The Wendy’s Company — Q1 2022 Form 10-Q Summary
Business Context and Reporting Period
The filing covers the 13-week fiscal quarter ended April 3, 2022, compared with the quarter ended April 4, 2021. Wendy’s operated or franchised 7,016 restaurants in the U.S. and 31 foreign countries and territories, including 402 U.S. company-operated restaurants, six international company-operated restaurants and 6,608 franchised restaurants. Company-operated restaurants represented approximately 5% of the system.
The business is organized into Wendy’s U.S., Wendy’s International and Global Real Estate & Development. The company primarily generates revenue from company-operated restaurant sales, franchise royalties and fees, rental income and advertising funds.
Key Financial Metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $488.6 million | $460.2 million | Up 6.2% |
| Operating profit | $74.9 million | $83.1 million | Down $8.2 million |
| Operating margin | 15.3% | 18.1% | Down approximately 280 bps |
| Income before taxes | $50.8 million | $54.5 million | Down $3.7 million |
| Net income | $37.4 million | $41.4 million | Down 9.6% |
| Diluted EPS | $0.17 | $0.18 | Down $0.01 |
| Operating cash flow | $21.0 million | $85.8 million | Down $64.8 million |
| Capital expenditures | $12.5 million | $10.4 million | Up $2.1 million |
Company-operated restaurant margin fell to 11.6% from 17.0%, primarily because food and paper costs increased to 32.6% of sales from 29.0%, while restaurant labor costs increased to 33.7% from 31.8%. Higher commodity and labor costs, lower customer counts and investment supporting the U.K. market pressured profitability.
Global same-restaurant sales increased 2.4%, including U.S. same-restaurant sales growth of 1.1% and international growth of 14.1%. Global systemwide sales increased 4.2% on a constant-currency basis to approximately $3.1 billion.
Cash, cash equivalents and restricted cash totaled $828.0 million at April 3, 2022, including $741.2 million of cash and cash equivalents. Total assets were $5.56 billion and total stockholders’ equity was $454.5 million.
Total debt, including the current portion and excluding unamortized issuance costs and purchase accounting adjustments, was approximately $2.92 billion. Carrying value of long-term debt was $2.87 billion, including $500 million of new senior secured notes issued on April 1, 2022. The company stated that it was in compliance with its debt covenants.
Material Changes Versus the Prior Comparable Period
- Revenue increased primarily from the acquisition of 93 Florida franchise-operated restaurants in late 2021, higher same-restaurant sales and net new restaurant development.
- Sales increased $20.2 million, while franchise royalty revenue and fees increased $6.1 million. Franchise rental income declined $1.0 million.
- Cost of sales increased $28.2 million, exceeding the revenue increase and reducing restaurant margin.
- General and administrative expense increased $9.7 million due to higher compensation, travel, share-based compensation, professional fees and investments in development, digital capabilities and the ERP implementation.
- Reorganization and realignment costs declined to $0.5 million from $4.9 million, primarily because Q1 2021 included costs related to the NPC Quality Burgers bankruptcy sale process.
- Interest expense declined $2.4 million, while investment income increased by $2.1 million due to a gain from an observable price change in an equity investment.
- Operating cash flow declined substantially because of incentive compensation payments, advertising fund payment timing, lower earnings and cloud-computing expenditures related primarily to the ERP implementation.
- Financing activities provided $452.8 million, principally from the $500 million debt issuance. Q1 2021 financing activities used $91.7 million, including share repurchases.
Guidance, Outlook, Commentary and Risks
- Management expects 2022 net new restaurant growth of 5% to 6% and targets 8,500 to 9,000 systemwide restaurants by the end of 2025. The system added 67 net restaurants during Q1.
- Breakfast launched in Canada on May 2, 2022. Management expects approximately 95% of global systemwide restaurants to offer breakfast and plans up to $16.0 million of incremental 2022 advertising support for the breakfast daypart.
- Digital sales represented approximately 10.6% of global systemwide sales in Q1 2022. U.S. breakfast sales averaged approximately $2,500 per restaurant per week.
- Advertising fund expense is expected to exceed advertising fund revenue by approximately $21.0 million in 2022, including the $16.0 million incremental advertising commitment and the reversal of approximately $5.0 million of prior excess advertising fund revenue.
- Expected 2022 capital expenditures are approximately $90 million to $100 million, including $77.5 million to $87.5 million for the remainder of the year. Cloud-computing arrangement expenditures are expected to total approximately $30 million, primarily for the ERP implementation.
- Expected cash dividends for the remainder of 2022 were approximately $80.3 million, assuming quarterly dividends continue at $0.125 per share. The company also had a $250 million share repurchase authorization; it repurchased $23.5 million of shares from April 3 through May 4, 2022.
- Management expects available cash and operating cash flow to meet operating requirements for the next 12 months, but noted that additional liquidity may not be available on acceptable terms if needed.
- Key risks include inflation and commodity volatility, labor costs and shortages, supply-chain disruptions, consumer spending and competition, COVID-19 effects, international execution, franchisee financial health, digital and cybersecurity risks, debt covenant and refinancing risks, litigation, real estate obligations and foreign currency movements.
- Lease guarantees totaled $89.3 million, and outstanding letters of credit totaled $22.1 million. The company stated that no material loss was expected from these items. Existing litigation loss exposure cannot be estimated clearly and could adversely affect a particular reporting period.
Important Facts for Investors to Verify
- Whether higher menu pricing and product mix can offset continuing food, labor and other inflationary pressures without weakening customer traffic.
- The sustainability of the 2.4% global same-restaurant sales increase and the effect of lower customer counts in the U.S.
- Progress toward the 5% to 6% 2022 net new restaurant growth objective and the 2025 target of 8,500 to 9,000 restaurants.
- The financial impact and execution progress of the Canadian breakfast launch, digital initiatives and ERP implementation.
- Cash generation after planned capital expenditures, advertising fund spending, dividends, share repurchases and cloud-computing costs.
- The use of proceeds from the $500 million debt issuance, future refinancing requirements and the company’s ability to maintain covenant compliance.
- The extent to which advertising fund deficits, franchisee health, lease guarantees and unresolved legal matters could affect future cash flows or earnings.