The Wendy’s Company: Fiscal 2013 First-Quarter 10-Q Summary
Business context and reporting period
The filing covers the 13 weeks ended March 31, 2013, compared with the 13 weeks ended April 1, 2012. Wendy’s operates and franchises quick-service restaurants, primarily in North America, which represents virtually all of its business and is reported as one segment. At March 31, 2013, the system comprised 6,544 restaurants, including 1,427 company-owned and 5,117 franchised locations.
Key financial metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Sales | $530.7 million | $519.9 million | 2.1% |
| Franchise revenues | $73.0 million | $73.3 million | (0.4)% |
| Total revenues | $603.7 million | $593.2 million | 1.8% |
| Operating profit | $22.5 million | $20.9 million | 7.7% |
| Net income attributable to Wendy’s | $2.1 million | $12.4 million | (83.1)% |
| Diluted earnings per share | $0.01 | $0.03 | Down |
| Operating margin | 3.7% | 3.5% | Improved |
| Net cash provided by operating activities | $32.6 million | $(15.1) million | Improved $47.7 million |
| Capital expenditures | $40.0 million | $47.0 million | Down $7.0 million |
Wendy’s restaurant margin increased to 12.8% from 11.8%. Total cost of sales declined to 86.8% of sales from 87.6%, reflecting pricing actions, sales mix, lower breakfast advertising costs and favorable beverage contracts, partly offset by higher commodity and labor costs.
Interest expense declined to $21.0 million from $28.2 million, primarily because of the purchase and redemption of 10.00% senior notes in 2012. However, other expense and investment income changed from $28.9 million of income in the prior year to $2.3 million of expense, principally because Q1 2012 included a $27.4 million gain on the sale of the Jurlique investment.
The company reported $428.7 million of cash and cash equivalents at March 31, 2013, compared with $453.4 million at December 30, 2012. Total debt, based on current and long-term debt reported on the balance sheet, was approximately $1.46 billion. Stockholders’ equity was $2.0 billion.
Material changes versus the prior comparable period
- Company-owned Wendy’s sales increased $13.9 million, while bakery sales declined $3.1 million.
- Systemwide same-store sales increased 0.7%; company-owned same-store sales increased 1.0% and franchised same-store sales increased 0.8% on the broader measure including international franchised restaurants.
- Average customer check increased, but customer transactions declined. Management cited holiday timing, adverse weather and foreign currency effects as additional sales pressures.
- Company-owned restaurant margin improved by 100 basis points to 12.8%.
- Depreciation and amortization increased $19.5 million to $51.8 million, including $14.5 million of accelerated depreciation related to assets being replaced under the Image Activation program.
- General and administrative expense decreased $7.0 million, primarily due to lower employee compensation, legal fees and information technology consulting costs.
- Q1 2013 included no impairment charge, compared with $4.5 million in Q1 2012.
- Net income declined substantially because the prior-year period included the Jurlique investment gain and noncontrolling-interest effects. Q1 2013 also included a $1.9 million deferred-tax benefit from the decision to indefinitely reinvest certain foreign earnings outside the United States.
- Cash flow from operations improved to $32.6 million from negative $15.1 million, substantially aided by working-capital timing and lower interest and tax payments.
Guidance, outlook, risks and unusual items
Management expects approximately $245 million of total 2013 cash capital expenditures, including approximately $205 million for the remainder of the year. Planned uses also include quarterly dividends of approximately $47.2 million for the remainder of 2013, potential restaurant transactions and possible stock repurchases of up to $100 million. Management stated that operating cash flow and available cash are expected to provide sufficient liquidity for operating requirements over the next 12 months.
On April 16, 2013, Wendy’s agreed to refinance its credit agreement, subject to closing conditions. The proposed facilities included a $350 million Term Loan A maturing in 2018, a $769.4 million Term Loan B maturing in 2019 and a $200 million revolving facility maturing in 2018. Management expected approximately $5.5 million of refinancing fees and up to approximately $21.1 million of debt extinguishment costs in Q2 2013, while anticipating approximately $20 million of future annual interest savings.
The Japan joint venture was expected to become majority-owned and consolidated beginning in Q2 2013 following planned capital contributions. Wendy’s potential obligations, including remaining funding and guarantees, could total approximately $6.7 million if the other partners cannot perform their reimbursement obligations.
Key risks include commodity inflation, labor and operating costs, intense competition and pricing pressure, consumer spending and preferences, food safety, franchisee financial condition, execution of the Image Activation program, development and acquisition risks, interest rates, legal and regulatory matters, adverse weather and foreign currency movements. The company had $5.8 million of reserves for legal and environmental matters and stated that existing matters were not expected to have a material effect, although the possible range of loss could not be estimated.
Wendy’s recorded $668,000 of costs related to discontinuing the breakfast daypart at certain restaurants and incurred $2.2 million of facilities relocation and transition costs in Q1 2013. The Atlanta support-center relocation was substantially complete, with approximately $4.8 million of additional 2013 costs expected.
Most important facts for investors to verify
- Whether the proposed debt refinancing closed on expected terms and delivered the anticipated interest savings.
- The impact of up to approximately $21.1 million of Q2 debt extinguishment costs and $5.5 million of refinancing fees.
- Whether restaurant margin improvements persist despite commodity, labor and competitive pricing pressures.
- Progress, spending and returns from the Image Activation program, including the effect of accelerated depreciation.
- The timing and accounting impact of consolidating the Japan joint venture in Q2 2013.
- Whether planned capital expenditures, dividends and potential share repurchases remain consistent with operating cash flow and liquidity.
- Future same-store sales, customer traffic and franchise restaurant counts, given the decline in restaurant units and transactions.
- Completion of the new collective bargaining agreement covering the bakery’s unionized employees and any resulting pension-cost changes.