cash used in financing activities

(156,954)

(222,201)

Net cash used in operations before effect of exchange rate changes on cash

(18,295)

(22,429)

Effect of exchange rate changes on cash

6,684

3,997

Net decrease in cash and cash equivalents

(11,611)

(18,432)

Cash and cash equivalents at beginning of period

198,240

327,216

Cash and cash equivalents at end of period

$

186,629

$

308,784

 

 

The Wendy's Company and Subsidiaries

Reconciliation of Net Income to Adjusted EBITDA

(In Thousands)

(Unaudited

 

 

 

Three Months Ended

Nine Months Ended

2017

2016

2017

2016

Net income

$

14,257

$

48,890

$

34,753

$

100,733

Provision for income taxes

17,298

28,965

28,639

50,385

Income before income taxes

31,555

77,855

63,392

151,118

Other expense (income), net

125

(498)

(3,108)

(1,036)

Interest expense

29,977

28,731

87,887

85,483

Operating profit

61,657

106,088

148,171

235,565

Plus (less):

Depreciation and amortization

31,216

29,362

91,690

92,456

System optimization losses (gains), net

106

(37,756)

39,749

(48,106)

Reorganization and realignment costs

2,888

2,129

20,768

7,866

Impairment of long-lived assets

1,041

361

1,804

12,991

Adjusted EBITDA

$

96,908

$

100,184

$

302,182

$

300,772

Adjusted EBITDA margin

31.5

%

27.5

%

33.1

%

26.7

%

 

Reconciliation of Net Income and Diluted Earnings Per Share to

Adjusted Income and Adjusted Earnings Per Share

(In Thousands Except Per Share Amounts)

(Unaudited)

Three Months Ended

Nine Months Ended

2017

2016

2017

2016

Net income

$

14,257

$

48,890

$

34,753

$

100,733

Plus (less):

Depreciation of assets that will be replaced as 

     part of the Image Activation initiative

(261)

(285)

186

2,930

System optimization losses (gains), net

106

(37,756)

39,749

(48,106)

Reorganization and realignment costs

2,888

2,129

20,768

7,866

Impairment of long-lived assets

1,041

361

1,804

12,991

Total adjustments

3,774

(35,551)

62,507

(24,319)

Income tax impact on adjustments (a)

4,190

16,083

(15,846)

9,243

Total adjustments, net of income taxes

7,964

(19,468)

46,661

(15,076)

Adjusted income

$

22,221

$

29,422

$

81,414

$

85,657

Diluted earnings per share

$

.06

$

.18

$

.14

$

.37

Total adjustments per share, net of income taxes

.03

(.07)

.18

(.05)

Adjusted earnings per share

$

.09

$

.11

$

.32

$

.32

(a) The provision for (benefit from) income taxes on "System optimization losses (gains), net" was $5,626 and $16,935 for the three months ended October 1, 2017 and October 2, 2016, respectively, and $(6,980) and $18,425 for the nine months ended October 1, 2017 and October 2, 2016, respectively.  The provision for (benefit from) income taxes on "System optimization losses (gains), net" includes the impact of non-deductible goodwill disposed of in connection with our system optimization initiative, adjustments related to prior year tax matters, changes to state deferred taxes and changes to valuation allowances on state net operating loss carryforwards. The benefit from income taxes on all other adjustments was calculated using an effective tax rate of 39.15% and 38.96% for the three and nine months ended October 1, 2017, respectively, and 38.60% for both the three and nine months ended October 2, 2016.



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