The Wendy’s Company 2022 Q3 Form 10-Q Summary
Business context and reporting period
The filing covers the 13-week third quarter and 39 weeks ended October 2, 2022, compared with October 3, 2021. Wendy’s operates, develops and franchises quick-service restaurants through three segments: Wendy’s U.S., Wendy’s International, and Global Real Estate & Development. The system comprised 7,080 restaurants in the U.S. and 31 foreign countries and territories, with approximately 95% of global restaurants offering breakfast.
Financial performance and key metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Revenue | $532.6 million | $470.3 million | $1,559.0 million | $1,423.8 million |
| Operating profit | $98.1 million | $80.2 million | $269.3 million | $290.1 million |
| Net income | $50.5 million | $41.2 million | $136.1 million | $148.3 million |
| Diluted EPS | $0.24 | $0.18 | $0.63 | $0.66 |
| Company-operated restaurant margin | 14.3% | 14.4% | 13.5% | 17.4% |
| Global same-restaurant sales | +6.9% | +3.3% | +4.4% | +10.9% |
- Q3 revenue increased 13.3%, while net income increased 22.8%. Nine-month revenue increased 9.5%, but net income declined 8.2%.
- Q3 sales increased primarily from the 2021 acquisition of 93 Florida restaurants, higher same-restaurant sales and net new restaurant development. Nine-month sales also reflected the offsetting effect of the 2021 sale of 47 New York company-operated restaurants.
- Q3 cost of sales was 85.7% of sales versus 85.6% in the prior-year quarter. Nine-month cost of sales increased to 86.5% from 82.6%, reflecting commodity and labor inflation, lower customer counts and U.K. investment costs.
- Nine-month operating profit was pressured by lower system optimization gains, higher interest expense, increased operating costs and a higher effective tax rate.
- Nine-month cash flow from operations was $182.6 million, down from $276.7 million. Capital expenditures were $50.0 million, and cash used in investing activities was $46.1 million.
- Cash, cash equivalents and restricted cash totaled $820.9 million at October 2, 2022, including $731.8 million of cash and cash equivalents, compared with $367.0 million at January 2, 2022.
- Long-term debt, including the current portion and before unamortized issuance costs, was approximately $2.9 billion. Carrying-value debt, net of issuance costs, was $2.86 billion, including $29.3 million due within one year.
Material changes versus the prior comparable period
- On April 1, 2022, Wendy’s issued $500.0 million of fixed-rate senior secured notes: $100.0 million at 4.236% and $400.0 million at 4.535%. The transaction increased debt and contributed to higher interest expense.
- Q3 and nine-month same-restaurant sales benefited from higher average checks, partly offset by lower customer counts. International same-restaurant sales rose 10.8% in Q3 and 13.3% year to date.
- Company-operated restaurant margin declined 10 basis points in Q3 and 390 basis points year to date, primarily due to higher food, paper and labor costs and other operating pressures.
- System optimization gains declined to $4.1 million year to date from $32.7 million, because the prior year included gains from selling 47 New York restaurants.
- Q3 included an $8.6 million gain from insurance recoveries. Nine-month results included a $2.1 million investment gain and no loss on early extinguishment of debt, compared with a $17.9 million loss in the prior-year period.
- Wendy’s completed implementation of a new ERP system during Q3 and modified related internal controls. Management concluded that disclosure controls remained effective at a reasonable assurance level.
Guidance, outlook, commentary and risks
- Management reduced expected 2022 net new restaurant growth to 2.0%–2.5%, primarily because of lower expected non-traditional restaurant development, and continues to target 8,000–8,500 systemwide restaurants by the end of 2025.
- The company expects approximately $90.0–$95.0 million of total 2022 capital expenditures, including approximately $40.0–$45.0 million during the remainder of the year.
- Wendy’s expects approximately $30.0 million of 2022 cash expenditures for cloud computing arrangements, primarily related to the ERP implementation, versus $22.7 million spent through Q3.
- Management expects advertising funds expense to exceed advertising funds revenue by approximately $21.0 million in 2022, including up to $16.0 million of incremental advertising investment.
- Management stated that available cash and operating cash flow are expected to satisfy operating requirements for the next 12 months, but additional liquidity may not be available on acceptable terms if needed.
- The company paid quarterly dividends of $0.125 per share and announced a $0.125 per-share dividend payable December 15, 2022. The $250.0 million repurchase authorization had $198.1 million remaining at October 2, 2022.
- Principal risks include inflation in food and labor costs, commodity volatility, labor shortages, consumer spending and competition, food-safety events, franchisee financial health, international execution, digital and cybersecurity risks, debt covenant and refinancing risks, litigation, foreign currency movements and the continuing effects of COVID-19.
- In August 2022, the CDC investigated an E. coli outbreak in which many affected individuals reported eating at Wendy’s. Wendy’s cooperated with the investigation and temporarily removed sandwich romaine lettuce in the relevant region. The CDC declared the outbreak over on October 4, 2022, but related claims and lawsuits remain a risk.
- Wendy’s had $94.1 million of lease guarantees and $28.6 million of outstanding letters of credit at October 2, 2022. The filing states that probable exposure and expected losses were not material.
Most important facts for investors to verify
- Whether sales growth and future margin performance can offset persistent commodity, labor and occupancy inflation.
- The effect of the $500.0 million debt issuance on interest expense, leverage, refinancing needs and covenant flexibility.
- Whether the reduced 2022 development outlook and 2025 restaurant target remain achievable.
- The sustainability of same-restaurant sales growth given lower customer counts and reliance on higher average checks.
- The cash impact of dividends, potential share repurchases, capital expenditures, ERP-related spending and advertising commitments.
- The ultimate financial, legal and brand impact of the 2022 food-safety claims and other litigation.
- The effectiveness of controls following the ERP implementation and the operational execution of Wendy’s digital, breakfast and international growth initiatives.