Business Context and Reporting Period
The Wendy’s Company operates, develops and franchises quick-service restaurants through three segments: Wendy’s U.S., Wendy’s International, and Global Real Estate & Development. This unaudited Form 10-Q covers the 13 weeks ended April 4, 2021, compared with the 13 weeks ended March 29, 2020. The system included 6,838 restaurants, including 362 company-operated, 5,523 U.S. franchised and 953 international franchised restaurants.
Key Financial Metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $460.2 million | $405.0 million | 13.6% increase |
| Operating profit | $83.1 million | $48.7 million | $34.4 million increase |
| Income before taxes | $54.5 million | $21.3 million | $33.2 million increase |
| Net income | $41.4 million | $14.4 million | $27.0 million increase |
| Diluted EPS | $0.18 | $0.06 | Increase |
| Net cash from operating activities | $85.8 million | $(19.4) million | $105.2 million improvement |
| Company-operated restaurant margin | 17.0% | 10.1% | 690 basis-point increase |
- Global same-restaurant sales increased 13.0%; U.S. same-restaurant sales increased 13.5%; international same-restaurant sales increased 7.9%.
- Global systemwide sales were $3.0 billion, compared with $2.6 billion in the prior-year quarter, and increased 12.5% on a constant-currency basis.
- Cost of sales declined to 83.0% of company-operated sales from 89.9%, primarily reflecting higher average checks and lower commodity costs, partly offset by labor-rate increases and lower customer counts.
- Cash, cash equivalents and restricted cash totaled $408.1 million at April 4, 2021, compared with $418.2 million at January 3, 2021.
- Total debt was $2.24 billion, including the current portion, and the Company reported compliance with its debt covenants. No borrowings were outstanding under its Class A-1 revolving notes or Canadian revolving credit facility.
- Capital expenditures were $10.4 million. Financing uses included $55.6 million of share repurchases, $20.2 million of dividends and $11.9 million of long-term debt repayments.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by higher company-operated sales, franchise royalty revenue and fees, franchise rental income, and advertising funds revenue.
- Sales and royalty revenue benefited from higher average checks, the breakfast daypart and government stimulus payments, partially offset by lower customer counts.
- Breakfast contributed 3.7% to U.S. same-restaurant sales. Digital sales represented approximately 7.5% of U.S. systemwide sales, more than double the prior-year level.
- Operating profit and net income increased substantially, helped by revenue growth, improved restaurant margins and a $4.0 million reduction in impairment charges.
- Reorganization and realignment costs increased to $4.9 million from $3.9 million, primarily due to $4.7 million of system-optimization costs associated with the NPC bankruptcy sale process. Prior-year costs included $3.5 million of IT realignment costs.
- Operating cash flow improved from an outflow of $19.4 million to an inflow of $85.8 million, partly due to the absence of a $24.7 million payment related to a financial institutions class-action settlement made in January 2020 and favorable working-capital timing.
- The Company repurchased 2.8 million shares for $56.0 million during the quarter. The weighted average basic shares outstanding declined slightly to 223.3 million from 223.5 million.
- NPC’s approximately 393 Wendy’s restaurants were sold to approved franchisees, including Flynn Restaurant Group and other franchisees; Wendy’s did not acquire restaurants in the transaction.
Guidance, Outlook, Commentary and Risks
- Management expects 2021 advertising funds expense to exceed advertising funds revenue by approximately $21.0 million, including up to $15.0 million of incremental Company-funded advertising to support breakfast.
- The Operations and Field Realignment Plan is expected to cost approximately $7.0 million to $9.0 million in total, including $6.5 million to $8.5 million of cash expenditures. Most remaining costs are expected during the remainder of 2021.
- Management expects capital expenditures of approximately $80.0 million to $90.0 million for 2021, including $70.0 million to $80.0 million during the remainder of the year.
- The Company expects approximately $66.4 million of cash dividends for the remainder of 2021 based on the $0.10 quarterly dividend declared for the second quarter, subject to future Board approval.
- Management expects available cash and operating cash flows to meet operating requirements for the next 12 months, but notes that additional liquidity may not be available on acceptable terms if needed.
- The Company planned to open company-operated restaurants in the United Kingdom in early June 2021 and expects to sell 47 company-operated New York restaurants to franchisees in the second quarter of 2021.
- COVID-19 remains a significant uncertainty. Approximately 85% of system dining rooms were open at quarter-end, but the duration and ultimate effects of the pandemic remain unpredictable.
- Other principal risks include competition, consumer spending and preferences, commodity and labor costs, supply-chain disruptions, food safety, digital and cybersecurity risks, franchisee financial health, real estate and lease obligations, debt covenants, litigation, foreign currency and impairment charges.
- The Company disclosed lease guarantees totaling $87.5 million and outstanding letters of credit totaling $26.6 million; it does not expect material losses from these items.
Important Facts for Investors to Verify
- Whether sales growth and same-restaurant sales remain strong after the temporary benefit from government stimulus payments and favorable comparisons with the COVID-19-affected prior-year period.
- The sustainability of the 17.0% company-operated restaurant margin amid labor inflation, commodity volatility and potential changes in customer traffic.
- Actual 2021 advertising fund deficits and the effect of incremental breakfast advertising on consolidated profitability.
- Progress and final costs of the Operations and Field Realignment Plan, NPC-related lease matters and the planned New York restaurant dispositions.
- Debt service capacity, covenant compliance and liquidity after dividends, share repurchases and planned capital expenditures.
- The effects of COVID-19, restaurant dining-room restrictions, franchisee financial condition and any renewed impairment or restructuring charges.
- Future dividend declarations and share repurchases, including the May 2021 increase of the repurchase authorization to $150.0 million.