The Wendy’s Company — FY2020 Form 10-K Summary
Business context and reporting period
The filing covers the 53-week fiscal year ended January 3, 2021, compared primarily with the 52-week year ended December 29, 2019. Wendy’s operates and franchises quick-service restaurants through three segments: Wendy’s U.S., Wendy’s International, and Global Real Estate & Development.
At year-end, the system included 6,828 restaurants: 5,881 in the U.S. and 947 internationally. The Company operated 361 restaurants, while franchisees operated 6,467, representing approximately 95% of the system. Wendy’s launched breakfast across the U.S. system in March 2020.
Financial performance and key metrics
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Revenue | $1,733.8 million | $1,709.0 million | +$24.8 million |
| Operating profit | $269.3 million | $262.6 million | +$6.7 million |
| Income before taxes | $152.8 million | $171.5 million | -$18.7 million |
| Net income | $117.8 million | $136.9 million | -$19.1 million |
| Diluted earnings per share | $0.52 | $0.58 | -$0.06 |
| Cash flow from operations | $284.4 million | $288.9 million | -$4.5 million |
| Capital expenditures | $69.0 million | $74.5 million | -$5.5 million |
| Long-term debt, including current portion | $2,247.1 million | $2,280.3 million | -$33.2 million |
Revenue increased 1.5%, aided by the extra fiscal week, restaurant growth, higher franchise royalties and breakfast. Sales at Company-operated restaurants were $722.8 million, franchise royalty revenue and fees were $444.7 million, franchise rental income was $232.6 million, and advertising funds revenue was $333.7 million.
Restaurant margin declined to 14.9% from 15.5%. Cost of sales increased to 85.1% of Company-operated sales from 84.5%, primarily due to lower customer counts, COVID-19-related employee recognition pay, higher labor costs and commodity inflation.
Global systemwide same-restaurant sales increased 1.2% for the year and 4.7% in the fourth quarter. U.S. systemwide same-restaurant sales increased 2.0%, while international same-restaurant sales declined 6.0%. Global systemwide sales increased 3.7% on a constant-currency basis, including an estimated 2.0% benefit from the 53rd week.
Fourth-quarter revenue was $474.3 million, operating profit was $78.6 million, and net income was $38.7 million, compared with $427.2 million, $36.7 million, and $26.5 million, respectively, in the prior-year quarter. The fourth quarter contained 14 weeks versus 13 weeks in the prior-year quarter.
Cash, cash equivalents and restricted cash totaled $418.2 million at year-end, including $307.0 million of cash and cash equivalents. Stockholders’ equity was $549.6 million. Finance lease liabilities totaled $518.2 million and operating lease liabilities totaled $910.7 million.
Material changes versus the prior comparable period
- COVID-19 materially disrupted operations, customer traffic, supply chains and restaurant development. At year-end, approximately 75% of dining rooms were open and more than 99% of global restaurants were operating.
- Drive-through and pickup became more important: pickup-window sales represented approximately 83% of Company-operated sales in 2020, compared with approximately two-thirds in 2018 and 2019.
- Breakfast contributed 6.3% of U.S. systemwide same-restaurant sales in the fourth quarter and 6.2% to 6.4% during the second through fourth quarters. Wendy’s funded $14.6 million of incremental breakfast advertising.
- Digital sales represented approximately 5% of U.S. systemwide sales, more than double the 2019 level.
- Net income declined despite higher revenue and operating profit, principally because 2019 included $25.6 million of investment income, including a $24.4 million cash settlement, while 2020 included only a $0.2 million investment loss.
- Advertising funds revenue declined $5.7 million, partly because breakfast advertising contributions were abated for the remainder of 2020. Advertising expense exceeded revenue by approximately $11.7 million, including the incremental breakfast advertising.
- The Company paid $24.7 million related to the settlement of the financial institutions class action in January 2020. The prior-year legal reserve had been $50.0 million, partly offset by insurance receivables.
- The Company suspended share repurchases in March 2020, resumed them in August, and repurchased $76.1 million of stock during the year. The Company paid $64.9 million of dividends, down from $96.4 million in 2019.
Outlook, liquidity, risks and unusual items
Management expects 2021 sales to benefit from recovery in customer counts, a full year of breakfast, new restaurants, menu improvements, pricing, operational execution and digital growth. Expected offsets include the sale of certain New York Company-operated restaurants to franchisees and the lapping of the 53rd week.
Management expects 2021 capital expenditures of approximately $80 million to $90 million, dividends of approximately $80.6 million if the quarterly dividend remains at $0.09 per share, and potential stock repurchases of up to the $67.7 million remaining under the February 2020 authorization. Management stated that available cash and operating cash flow should cover operating requirements for the next 12 months, subject to business conditions.
The Company expects advertising funds expense to exceed advertising funds revenue in 2021 because it plans to fund approximately $15.0 million of incremental breakfast advertising. General and administrative expense and franchise support costs are expected to increase, particularly from IT investments, while labor costs are expected to rise, including costs associated with the planned U.K. launch.
The Company had approximately $2.2 billion of debt, including $2.247 billion of reported long-term debt including the current portion, and was in compliance with debt covenants at year-end. Its securitized financing facility is secured by substantially all assets of certain subsidiaries and contains covenants and rapid-amortization provisions. The Company had no outstanding borrowings under its U.S. variable funding notes or U.S. advertising fund revolver at year-end; C$2.5 million remained outstanding under the Canadian facility and was repaid after year-end.
- COVID-19 remains the principal near-term risk, including renewed closures, reduced traffic, labor constraints, supply interruptions, franchisee financial distress and covenant pressure.
- Commodity costs, labor costs, food safety, competition, consumer preferences and the performance of the breakfast daypart could materially affect margins and sales.
- The predominantly franchised model exposes Wendy’s to franchisee liquidity, execution, compliance and payment risks. NPC, its largest franchisee, filed for Chapter 11; its approximately 393 Wendy’s restaurants were expected to be sold to approved franchisees in late first or early second quarter 2021, with no restaurants expected to be acquired by Wendy’s.
- The Company recognized $8.0 million of long-lived asset impairment charges, primarily due to COVID-19-related deterioration at Company-operated restaurants.
- Operations and field realignment costs totaled $3.8 million in 2020, with total plan costs expected to reach approximately $7 million to $9 million. Additional 2021 costs were expected at approximately $3 million to $5 million.
- Legal and environmental matters are accrued when probable and reasonably estimable, but the filing states that the aggregate possible range of loss for existing proceedings cannot be estimated clearly.
- Goodwill and indefinite-lived intangible assets remained sensitive to assumptions regarding future cash flows and discount rates. The global real estate and development reporting unit had only a 13% fair-value cushion over carrying value at the annual test.
Most important facts for investors to verify
- Whether the post-pandemic recovery in customer counts offsets labor, commodity and occupancy inflation.
- The sustainability and profitability of breakfast sales, including whether incremental advertising produces sufficient returns.
- Franchisee financial health, NPC restaurant transfers, royalty collections and deferred rent recoveries.
- Compliance with securitized debt covenants and the timing of anticipated debt repayments or refinancing beginning in 2025.
- Execution of the U.K. launch, Image Activation investments, new restaurant development and digital commerce initiatives.
- Future dividend and repurchase capacity after planned capital expenditures, advertising investments and debt-service requirements.
- Potential additional impairment, restructuring, legal, cybersecurity, supply-chain and COVID-19-related costs.