Business Context and Reporting Period
The Wendy’s Company operates and franchises quick-service restaurants through three segments: Wendy’s U.S., Wendy’s International, and Global Real Estate & Development. The fiscal second quarter and first six months ended July 2, 2023 comprised 13 and 26 weeks, respectively, compared with July 3, 2022. The system included 7,115 restaurants in the U.S. and 32 foreign countries and territories, with approximately 95% franchised.
Financial Performance and Position
| Metric | Q2 2023 | Q2 2022 | Six Months 2023 | Six Months 2022 |
|---|---|---|---|---|
| Revenue | $561.6 million | $537.8 million | $1,090.4 million | $1,026.4 million |
| Operating profit | $109.3 million | $96.3 million | $193.8 million | $171.2 million |
| Net income | $59.6 million | $48.2 million | $99.5 million | $85.6 million |
| Diluted EPS | $0.28 | $0.22 | $0.46 | $0.39 |
| Global company-operated restaurant margin | 16.5% | 14.5% | 15.2% | 13.1% |
| Cash flow from operations | Not separately reported | Not separately reported | $141.5 million | $98.2 million |
Q2 operating margin was approximately 19.5% and net margin approximately 10.6%. For the first six months, operating margin was approximately 17.8% and net margin approximately 9.1%.
- Q2 global same-restaurant sales increased 5.1%; U.S. increased 4.9% and international increased 7.2%. Six-month increases were 6.5%, 6.0%, and 10.3%, respectively.
- Q2 global systemwide sales increased 6.9% on a constant-currency basis; six-month systemwide sales increased 8.4%.
- Digital sales represented approximately 12.7% of global systemwide sales for the first six months, compared with 10.9% under the comparable prior-year definition. The company revised the definition to include in-restaurant mobile scans.
- At July 2, 2023, cash and cash equivalents were $635.4 million and total cash, cash equivalents, and restricted cash were $700.2 million.
- Total debt, including the current portion and before considering lease liabilities, was $2.810 billion. The company was in compliance with its debt covenants.
- Six-month capital expenditures were $30.2 million. Cash flow from operations less capital expenditures was approximately $111.3 million, before cloud-computing expenditures and other investing items.
- Total liabilities were $4.963 billion and stockholders’ equity was $391.1 million at July 2, 2023.
Material Changes Versus the Prior Comparable Period
- Q2 revenue increased 4.4%, operating profit increased approximately 13.5%, and net income increased 23.7%. Six-month revenue increased 6.2% and net income increased 16.2%.
- Restaurant margin improved by 200 basis points in Q2 and 210 basis points for the first six months, primarily reflecting higher average checks and cost leverage, partly offset by commodity, labor, U.K. investment, and inflationary pressures.
- Franchise royalty revenue and fees increased $9.7 million in Q2 and $22.4 million for the first six months, driven by higher same-restaurant sales and new restaurant development.
- International segment profit declined $0.9 million in Q2 despite higher revenue, primarily because of franchise support costs, U.K. market investments, and inflation. Six-month international segment profit increased $1.2 million.
- Global Real Estate & Development segment profit declined $0.8 million in Q2 and $3.3 million for the first six months, primarily because of lower gains on sales-type leases and higher rental expense.
- Cash flow from operations increased $43.3 million year over year. Financing cash flow changed from a $362.7 million inflow in 2022, which reflected debt financing, to a $246.3 million outflow in 2023, primarily due to dividends, share repurchases, and debt repayments.
- The company repurchased $88.3 million of common stock during the first six months and had $411.7 million remaining under its $500 million January 2023 authorization as of July 2, 2023. It also paid $105.7 million in dividends, compared with $53.5 million in the prior-year period.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- Management expects 2023 capital expenditures of approximately $75 million to $85 million, including approximately $45 million to $55 million during the remainder of the year.
- The company expects approximately $30 million of 2023 cash expenditures for cloud-computing arrangements; $16.8 million had been spent in the first six months.
- Management expects advertising funds expense to be approximately $3 million below advertising funds revenue for 2023, including prior-year advertising fund surplus and incremental Canadian advertising funding.
- The organizational redesign plan is expected to cost approximately $11 million to $13 million in total, including approximately $9 million to $11 million of cash expenditures. The company recorded $7.4 million in the first six months and expects additional costs of approximately $3.5 million to $5.5 million.
- The company expects available cash and operating cash flows to satisfy operating cash requirements for the next 12 months, but notes that additional liquidity may not be available on acceptable terms if needed.
- Inflation, commodity costs, labor costs and labor availability remain significant operating risks. Management expects inflationary pressures to continue through the remainder of 2023, with recovery dependent on pricing and product mix.
- Other key risks include competition, consumer spending and preferences, food safety, supply-chain disruption, international and U.K. execution, digital and cybersecurity risks, debt and covenant restrictions, franchisee financial health, litigation, foreign currency movements, weather, and the organizational redesign.
- Unusual items included $10.4 million of investment impairment losses, $7.5 million of reorganization and realignment costs, and a $1.3 million loss on early extinguishment of debt for the first six months. The prior-year period included a $2.1 million investment gain and $3.7 million of system optimization gains.
- The company has guaranteed certain leases and other obligations totaling $95.5 million and had $28.8 million of outstanding letters of credit at July 2, 2023. Management does not expect material losses from these arrangements.
- Litigation and environmental claims are described as inherent to the business; the company believes accruals are adequate but cannot estimate the aggregate possible range of loss.
Important Facts for Investors to Verify
- Confirm the sustainability of same-restaurant sales growth and the extent to which growth reflects pricing rather than customer-count increases.
- Assess whether improved restaurant margins can offset commodity, labor, inflationary, and U.K. expansion costs.
- Monitor leverage, scheduled debt maturities, interest-rate exposure, debt repurchases, covenant compliance, and liquidity after dividends and share repurchases.
- Track the remaining cost and timing of the organizational redesign and cloud-computing investments.
- Evaluate franchisee financial condition, new restaurant development, incentive-program costs, and the predominantly franchised operating model.
- Review the effect of the $10.4 million investment impairment and other nonrecurring items on underlying earnings.
- Verify subsequent share repurchases, dividends, debt activity, litigation developments, and changes in the company’s full-year outlook in later filings.