Wendy’s/Arby’s Group, Inc. — Form 10-Q Summary
Business context and reporting period
This combined quarterly report covers Wendy’s/Arby’s Group, Inc. and its wholly owned subsidiary, Wendy’s/Arby’s Restaurants, LLC. The fiscal quarter ended April 3, 2011, and both comparable periods contained 13 weeks. Operations comprised the Wendy’s and Arby’s restaurant systems, including company-owned and franchised restaurants.
- Wendy’s system: 6,565 restaurants, including 1,395 company-owned.
- Arby’s system: 3,631 restaurants, including 1,139 company-owned.
- Total system: 10,196 restaurants, including 2,534 company-owned.
- Management was exploring strategic alternatives for Arby’s, including a potential sale; Arby’s was not classified as held for sale or discontinued operations as of April 3, 2011.
Key financial metrics
| Wendy’s/Arby’s Group | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Total revenues | $847.8 million | $837.4 million | +$10.4 million; +1.2% |
| Operating profit | $30.6 million | $26.3 million | +$4.3 million; +16.3% |
| Loss before income taxes | $(3.4) million | $(8.5) million | Improved by $5.1 million |
| Net loss | $(1.4) million | $(3.4) million | Improved by $2.0 million |
| Basic and diluted loss per share | $0.00 | $(0.01) | Improved |
| Cash flow from operations | $53.5 million | $35.2 million | +$18.2 million |
| Capital expenditures | $28.6 million | $27.1 million | +$1.4 million |
Consolidated restaurant margin declined to 12.5% from 13.9%. Cost of sales increased to 87.2% of sales from 85.7%. Wendy’s restaurant margin declined to 13.4% from 15.4%, while Arby’s declined modestly to 10.6% from 10.8%.
- Wendy’s same-store sales: 0.0% systemwide, including (0.9)% for company-owned restaurants and 0.3% for franchised restaurants.
- Arby’s same-store sales: 5.5% systemwide, including 6.8% for company-owned restaurants and 4.8% for franchised restaurants.
- Wendy’s segment operating profit was $43.7 million, down from $52.4 million.
- Arby’s segment operating loss improved to $(5.3) million from $(21.0) million.
- Cash and cash equivalents were $500.1 million at April 3, 2011, compared with $512.5 million at January 2, 2011.
- Total debt, including current and long-term portions, was approximately $1.544 billion at April 3, 2011, based on the financial-instrument disclosure.
- Long-term debt decreased to $1.527 billion from $1.554 billion at January 2, 2011.
Material changes versus the prior comparable period
- Revenue increased primarily because of stronger Arby’s sales, partially offset by weaker Wendy’s company-owned same-store sales and lower sales of bakery and kids’ meal promotion items.
- Arby’s benefited from a fish limited-time offer, an Angus roast beef product, new brand positioning and a value-menu item.
- Wendy’s sales were affected by severe winter weather, higher Canadian sales taxes and weaker company-owned same-store sales.
- Commodity costs increased materially. Wendy’s cost of sales rose to 86.6% of sales from 84.6%; Arby’s rose to 89.4% from 89.2%.
- General and administrative expense decreased by $6.9 million, primarily because of the reversal of the remaining Strategic Sourcing Group commitment and the non-recurrence of Wendy’s integration expenses. These savings were partly offset by Arby’s strategic-alternatives costs and higher professional fees.
- Impairment charges decreased to $9.6 million from $11.6 million. Q1 2011 charges included $7.9 million for Wendy’s restaurants and $1.7 million for Arby’s restaurants.
- Interest expense decreased to $34.3 million from $36.3 million, primarily following redemption of Wendy’s 6.25% senior notes in 2010, partly offset by higher term-loan borrowings.
- Operating cash flow improved, partly because of timing-related increases in accounts payable and lower payments of accrued liabilities.
- Debt repayments totaled $29.8 million, including a $24.9 million excess-cash-flow prepayment under the Restaurants term loan.
- The Group paid $8.4 million of dividends in the quarter and made no common-stock repurchases.
Guidance, outlook, risks and unusual items
- Management expected continued positive operating cash flow during the remainder of 2011 and stated that operating cash flow and available cash should provide sufficient liquidity for operating requirements over the following 12 months.
- Expected remaining-2011 capital expenditures were approximately $145 million, implying approximately $174 million for the full year. The filing did not provide earnings guidance.
- Management expected commodity costs to remain significantly higher than in 2010. Wendy’s planned prudent price increases, while Arby’s planned selective price increases in the second half of 2011.
- Remaining-2011 cash requirements included approximately $8.4 million of scheduled debt principal repayments, up to approximately $25.1 million of dividends and potential acquisitions, dispositions, financing activity and stock repurchases.
- The Group had approximately $250 million of authorized stock-repurchase capacity through January 1, 2012; no shares were repurchased during the quarter.
- Approximately 450 Arby’s franchised restaurants had royalties, rent or other fees at least 60 days past due. Arby’s closed 21 franchised restaurants during the quarter and experienced a net decline of 13 franchised restaurants.
- Risks included franchisee financial distress, restaurant closures, commodity and labor inflation, competition and pricing pressure, consumer spending weakness, adverse weather, food safety events, regulatory changes, interest rates, impairment charges and uncertainty regarding the Arby’s strategic review.
- The companies accrued $1.3 million and $1.3 million, respectively, for the portion of an Arby’s employee-retention program not conditioned on a sale.
- Legal and environmental reserves totaled approximately $3.9 million. Management did not believe these matters would materially affect consolidated financial position or results of operations, although the aggregate possible range of loss could not be estimated.
- Disclosure controls were evaluated as effective, and no material changes to internal control over financial reporting were reported.
Important facts for investors to verify
- Whether the Arby’s strategic review results in a sale, another transaction or no transaction, and the related effect on debt repayment requirements and financial statements.
- Whether elevated commodity costs and planned price increases affect traffic, market share and restaurant margins.
- Arby’s franchisee liquidity, overdue receivables, restaurant closures and future royalty revenue.
- The sustainability of operating cash flow after capital expenditures, debt repayments, dividends and any strategic-transaction costs.
- The terms, covenants and refinancing requirements of the approximately $1.5 billion debt structure.
- Whether Wendy’s same-store sales and margins recover after the winter-weather impact and higher operating costs.
- Actual full-year capital expenditures versus the approximately $174 million plan and any acquisitions, dispositions or share repurchases.
- The ultimate amount and outcome of legal, environmental and other contingencies beyond recorded reserves.