The Wendy’s Company 2023 First-Quarter Form 10-Q Summary
Business Context and Reporting Period
The filing covers the 13 weeks ended April 2, 2023, compared with the 13 weeks ended April 3, 2022. Wendy’s operates and franchises quick-service restaurants through three segments: Wendy’s U.S., Wendy’s International, and Global Real Estate & Development.
- The system comprised 7,095 restaurants in the U.S. and 31 foreign countries and territories, including 5,989 U.S. restaurants and 1,106 international restaurants.
- Approximately 5% of the system was company-operated; the remainder was franchised.
- Global digital sales represented approximately 12.4% of systemwide sales, compared with 10.6% in the prior-year quarter.
Financial Performance and Key Metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenue | $528.8 million | $488.6 million | 8.2% increase |
| Operating profit | $84.5 million | $74.9 million | $9.6 million increase |
| Net income | $39.8 million | $37.4 million | 6.4% increase |
| Diluted earnings per share | $0.19 | $0.17 | Increase |
| Cash flow from operations | $53.0 million | $21.0 million | $32.0 million increase |
| Capital expenditures | $12.2 million | $12.5 million | $0.3 million decrease |
- Global same-restaurant sales increased 8.0%; U.S. same-restaurant sales increased 7.2%; and international same-restaurant sales increased 13.9%, all on a constant-currency basis where applicable.
- Global systemwide sales increased to $3.36 billion from $3.07 billion. U.S. systemwide sales increased 8.6% and international systemwide sales increased 21.0% on a constant-currency basis.
- Global company-operated restaurant margin was 13.8%, up 220 basis points from 11.6%. U.S. company-operated restaurant margin was 14.7%, compared with 12.0%.
- Cost of sales declined to 86.2% of sales from 88.4%, primarily due to higher average checks, partly offset by commodity, labor and U.K. market costs.
- Interest expense increased to $31.7 million from $26.4 million.
Balance Sheet, Debt and Liquidity
- Cash and cash equivalents were $676.5 million at April 2, 2023, compared with $745.9 million at January 1, 2023. Total cash, cash equivalents and restricted cash were $740.6 million, down from $831.8 million.
- Total debt, including the current portion and before debt issuance costs, was approximately $2.85 billion; reported long-term debt, net of issuance costs, was $2.82 billion including the current portion.
- The Company repurchased $31.6 million principal of its 7% debentures and incurred a $1.3 million loss on early extinguishment of debt.
- The Company was in compliance with its debt covenants as of April 2, 2023.
- Financing activities used $132.3 million, primarily reflecting debt repayments, $36.7 million of share repurchases and $53.1 million of dividends.
- Management stated that available cash and operating cash flows are expected to provide sufficient liquidity for operating requirements over the next 12 months, although additional financing may not be available on acceptable terms.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by higher company-operated same-restaurant sales, increased franchise royalties and fees, higher advertising fund revenue and net new restaurant development.
- Net income increased despite higher interest expense, a $3.6 million investment impairment, a $1.3 million debt extinguishment loss and $6.8 million of reorganization costs.
- General and administrative expense was essentially flat at $62.3 million, although share-based compensation declined while professional fees and incentive compensation increased.
- Operating cash flow improved substantially, primarily due to lower incentive compensation payments, higher earnings and the timing of advertising fund payments.
- Global Real Estate & Development segment profit declined to $25.1 million from $27.6 million, primarily because of higher franchise rental expense.
- Restaurant count was unchanged overall at 7,095, with 39 openings and 39 closures during the quarter.
Guidance, Outlook, Risks and Unusual Items
- The February 2023 organizational redesign is expected to generate total costs of approximately $11 million to $13 million, including approximately $9 million to $11 million of cash expenditures. The Company recognized $6.7 million in the quarter and expects most costs to be recognized in 2023, with related activity continuing into 2026.
- Management expects 2023 general and administrative expense to remain relatively flat compared with 2022.
- Expected 2023 capital expenditures are approximately $75 million to $85 million, including $63 million to $73 million during the remainder of the year. The Company also expects approximately $25 million of cloud-computing arrangement spending during 2023.
- Management expects advertising fund expense to be approximately $3 million below advertising fund revenue for 2023, including planned incremental Canadian advertising funding.
- The Company authorized up to $500 million of common-stock repurchases through February 2027. Approximately $461.2 million remained available at April 2, 2023; an additional $23.6 million of repurchases occurred through May 3, 2023.
- Management expects inflationary pressure on labor and commodities to continue. Key exposures include food and labor costs, pricing competition, consumer spending, franchisee health, supply-chain disruptions, international operations, digital systems and cybersecurity, debt obligations, litigation, foreign currency and the execution of the organizational redesign.
- The Company guarantees certain leases and other obligations totaling $99.4 million and had $28.9 million of outstanding letters of credit. Management does not expect material losses from these items.
- The Company stated that there were no material changes from previously disclosed risk factors and that disclosure controls were effective as of April 2, 2023.
Important Facts for Investors to Verify
- Whether strong same-restaurant sales and higher average checks continue without further weakening customer traffic.
- Whether commodity, labor and U.K. operating pressures offset restaurant-margin improvement.
- The timing and total cost of the organizational redesign, including cash expenditures and any impact on execution.
- Cash generation relative to planned dividends, stock repurchases, debt repurchases, capital expenditures and technology spending.
- Leverage, interest expense, debt maturities, covenant compliance and the Company’s ability to refinance or repurchase debt.
- Whether the new Pacesetter development incentives accelerate restaurant growth while reducing near-term royalty and advertising revenue.
- The potential for additional impairment of the equity investment or other long-lived assets.
- The outcome and potential exposure from litigation, lease guarantees, letters of credit and other contingencies.