The Wendy’s Company — FY2019 Form 10-K Summary
Business context and reporting period
The filing covers the 52-week fiscal year ended December 29, 2019; the requested “2019 Q4” is included as the fourth quarter of this annual filing. Wendy’s operates, develops and franchises quick-service restaurants. The system had 6,788 restaurants at year-end, including 357 Company-operated U.S. restaurants and 6,431 franchised restaurants in the U.S. and 30 foreign countries and territories. Approximately 95% of the system was franchised.
Beginning in the fourth quarter, the Company reported three segments: Wendy’s U.S., Wendy’s International, and Global Real Estate & Development. The Company adopted the new lease accounting standard in 2019; prior periods were not restated.
Financial performance and key metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | $1,709.0 million | $1,589.9 million | +$119.1 million |
| Operating profit | $262.6 million | $249.9 million | +$12.7 million |
| Net income | $136.9 million | $460.1 million | -$323.2 million |
| Diluted EPS | $0.58 | $1.88 | -$1.30 |
| Cash flow from operations | $288.9 million | $224.2 million | +$64.7 million |
| Capital expenditures | $74.5 million | $69.9 million | +$4.6 million |
| Long-term debt, including current portion | $2,280.3 million | $2,328.8 million | -$48.5 million |
| Cash, cash equivalents and restricted cash | $358.7 million | $486.5 million | -$127.8 million |
Operating margin was approximately 15.4%, compared with 15.7% in 2018. Net margin was approximately 8.0%, compared with 28.9% in 2018, primarily because 2018 included a $450.0 million gain on the sale of the Company’s Inspire Brands interest.
- Company-operated sales increased to $707.5 million from $651.6 million, supported by a 3.1% increase in Company-operated same-restaurant sales and a net increase in restaurants.
- Franchise royalty revenue and fees increased to $429.0 million from $409.0 million, primarily reflecting 2.9% U.S. franchise same-restaurant sales growth and restaurant-count growth.
- Franchise rental income increased to $233.1 million from $203.3 million, substantially due to the 2019 lease-accounting adoption, which increased gross rental revenue and expense.
- Global systemwide sales increased to $10.94 billion from $10.51 billion; constant-currency growth was 4.4%.
- Restaurant margin declined to 15.5% from 15.8%. Cost of sales increased to 84.5% of sales from 84.2%, reflecting higher labor and commodity costs and lower customer counts, partly offset by pricing and product mix.
- Segment profit was $496.6 million, compared with $491.7 million. Wendy’s U.S. segment profit increased to $369.2 million, while International declined to $20.2 million and Global Real Estate & Development declined to $107.1 million.
Material changes versus the prior comparable period
- Revenue increased 7.5%, but net income and diluted EPS declined sharply because 2018 benefited from the $450.0 million Inspire Brands investment-sale gain.
- Operating profit increased despite higher franchise support costs, reorganization costs and impairment charges. General and administrative expense declined by $17.3 million, largely because 2018 included higher cybersecurity-related legal reserves.
- The Company adopted the lease standard, recognizing $857.2 million of operating lease assets and $941.5 million of operating lease liabilities at year-end 2019. The adoption materially increased reported assets and liabilities and contributed approximately $38 million to 2019 franchise rental revenue and expense.
- Cash flow from operations improved 28.9%, primarily because 2018 included significant income-tax payments related to the Inspire Brands sale.
- Share repurchases declined to $202.7 million from $270.2 million, while dividends paid increased to $96.4 million from $80.5 million. The Company repurchased 10.2 million shares during 2019.
- The Company refinanced debt in June 2019, issued $850 million of new fixed-rate senior secured notes, repaid the outstanding Series 2015-1 Class A-2-II notes, and established a $150 million variable funding facility with no borrowings outstanding at year-end.
Guidance, outlook, risks and unusual items
Management expected 2020 sales and franchise royalties to benefit from the planned March 2, 2020 nationwide U.S. breakfast launch, menu innovation, selective pricing, operational execution, digital initiatives and continued restaurant development. The anticipated sale of certain New York Company-operated restaurants to franchisees was expected to reduce Company-operated sales but increase franchise royalties. Management expected higher wages and commodity costs to offset some productivity benefits and expected advertising expense to exceed advertising-fund revenue as it supported breakfast.
- The Company invested approximately $16.8 million in 2019 to prepare for breakfast, primarily for franchisee smallwares, menu boards, recruiting and related support. Breakfast execution involves risks related to competition, labor availability, operating complexity, cannibalization and franchisee participation.
- The IT realignment plan generated $9.1 million of 2019 costs. Total expected costs were approximately $13.0 million to $15.0 million, with most remaining costs expected in the first half of 2020.
- A $25.0 million cash settlement related to a previously held investment generated $24.4 million of investment income in 2019.
- The Company recorded $7.0 million of long-lived asset impairment charges and $17.0 million of reorganization and realignment costs.
- Cybersecurity-related consumer and financial-institution class actions were settled. The financial-institution settlement was $50.0 million, with approximately $24.7 million paid by the Company in January 2020 after insurance recoveries. A shareholder derivative settlement had received preliminary court approval as of January 24, 2020.
- Liquidity risks include approximately $2.3 billion of debt, substantial lease obligations, debt covenants and rapid-amortization provisions, $75.6 million of lease guarantees, and $25.1 million of letters of credit. Management stated that available cash and operating cash flow were expected to satisfy operating requirements for the next 12 months.
- Key operating risks include competition and discounting, consumer preferences, labor and commodity inflation, food safety, supply-chain concentration, franchisee financial health and execution, digital and cybersecurity risks, impairment, legal and regulatory matters, and economic disruptions.
Most important facts for an investor to verify
- Reconcile the year-over-year earnings decline for the effect of the nonrecurring 2018 Inspire Brands gain and other unusual items.
- Assess the quality and sustainability of operating cash flow after dividends, share repurchases, capital expenditures, breakfast investments and required debt service.
- Review debt maturities, securitization covenants, rapid-amortization triggers and the availability of the $150 million variable funding facility.
- Evaluate the impact of lease accounting on reported revenue, expenses, assets, liabilities and leverage; 2018 is not fully comparable for these measures.
- Track breakfast launch results, incremental advertising spending, labor availability, margin effects and potential sales cannibalization.
- Monitor franchisee health, royalty trends, restaurant development, Image Activation participation and planned New York restaurant dispositions.
- Review cybersecurity litigation, insurance recoveries and the status of the shareholder derivative settlement, as well as other legal and environmental contingencies.
- Confirm dividend and share-repurchase capacity against debt restrictions, lease commitments and other contractual obligations.