The Wendy’s Company: Q3 2012 Form 10-Q Summary
Business context and reporting period
The filing covers the 13-week quarter and 39-week year-to-date period ended September 30, 2012, compared with October 2, 2011. Wendy’s operates and franchises quick-service restaurants, primarily in North America, and reports one operating segment. The system comprised 6,543 restaurants at quarter-end, including 1,447 company-owned and 5,096 franchised locations. Arby’s results are presented as discontinued operations following its 2011 sale.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | Change |
|---|---|---|---|
| Revenue | $636.3 million | $611.4 million | 4.1% increase |
| Operating profit | $31.2 million | $32.4 million | 3.7% decrease |
| Operating margin | 4.9% | 5.3% | Down approximately 40 basis points |
| Net loss attributable to Wendy’s | $26.2 million | $4.0 million | Higher loss |
| Loss per share | $0.07 | $0.01 | Worse by $0.06 |
| Wendy’s restaurant margin | 13.9% | 13.7% | Up 20 basis points |
| Metric | 9M 2012 | 9M 2011 | Change |
|---|---|---|---|
| Revenue | $1.875 billion | $1.816 billion | 3.3% increase |
| Operating profit | $90.5 million | $107.8 million | 16.0% decrease |
| Operating margin | 4.8% | 5.9% | Down approximately 110 basis points |
| Net loss attributable to Wendy’s | $19.3 million | $5.9 million income | Decline of $25.2 million |
| Loss per share | $0.05 | $0.01 income | Decline of $0.06 |
| Wendy’s restaurant margin | 13.3% | 13.7% | Down 40 basis points |
Q3 same-store sales increased 2.8% systemwide under the new methodology, including 2.7% for company-owned restaurants and 2.9% for franchised restaurants. Year-to-date systemwide same-store sales increased 2.3%. Higher average checks, primarily from menu price increases, were partly offset by lower customer transactions.
Year-to-date operating results included $26.2 million of facilities relocation and transition costs, $7.8 million of impairment charges, and $75.1 million of losses on early extinguishment of debt. These items significantly affected reported profitability. The company also recorded a $27.4 million gain on the sale of its Jurlique investment.
Cash flow, debt and liquidity
- Cash provided by operating activities was $124.6 million for the first nine months, down from $182.1 million in the prior-year period.
- Capital expenditures were $126.3 million, including $31.3 million for Image Activation restaurants, $25.5 million for point-of-sale equipment, and $12.9 million related to the corporate headquarters and relocation.
- Cash used in investing activities was $134.6 million, including $40.6 million for restaurant acquisitions.
- Cash and cash equivalents were $453.6 million at September 30, 2012, compared with $475.2 million at January 1, 2012.
- Total long-term debt was $1.457 billion, including $1.114 billion under a new term loan; current maturities were $10.0 million.
- The new credit agreement includes a $1.125 billion senior secured term loan due in 2019 and a $200 million revolving facility due in 2017. The term loan carried a 4.75% interest rate at quarter-end.
- No revolving borrowings were outstanding at quarter-end, although $19.0 million of letters of credit had been issued. The company was in compliance with its debt covenants.
Material changes versus the prior comparable period
- Revenue increased, supported by same-store sales, price increases, and additional company-owned restaurants, but cost inflation and labor investments increased cost of sales.
- Year-to-date restaurant margin declined to 13.3% from 13.7%, reflecting a 1.1% increase in commodity costs and higher labor costs, partly offset by pricing and lower breakfast advertising expense.
- The company refinanced its debt, repaid the prior term loan and 10% senior notes, and incurred substantial early-extinguishment charges. Interest expense nevertheless declined because of the retired senior notes.
- Wendy’s acquired 30 franchised restaurants in Austin, Texas, for $19.0 million and 24 franchised restaurants in Albuquerque, New Mexico, for $19.1 million. The acquired restaurants were not material to consolidated results.
- The Atlanta restaurant support center relocation to Ohio was substantially completed during the quarter. Total transition costs incurred since inception were $31.8 million, with approximately $9.1 million expected after September 30, 2012.
- The company sold its Jurlique investment for net proceeds of approximately $27.3 million and distributed approximately $3.7 million to minority shareholders, including approximately $2.3 million to former executives.
Outlook, commentary and risks
Management expected approximately $99 million of additional capital expenditures during the remainder of 2012, implying approximately $225 million for the full year. It also expected quarterly dividends of up to approximately $15.6 million in the fourth quarter and retained authorization to repurchase up to $100 million of common stock through December 29, 2013. Management stated that operating cash flow and available cash were expected to provide sufficient liquidity for operating requirements over the next 12 months.
The filing does not provide a formal earnings or revenue outlook. Management highlighted growth initiatives involving menu improvement, product innovation, operational execution, Image Activation, daypart expansion, and international brand development.
Principal risks include commodity and labor inflation, intense price competition, economic weakness and unemployment, lower customer traffic, food safety events, franchisee financial condition, execution of remodeling and acquisition programs, interest-rate exposure from predominantly variable-rate debt, legal and regulatory matters, and potential impairment of goodwill and indefinite-lived intangible assets. Management noted declining market capitalization and stated that the fourth-quarter impairment review could result in an impairment charge, but could not determine whether one would be required.
Other contingencies include approximately $21.7 million of capital expenditure commitments for the remainder of 2012, a $2.0 million franchisee loan guarantee with a $0.2 million recorded liability, and Japan joint venture guarantee exposure of approximately $3.5 million, potentially increasing to approximately $6.5 million if reimbursement obligations are not honored. Legal and environmental reserves for continuing operations totaled $3.0 million.
Important facts for investors to verify
- Reconcile reported net losses with the $75.1 million debt-refinancing charge, $26.2 million relocation costs, $27.4 million Jurlique gain, and discontinued-operation amounts.
- Assess whether menu pricing can offset commodity, labor, and other operating-cost inflation without weakening traffic.
- Monitor leverage, variable-rate debt exposure, covenant compliance, required term-loan amortization, and cash available after capital expenditures and dividends.
- Review the outcome of the fourth-quarter goodwill and trademark impairment testing.
- Evaluate the returns and integration of the 54 acquired franchised restaurants and the progress and cost of the Image Activation program.
- Confirm the ultimate cost and timing of remaining Atlanta relocation obligations and other capital commitments.
- Consider the effect of the new 5% and 10% multiemployer pension-plan contribution surcharges and the pending collective bargaining agreement expiration in March 2013.