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. As of July 3, 2022, the system included 7,040 restaurants across the U.S. and 31 foreign countries and territories, with approximately 95% franchised. This unaudited Form 10-Q covers the 13 weeks ended July 3, 2022 and the 26 weeks ended July 3, 2022, compared with periods ended July 4, 2021.
Financial Results and Key Metrics
| Metric | Q2 2022 | Q2 2021 | Six Months 2022 | Six Months 2021 |
|---|---|---|---|---|
| Revenue | $537.8 million | $493.3 million | $1,026.4 million | $953.5 million |
| Operating profit | $96.3 million | $126.7 million | $171.2 million | $209.9 million |
| Net income | $48.2 million | $65.7 million | $85.6 million | $107.1 million |
| Diluted EPS | $0.22 | $0.29 | $0.39 | $0.47 |
| Operating margin | 17.9% | 25.7% | 16.7% | 22.0% |
| Net margin | 9.0% | 13.3% | 8.3% | 11.2% |
| Company-operated restaurant margin | 14.5% | 20.3% | 13.1% | 18.7% |
- Q2 revenue increased 9.0%; six-month revenue increased 7.6%.
- Global same-restaurant sales increased 3.7% in Q2 and 3.1% year to date; U.S. same-restaurant sales increased 2.3% and 1.7%, respectively; international same-restaurant sales increased 15.2% and 14.7%.
- Six-month cash flow from operations was $98.2 million, down from $158.8 million. Capital expenditures were $30.9 million, and cash used in investing activities was $28.8 million.
- Cash, cash equivalents and restricted cash totaled $796.6 million at July 3, 2022, including $700.8 million of cash and cash equivalents.
- Total debt, including the current portion and before unamortized debt issuance costs, was approximately $2.91 billion. The balance-sheet carrying value of long-term debt, including the current portion, was $2.862 billion.
- Total assets were $5.516 billion and stockholders’ equity was $422.9 million at July 3, 2022.
Material Changes Versus the Prior Comparable Period
- Revenue growth reflected the fourth-quarter 2021 acquisition of 93 Florida franchise-operated restaurants, higher same-restaurant sales, net new restaurant development and increased franchise-related fees. These benefits were partly offset by the 2021 sale of 47 New York Company-operated restaurants.
- Restaurant margin declined 580 basis points in Q2 and 560 basis points year to date. Management attributed the pressure primarily to higher commodity and labor costs, lower customer counts and investments supporting the U.K. market, partly offset by higher average checks.
- Net income fell 26.7% in Q2 and 20.1% for the first six months. Operating profit declined despite revenue growth because of cost inflation, lower system optimization gains and higher depreciation, impairment and interest expense.
- Compared with 2021, the current period had no comparable $17.9 million loss on early extinguishment of debt and included a $2.1 million investment gain, but these benefits did not offset operating margin compression.
- Debt increased following the April 1, 2022 issuance of $500.0 million of fixed-rate senior secured notes. Financing activities generated $362.7 million of cash, including $500.0 million of debt proceeds.
- The Company repurchased 2.8 million shares for $51.9 million during the first six months and paid $53.5 million of dividends. Approximately $198.1 million remained available under the repurchase authorization at July 3, 2022.
Guidance, Outlook, Commentary and Risks
- Management expects 2022 advertising fund expense to exceed advertising fund revenue by approximately $21.0 million, including up to $16.0 million of incremental advertising investment.
- The Company expects 2022 net new restaurant growth of 3% to 4% and 8,000 to 8,500 systemwide restaurants by the end of 2025. REEF is now expected to open 100 to 150 delivery kitchens by the end of 2025, primarily in Canada and the U.K.
- Management expects approximately $90 million to $100 million of total 2022 capital expenditures, $53.2 million of additional 2022 dividends at the declared rate, and approximately $30.0 million of 2022 cloud-computing expenditures, primarily related to the ERP implementation.
- Breakfast launched in Canada on May 2, 2022. U.S. breakfast average weekly sales were approximately $2,600 per restaurant during the first six months, and digital sales represented approximately 10.2% of global systemwide sales.
- Management expects inflationary pressure on labor and commodities to continue. Key risks include commodity volatility, labor shortages and wage inflation, competition, consumer spending, food safety, supply-chain interruptions, technology and cybersecurity issues, foreign currency movements, COVID-19 impacts, franchisee financial health, debt covenant and refinancing risks, litigation and real-estate obligations.
- The Company guaranteed certain former Company-operated restaurant leases totaling $88.8 million at July 3, 2022 and had $28.6 million of outstanding letters of credit. Management did not expect material losses from these items.
- The Company stated that it was in compliance with debt covenants and expected available cash and operating cash flow to meet operating requirements for the next 12 months. Legal proceedings remain subject to potentially material but indeterminate losses; no material developments were reported from the prior Form 10-K.
Investor Verification Points
- Verify whether same-restaurant sales growth can offset sustained food, labor and occupancy inflation and restore restaurant margins.
- Assess leverage, fixed-rate debt service, anticipated repayment dates and the availability of the $300 million variable funding facility.
- Monitor cash generation after dividends, share repurchases, capital expenditures, cloud-computing investments and development-fund commitments.
- Evaluate execution of the Canada breakfast launch, digital initiatives, U.K. expansion, REEF delivery kitchens and the 2025 restaurant-growth targets.
- Review franchisee health, franchise development obligations, lease guarantees and the Company’s predominantly franchised operating model.
- Consider the potential effects of COVID-19, commodity and labor inflation, supply disruptions, foreign exchange, litigation and any strategic transaction discussions referenced in the filing.