Wendy's Co annual report, FY2022

The Wendy’s Company: FY2022 Form 10-K Summary

Business context and reporting period

The filing covers the 52-week fiscal year ended January 1, 2023, referred to as fiscal 2022. It is an annual Form 10-K rather than a standalone fourth-quarter filing. Wendy’s operates and franchises quick-service restaurants through three segments: Wendy’s U.S., Wendy’s International, and Global Real Estate & Development.

System size increased to 7,095 restaurants in the U.S. and 31 foreign countries and territories, from 6,949 at the prior year-end.
Company-operated restaurants represented approximately 5% of the system: 403 in the U.S. and 12 internationally.
Franchisees operated approximately 95% of the system, making royalty, rental, advertising and franchise-fee revenue dependent on franchisee performance.
Wendy’s and its franchisees added 276 restaurants and closed 130 during 2022, resulting in 146 net additions.

Financial performance and key metrics

Metric	2022	2021	Change
Total revenue	$2,095.5 million	$1,897.0 million	+10.5%
Operating profit	$353.3 million	$367.0 million	-3.7%
Income before taxes	$243.5 million	$240.6 million	+1.2%
Net income	$177.4 million	$200.4 million	-11.5%
Diluted earnings per share	$0.82	$0.89	-7.9%
Cash flow from operations	$259.9 million	$345.8 million	-24.8%
Capital expenditures	$85.5 million	$78.0 million	+$7.6 million
Global same-restaurant sales	+4.9%	+10.0%	Lower growth
Global company-operated restaurant margin	13.8%	16.7%	-290 basis points

Revenue growth was led by higher company-operated sales, a 4.9% increase in global franchise same-restaurant sales and net restaurant additions. Company-operated sales also benefited from the full-year contribution of 93 franchise restaurants acquired in Florida in late 2021.

Sales at company-operated restaurants were $896.6 million, up from $734.1 million.
Franchise royalty revenue and fees were $558.2 million, up from $536.7 million.
Franchise rental income was $234.5 million, down from $236.7 million.
Advertising funds revenue was $406.2 million, up from $389.5 million.
Cost of sales increased to 86.2% of company-operated sales from 83.3%, primarily due to commodity inflation, higher labor rates, lower customer counts and U.K. market investments.
The effective tax rate increased to 27.2% from 16.7%, primarily because of higher state taxes, lower share-based compensation tax benefits and higher taxes on foreign operations.
Digital sales represented approximately 10.3% of global systemwide sales.

Liquidity, debt and capital allocation

Cash and cash equivalents were $745.9 million at January 1, 2023, compared with $249.4 million at January 2, 2022. Total cash, cash equivalents and restricted cash were $831.8 million.
Net cash provided by operating activities declined to $259.9 million, primarily due to marketing payment timing, higher incentive compensation payments and cloud-computing expenditures related to the ERP implementation.
Total long-term debt, including the current portion and before certain accounting adjustments, was approximately $2.9 billion; reported balance-sheet debt was $2.851 billion, including $29.3 million payable within 12 months.
Debt included $500.0 million of 2022-1 senior secured notes issued in April 2022, with interest rates of 4.236% and 4.535% and anticipated repayment dates in 2029 and 2032.
The company had access to a $300.0 million variable funding facility and had no borrowings under it at year-end, although letters of credit were outstanding.
2022 dividends totaled $106.8 million, or $0.50 per share. A $0.25-per-share dividend was declared for March 2023.
The company repurchased $51.9 million of common stock during 2022. In January 2023, the Board authorized repurchases of up to $500.0 million through February 2027.
Future minimum non-cancelable lease payments totaled $2.1595 billion, including $148.5 million due within 12 months.
Lease guarantees totaled $102.6 million, and outstanding letters of credit totaled $28.6 million.

Material changes versus the prior comparable period

Revenue increased 10.5%, but operating profit declined because cost inflation, labor costs and investments more than offset sales growth.
Net income declined 11.5%, with the effective tax rate increasing materially and interest expense rising to $122.3 million from $109.2 million.
Company-operated restaurant margin contracted by 290 basis points to 13.8%.
Operating cash flow fell by $85.9 million, while financing cash flow increased to $288.7 million, primarily reflecting the 2022 debt issuance and lower share repurchases.
International revenue increased to $106.7 million from $86.4 million, supported by U.K. company-operated restaurants and higher international same-restaurant sales.
Global Real Estate & Development revenue declined to $238.6 million from $243.1 million, but segment profit increased to $108.7 million from $106.1 million.
System optimization gains declined to $6.8 million from $33.5 million because 2021 included the sale of 47 New York company-operated restaurants.
Impairment of long-lived assets increased to $6.4 million from $2.3 million, primarily due to weaker performance at certain company-operated restaurants.

Guidance, outlook, risks and unusual items

Management expects 2023 company-operated and franchise sales to benefit from continued breakfast growth, menu improvements, strategic pricing, operational execution, digital growth and additional restaurants. Cost of sales margins are expected to benefit from productivity initiatives but remain pressured by commodity inflation and higher labor rates. General and administrative expense is expected to remain relatively flat in 2023 and 2024 as a result of an organizational redesign.

The February 2023 organizational redesign is expected to cost approximately $11 million to $13 million, including approximately $9 million to $11 million of cash costs. Approximately two-thirds of cash costs are expected in 2023.
2023 expected capital expenditures are approximately $75 million to $85 million, plus approximately $25 million for cloud-computing arrangements.
Expected 2023 dividends are approximately $212.6 million if quarterly dividends continue at $0.25 per share.
Management expects available cash and operating cash flow to satisfy operating requirements for the next 12 months, but notes that additional liquidity may not be available on acceptable terms.
Key risks include competition and discounting, consumer spending, inflation, commodity and labor costs, labor shortages, supply-chain concentration, food safety, franchisee financial health, digital and cybersecurity execution, international expansion, foreign exchange, regulatory changes and litigation.
In August 2022, the CDC investigated a multistate E. coli outbreak in which many affected individuals reported eating at Wendy’s. Wendy’s removed romaine lettuce from restaurants in the relevant region and was named in claims and lawsuits; the CDC later stated that the specific source was not confirmed.
The securitized financing facility contains financial covenants, collateral requirements and rapid-amortization provisions. A covenant breach or failure to refinance debt at anticipated repayment dates could restrict cash available for operations and growth.
The filing states that litigation and environmental accruals are adequate, but the aggregate possible loss from existing claims cannot be estimated clearly.
The company received an unqualified audit opinion and an unqualified opinion on internal control over financial reporting.

Important facts investors should verify

Whether same-restaurant sales growth can continue despite declining customer counts in company-operated and franchise restaurants.
Whether pricing and productivity initiatives can offset commodity, wage, occupancy and other operating-cost inflation.
The sustainability of approximately $2.9 billion of debt, anticipated debt repayments, covenant compliance and refinancing requirements.
The effect of the $500 million share-repurchase authorization and higher planned dividends on liquidity and leverage.
Execution and financial returns from breakfast expansion, digital commerce, Image Activation, U.K. operations and new restaurant development incentives.
Potential financial exposure from E. coli-related claims, lease guarantees, franchisee distress, self-insured claims and other litigation or contingencies.
The timing and total cost of the organizational redesign, including whether projected general and administrative savings are achieved.
The comparability of reported revenue and margins because advertising funds revenue and expense are reported gross and company-operated restaurants represent only a small portion of the system.