Wendy’s Company 2021 Q3 Form 10-Q Summary
Business context and reporting period
The Wendy’s Company operates, develops and franchises quick-service restaurants through three segments: Wendy’s U.S., Wendy’s International, and Global Real Estate & Development. As of October 3, 2021, the system included 6,891 restaurants in the U.S. and 31 foreign countries and territories, with approximately 95% franchised. The filing covers the 13 weeks ended October 3, 2021 and the 39 weeks ended October 3, 2021, compared with September 27, 2020.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | Change | 9M 2021 | 9M 2020 | Change |
|---|---|---|---|---|---|---|
| Revenue | $470.3 million | $452.2 million | 4.0% | $1,423.8 million | $1,259.5 million | 13.0% |
| Operating profit | $80.2 million | $81.3 million | (1.4%) | $290.1 million | $190.7 million | 52.1% |
| Net income | $41.2 million | $39.8 million | 3.6% | $148.3 million | $79.1 million | 87.4% |
| Diluted EPS | $0.18 | $0.17 | +$0.01 | $0.66 | $0.35 | +$0.31 |
| Company-operated restaurant margin | 14.4% | 16.9% | (250 bps) | 17.4% | 13.9% | +350 bps |
| Cash flow from operations | Not separately reported | Not separately reported | — | $276.7 million | $205.8 million | +$70.9 million |
Q3 global same-restaurant sales increased 3.3%, including 2.1% in the U.S. and 14.7% internationally. Nine-month global same-restaurant sales increased 10.9%, including 10.2% in the U.S. and 17.4% internationally. Digital sales represented approximately 8.0% of global systemwide sales, while breakfast represented approximately 7.2% of U.S. systemwide sales during the nine-month period.
Cash flow, liquidity and capital structure
- Cash, cash equivalents and restricted cash totaled $652.7 million at October 3, 2021, compared with $418.2 million at January 3, 2021. Cash and cash equivalents alone were $571.5 million.
- Operating activities provided $276.7 million; investing activities provided $15.0 million; and financing activities used $57.5 million during the first nine months.
- Capital expenditures were $43.4 million through nine months. Management expected full-year 2021 capital expenditures of approximately $75 million to $85 million.
- Total long-term debt, including the current portion and excluding unamortized issuance costs and purchase accounting adjustments, was approximately $2.437 billion. Reported debt carrying value was $2.394 billion, including current and long-term portions.
- In June 2021, the Company issued $1.1 billion of fixed-rate senior secured notes at rates of 2.370% and 2.775%, repaid specified 2015 and 2018 notes, and established a $300 million revolving facility. No amounts were borrowed under the new revolving facility at quarter-end.
- The Company stated that it was in compliance with its debt covenants and expected available cash and operating cash flow to meet operating requirements for the next 12 months.
- The Company paid $69.0 million of dividends during the first nine months and repurchased $127.2 million of common stock. At October 3, 2021, $60.6 million remained available under the then-current authorization.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by higher franchise royalty revenue and fees, advertising funds revenue, franchise rental income and same-restaurant sales. Company-operated sales declined in Q3 because 47 New York restaurants were sold to franchisees during Q2 2021, partially offset by higher same-restaurant sales.
- Q3 restaurant margin declined because of higher restaurant labor rates, commodity costs, lower local advertising spending in the prior-year period and lower customer count. Nine-month margin improved because of higher average checks, customer recovery from COVID-19-affected 2020 results and lower prior-year recognition pay.
- Nine-month operating profit benefited from $32.7 million of system optimization gains, primarily from the sale of 47 New York company-operated restaurants, versus $2.3 million in the prior-year period.
- General and administrative expense increased by $31.0 million year over year for nine months, primarily due to higher incentive compensation, professional fees and share-based compensation.
- Interest expense declined by $3.7 million for nine months following the refinancing, but the Company recognized a $17.9 million loss on early extinguishment of debt.
- The Company’s restaurant count increased from 6,828 at January 3, 2021 to 6,891 at October 3, 2021. Company-operated restaurants declined from 361 to 311, while franchised restaurants increased correspondingly.
Guidance, outlook, commentary and risks
- Management expected to fund up to $25.0 million of incremental advertising during 2021 to support breakfast. Advertising funds expense was expected to exceed advertising funds revenue by approximately $31.0 million for 2021.
- The Company announced a $100 million strategic build-to-suit development fund expected to support approximately 80 to 90 new franchise restaurants from 2022 through 2025.
- REEF Kitchens committed to open and operate 700 delivery kitchens over five years across the U.S., Canada and the U.K.
- The Operations and Field Realignment Plan was expected to incur total costs of approximately $5.5 million to $6.0 million, with up to approximately $0.5 million of additional costs remaining after the first nine months. Most remaining costs were expected in the remainder of 2021.
- Management continued to identify COVID-19, labor availability, commodity inflation, competition, consumer spending, supply-chain disruptions, digital and cybersecurity risks, international operations, franchisee financial health, debt obligations, litigation and lease exposure as material risks.
- The filing states that substantially all restaurants were open at October 3, 2021, but labor availability remained under pressure. Management could not predict the ultimate duration or effect of the COVID-19 pandemic.
- The Company guaranteed certain franchisee leases totaling $89.6 million and had $23.6 million of outstanding letters of credit. Management did not expect material losses from these items, although litigation outcomes and future developments could adversely affect a reporting period.
Most important facts for investors to verify
- Whether labor shortages, wage inflation and commodity costs continue to pressure company-operated restaurant margins.
- Execution and funding of the REEF Kitchens commitment and the $100 million build-to-suit development program.
- The sustainability of same-restaurant sales growth after favorable comparisons with COVID-19-affected 2020 periods.
- Debt service requirements, refinancing terms, covenant compliance and the use of remaining refinancing proceeds.
- The effect of planned share repurchases, including the announced $125 million accelerated share repurchase and subsequent authorization increases.
- Whether the approximately $31 million expected 2021 advertising funds deficit and remaining realignment costs affect cash flow or profitability.
- Potential exposure from franchisee financial condition, lease guarantees, litigation and the pending appeal related to the previously disclosed shareholder derivative settlement.