Wendy’s Company 2021 Q2 Form 10-Q Summary
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 filing covers the 13-week quarter and 26-week year-to-date periods ended July 4, 2021, compared with June 28, 2020. The system included 6,866 restaurants in the U.S. and 31 foreign countries and territories; approximately 95% of dining rooms were open at quarter-end.
Financial performance and key metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $493.3 million | $402.3 million | $953.5 million | $807.3 million |
| Operating profit | $126.7 million | $60.7 million | $209.9 million | $109.4 million |
| Net income | $65.7 million | $24.9 million | $107.1 million | $39.3 million |
| Diluted EPS | $0.29 | $0.11 | $0.47 | $0.17 |
| Operating margin | 25.7% | 15.1% | 22.0% | 13.6% |
| Net margin | 13.3% | 6.2% | 11.2% | 4.9% |
| Company-operated restaurant margin | 20.3% | 14.4% | 18.7% | 12.2% |
- Q2 revenue increased 22.6%; year-to-date revenue increased 18.1%.
- Global same-restaurant sales increased 17.4% in Q2 and 15.2% year to date. U.S. same-restaurant sales increased 16.1% and 14.9%, respectively; international same-restaurant sales increased 31.4% and 19.0%.
- Global systemwide sales were $3.25 billion in Q2 and $6.20 billion year to date, up from $2.62 billion and $5.24 billion, respectively.
- Q2 revenue growth reflected higher restaurant sales, franchise royalties and fees, rental income, and advertising fund revenue. Growth benefited from higher customer counts versus the pandemic-affected 2020 period, higher average checks, breakfast, and government stimulus payments during the first quarter.
- Cash flow from operating activities was $158.8 million in the first six months, compared with $30.6 million in the prior-year period. Capital expenditures were $24.1 million.
- Cash, cash equivalents, and restricted cash totaled $640.2 million at July 4, 2021, including $568.1 million of cash and cash equivalents.
Debt, liquidity, and capital allocation
- Long-term debt, including the current portion and excluding unamortized issuance costs, was approximately $2.45 billion at July 4, 2021. Reported debt carrying value was $2.41 billion, net of issuance costs.
- In June 2021, the Company issued $450 million of 2.370% Series 2021-1 Class A-2-I Notes and $650 million of 2.775% Series 2021-1 Class A-2-II Notes. Proceeds refinanced specified 2015 and 2018 notes and provided funds for general corporate purposes.
- The refinancing generated a $17.9 million loss on early extinguishment of debt, including a $9.6 million make-whole payment and an $8.3 million write-off of deferred financing costs. Interest expense declined modestly year over year.
- The Company had access to a $300 million revolving Series 2021-1 Class A-1 facility and had no borrowings under it at quarter-end. It was in compliance with its debt covenants.
- The Company repurchased approximately 4.0 million shares for $83.3 million during the first six months and paid $42.3 million in dividends. The repurchase authorization was subsequently increased to $220 million, with $100 million of availability reported as of August 11, 2021.
- Management stated that available cash and operating cash flows were expected to satisfy operating requirements for the next 12 months, although additional liquidity may not be available on acceptable terms if needed.
Material changes versus the prior comparable period
- Profitability improved substantially as sales recovered from the COVID-19-affected 2020 comparison period, restaurant cost ratios declined, and systemwide sales increased.
- Cost of sales declined to 79.7% of sales in Q2 from 85.6% and to 81.3% year to date from 87.8%. Management cited higher customer counts, higher average checks, and the absence of 2020 incremental recognition pay; higher commodity costs partially offset these benefits.
- The Company sold 47 Company-operated New York restaurants to franchisees during Q2, reducing U.S. Company-operated restaurants from 362 at April 4 to 314 at July 4. The transaction generated a $30.8 million net system optimization gain and $50.5 million of proceeds.
- System optimization gains increased to $30.8 million in Q2 and $31.3 million year to date, compared with $2.0 million and $2.3 million in the prior-year periods. This significantly benefited operating profit.
- Impairment charges declined to $1.3 million year to date from $4.7 million, while reorganization and realignment costs were $7.0 million versus $6.8 million.
- The Company did not acquire restaurants in the NPC bankruptcy sale process; all NPC Wendy’s restaurants were sold to approved franchisees. The Company recognized $5.6 million of related system optimization costs year to date and expected an additional approximately $1.0 million gain upon final lease terminations.
Guidance, outlook, commentary, and risks
- The filing does not provide clear formal full-year revenue or earnings guidance. Management expected 2021 capital expenditures of approximately $80 million to $90 million and estimated approximately $53.5 million of dividend cash requirements for the remainder of 2021.
- Management expected total 2021 incremental advertising investment of $25 million, including an additional $10 million announced after quarter-end, to support breakfast.
- Breakfast represented approximately 7.2% of U.S. systemwide sales and digital sales represented approximately 7.5% during the first six months of 2021.
- Management planned additional growth through a REEF Kitchens commitment to open approximately 700 delivery kitchens over five years and a $100 million strategic build-to-suit development fund expected to support approximately 80 to 90 new franchise restaurants from 2022 through 2025.
- The Operations and Field Realignment Plan was expected to incur total costs of approximately $6 million to $8 million, including $1 million to $3 million of additional costs primarily in the remainder of 2021.
- Key risks include COVID-19 and other health events, competition, consumer spending, food and labor inflation, labor shortages, commodity volatility, supply-chain disruptions, franchisee financial health, debt and covenant requirements, digital and cybersecurity risks, litigation, real estate and lease obligations, international operations, and the ability to sustain breakfast and new restaurant growth.
- Lease guarantees totaled $95.2 million at July 4, 2021, and outstanding letters of credit totaled $26.6 million. The Company stated that probable exposure under lease guarantees and expected losses from letters of credit were not material.
- A shareholder derivative lawsuit related to 2015 and 2016 cyberattacks had a settlement approval hearing scheduled for September 2, 2021. The settlement contemplated governance undertakings and up to $950 thousand of plaintiffs’ fees and expenses, expected to be covered by insurance if approved.
Most important facts for investors to verify
- Whether same-restaurant sales and customer traffic remain strong after the favorable comparison with the COVID-19-affected 2020 period and after stimulus effects fade.
- The sustainability of the 2021 margin improvement amid commodity inflation, labor costs, wage rates, and labor availability.
- The recurring earnings impact of the $30.8 million New York restaurant disposition gain and other system optimization items.
- Execution and economics of the breakfast, digital, REEF Kitchens, and build-to-suit development initiatives, including the planned advertising investment.
- Debt service requirements, refinancing covenants, scheduled principal payments, and the Company’s ability to fund dividends, repurchases, capital expenditures, and growth while maintaining liquidity.
- Progress and final costs associated with the Operations and Field Realignment Plan, NPC-related lease matters, legal proceedings, and COVID-19 contingencies.