The Wendy’s Company: Q1 2020 Form 10-Q Summary
Business context and reporting period
The filing covers the 13-week quarter ended March 29, 2020, compared with the quarter ended March 31, 2019. Wendy’s operated or franchised 6,805 restaurants in the U.S. and 30 foreign countries and territories, including 358 company-operated, 5,503 U.S. franchised and 944 international franchised restaurants. Company-operated restaurants represented approximately 5% of the system.
The quarter included the March 2, 2020 U.S. breakfast launch and the initial effects of the COVID-19 pandemic, which materially affected March results and created substantial uncertainty for the remainder of 2020.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $405.0 million | $408.6 million | Down $3.6 million |
| Operating profit | $48.7 million | $66.3 million | Down $17.6 million |
| Income before taxes | $21.3 million | $39.9 million | Down $18.6 million |
| Net income | $14.4 million | $31.9 million | Down $17.5 million |
| Basic and diluted EPS | $0.06 | $0.14 | Down $0.08 |
| Operating cash flow | $(19.4) million | $62.0 million | Down $81.4 million |
| Capital expenditures | $12.6 million | $11.2 million | Up $1.4 million |
| Restaurant margin | 10.1% | 15.0% | Down 4.9 percentage points |
Total revenue consisted of $166.8 million of company-operated restaurant sales, $101.7 million of franchise royalty revenue and fees, $57.9 million of franchise rental income and $78.6 million of advertising funds revenue.
Cash, cash equivalents and restricted cash totaled $385.5 million at March 29, 2020, compared with $358.7 million at December 29, 2019. Cash and cash equivalents alone were $294.9 million. Total debt, including the current portion and excluding unamortized debt issuance costs and purchase accounting adjustments, was approximately $2.46 billion. Total liabilities were $4.53 billion and stockholders’ equity was $451.1 million.
Material changes versus the prior comparable period
- Global systemwide same-restaurant sales were down 0.2%, compared with a 1.4% increase in Q1 2019. U.S. systemwide same-restaurant sales were flat, while international same-restaurant sales declined 1.6%.
- Same-restaurant sales were positive before the pandemic but declined sharply during March. U.S. systemwide same-restaurant sales were up 3.7% for the two months ended March 1 and down 7.7% for the month ended March 29.
- Global systemwide sales increased 1.0% on a constant-currency basis to $2.61 billion, despite the pandemic’s late-quarter impact.
- Restaurant margin declined primarily because of labor-rate inflation, higher commodity costs, breakfast training costs and higher maintenance costs.
- Cost of sales increased $7.4 million, while general and administrative expense increased $2.3 million. Reorganization and realignment costs increased to $3.9 million from $0.8 million, including $3.6 million related to an IT realignment plan.
- COVID-19-related impairment testing resulted in $4.6 million of long-lived asset impairment charges, compared with $1.5 million in Q1 2019.
- Operating cash flow turned negative, primarily due to lower earnings, a $24.7 million payment related to settlement of the financial institutions class action, timing of incentive compensation and marketing payments, and lower deferred vendor incentives.
- Financing cash flow was $63.4 million, versus an outflow of $62.5 million in Q1 2019, reflecting new borrowings taken largely as a COVID-19 liquidity precaution.
Guidance, outlook, commentary and risks
- Management did not provide a reliable full-year 2020 earnings or cash-flow estimate, stating that the pandemic’s impact could not be reasonably estimated. Results for the quarter are not necessarily indicative of the full year.
- As of March 29, 2020, 52 U.S. and 233 international restaurants were temporarily closed, approximately 4.2% of the system. By April 26, closures had increased to 66 U.S. and 261 international restaurants, approximately 4.8% of the system.
- For the weeks ended April 5 through April 26, global systemwide same-restaurant sales declines ranged from 26.7% to 9.9%, showing continued but improving pandemic pressure after quarter-end.
- The Company closed most dining rooms where permitted and continued to emphasize drive-through, delivery and selected carryout operations. Supply interruptions, labor shortages, higher labor costs and reduced consumer spending were identified as material risks.
- Management drew $120.0 million under the Class A-1 variable funding senior secured notes, C$5.5 million under a Canadian revolving facility and $25.0 million under the U.S. advertising fund credit line. The Company said available cash and operating cash flows were expected to cover operating requirements for the next 12 months, but additional liquidity may not be available on acceptable terms.
- Management reduced the second-quarter dividend to $0.05 per share from $0.12 per share, suspended share repurchases, identified approximately $30.0 million of planned 2020 G&A and capital savings, and deferred certain payroll tax payments under the CARES Act.
- To support franchisees, Wendy’s extended royalty and advertising payment terms, abated advertising contributions on breakfast sales for the remainder of 2020, offered temporary base-rent deferrals and extended development and reimaging requirements.
- The Company expected approximately $1.5 million of additional IT realignment costs after recognizing $3.6 million in Q1, with most remaining costs expected in Q2 2020. It also expected to sell 43 New York company-operated restaurants to franchisees during the following 12 months, while retaining Manhattan company-operated restaurants.
- Further deterioration in restaurant performance could result in additional long-lived asset, goodwill or trademark impairment charges. The global real estate and development reporting unit had only nominal excess fair value over carrying value in its March impairment test.
Important facts for investors to verify
- Subsequent-quarter same-restaurant sales, restaurant closures and the pace of recovery in dine-in, drive-through and delivery channels.
- Franchisee liquidity and the effect of extended payment terms, rent deferrals and potential franchisee defaults on royalty, advertising and rental cash collections.
- Operating cash flow, debt covenant compliance, variable-rate borrowing costs and remaining borrowing capacity.
- Whether additional asset impairments or goodwill impairment charges are recorded as pandemic-related assumptions change.
- The timing and cost of the IT realignment and the achievement of the planned $30.0 million of 2020 savings.
- Future dividend declarations, the continuation of the share-repurchase suspension and capital allocation priorities.
- Commodity availability and pricing, labor availability and costs, and the effect of supply-chain disruptions on restaurant operations.
- Outstanding commitments, including approximately $77.8 million of lease guarantees and $25.1 million of letters of credit as of March 29, 2020.