Business Context and Reporting Period
The Wendy’s Company operates and franchises Wendy’s quick-service restaurants, primarily in North America, and reports one operating segment. As of September 28, 2014, the system included 6,532 restaurants, including 995 company-owned and 5,537 franchised locations. The filing covers the 13-week third quarter and 39-week period ended September 28, 2014, compared with periods ended September 29, 2013.
Key Financial Metrics
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Revenue | $512.5 million | $640.8 million | $1,559.1 million | $1,895.0 million |
| Operating profit | $46.9 million | $26.8 million | $199.8 million | $106.3 million |
| Net income attributable to Wendy’s | $22.8 million | $(1.9) million | $98.1 million | $12.4 million |
| EPS, basic and diluted | $0.06 | Nearly $0.00 | $0.26 | $0.03 |
| Cash flow from operations | Not separately provided | Not separately provided | $182.6 million | $252.7 million |
| Capital expenditures | Not separately provided | Not separately provided | $197.9 million | $130.8 million |
Operating margin was approximately 9.2% in Q3 2014 versus 4.2% in Q3 2013, and approximately 12.8% for the first nine months versus 5.6% in the prior-year period. Net margin was approximately 4.5% in Q3 2014 versus negative 0.3% in Q3 2013, and 6.3% for the first nine months versus 0.7% in the prior-year period. Wendy’s restaurant margin was 15.5% in Q3 and 15.4% for the first nine months, compared with 15.5% and 15.0%, respectively, in the comparable periods.
At September 28, 2014, cash and cash equivalents were $342.4 million, down from $580.2 million at December 29, 2013. Total debt, including current maturities, was approximately $1.45 billion, compared with approximately $1.46 billion at year-end 2013. Stockholders’ equity was $1.73 billion, compared with $1.93 billion at year-end.
Cash used in financing activities was $338.0 million, principally reflecting $291.2 million of share repurchases and $55.0 million of dividends. The company stated that operating cash flow and available cash should be sufficient to meet operating requirements for the next 12 months.
Material Changes Versus the Prior Comparable Period
- Q3 revenue declined $128.3 million, primarily because restaurant sales declined $148.9 million following the sale of company-owned restaurants; franchise revenue increased $20.6 million.
- For the first nine months, revenue declined $335.9 million, including a $393.4 million decline in sales, substantially offset by a $57.5 million increase in franchise revenue.
- Same-restaurant sales improved for the first nine months: systemwide North America same-restaurant sales increased 1.6% versus 1.4% in the prior year. Q3 North America systemwide same-restaurant sales increased 0.7% versus 3.1%.
- Operating profit benefited from lower general and administrative expense, lower depreciation and amortization, reduced interest expense, and a $35.6 million net facilities action income in the first nine months, compared with $31.7 million of expense in the prior year.
- The company repurchased $291.2 million of common stock during the first nine months, including a $275.0 million modified Dutch auction tender offer, versus $41.5 million in the prior-year period.
- Capital expenditures increased $67.1 million, primarily for the Image Activation remodeling program, while operating cash flow decreased $70.1 million.
Outlook, Management Commentary, Risks, and Unusual Items
- The system optimization initiative included the sale of 176 company-owned restaurants during the first nine months of 2014. Wendy’s plans to sell all remaining company-owned Canadian restaurants to franchisees by the end of the first quarter of 2015; 134 restaurants were classified as held for sale at September 28, 2014.
- The company expects an additional $2.0 million to $4.0 million of system optimization costs through the first quarter of 2015, excluding gains or losses on future Canadian restaurant sales.
- In November 2014, Wendy’s announced a general and administrative expense reduction and resource realignment plan. Expected costs are approximately $20 million to $25 million, primarily in the fourth quarter of 2014 and first half of 2015, with completion expected by the end of the second quarter of 2015.
- The company expects approximately $285 million of total 2014 capital expenditures, up to $20.1 million of fourth-quarter dividends, and up to $86.1 million of remaining 2014 share repurchases under the then-current program.
- Management cited competition, consumer demand, commodity costs, labor and operating costs, food safety, franchisee financial condition, remodel execution, weather, interest rates, legal and regulatory requirements, and impairment risk as important uncertainties.
- Legal and environmental accruals totaled $3.4 million. Management did not believe pending matters would materially affect financial position or results, but stated that the possible range of loss could not be estimated.
- The company’s withdrawal from a multiemployer pension plan carries an estimated withdrawal liability of $13.5 million; the final amount remained subject to negotiations.
- Interest-rate swaps hedge anticipated floating-rate payments on $450 million of borrowings beginning June 30, 2015. The swaps had a $1.3 million liability at September 28, 2014.
Important Facts for Investors to Verify
- Whether the planned Canadian restaurant sales and broader system optimization produce sustainable franchise revenue and cash flow without materially weakening company-owned sales.
- The timing and ultimate cost of the announced $20 million to $25 million G&A reduction plan and the expected operating savings.
- Whether increased Image Activation capital spending generates sufficient same-restaurant sales and restaurant-level returns.
- The effect of lower operating cash flow, substantial share repurchases, dividends, and approximately $1.45 billion of debt on liquidity and leverage.
- Commodity inflation, especially beef costs, labor pressures, pricing effectiveness, and customer-count trends.
- The final withdrawal liability under the multiemployer pension plan and any material legal, tax, franchisee-guarantee, or impairment exposures.