The Wendy’s Company: FY2013 Form 10-K Summary
Business context and reporting period
The Wendy’s Company operates and franchises quick-service hamburger restaurants, principally in North America. Fiscal 2013 ended December 29, 2013 and comprised 52 weeks. The system included 6,557 restaurants: 1,183 company-operated and 5,374 franchised, with approximately 82% franchised.
The filing also provides fourth-quarter results for the 13 weeks ended December 29, 2013. Arby’s has been classified as discontinued operations since its 2011 sale.
Key financial metrics
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Sales | $2,165.8 million | $2,198.3 million | (1.5%) |
| Franchise revenues | $321.6 million | $306.9 million | 4.8% |
| Total revenues | $2,487.4 million | $2,505.2 million | (0.7%) |
| Operating profit | $135.1 million | $122.7 million | 10.1% |
| Operating margin | 5.4% | 4.9% | Improved |
| Income from continuing operations | $44.9 million | $8.0 million | Up $36.9 million |
| Net income attributable to Wendy’s | $45.5 million | $7.1 million | Up $38.4 million |
| Diluted EPS | $0.11 | $0.02 | Up $0.09 |
| Cash flow from operations | $329.8 million | $190.4 million | Up $139.4 million |
Wendy’s restaurant margin improved to 15.3% from 14.0%. North America systemwide same-restaurant sales increased 1.8%, including 1.9% for company-operated restaurants and 1.7% for franchised restaurants. The company reported $2,102.9 million of company-owned restaurant sales, $62.9 million of bakery sales, $285.9 million of royalty revenue and $35.7 million of other franchise-related and other revenue.
At December 29, 2013, cash and cash equivalents were $580.2 million, working capital was $572.9 million and total debt, including the current portion, was $1,463.8 million. Stockholders’ equity was $1,929.5 million. The company stated that available cash and operating cash flow were expected to satisfy operating liquidity requirements for the next 12 months.
Fourth-quarter 2013 results
| Metric | Q4 2013 | Q4 2012 |
|---|---|---|
| Revenues | $592.4 million | $629.9 million |
| Operating profit | $28.9 million | $32.3 million |
| Income from continuing operations | $32.9 million | $25.4 million |
| Net income attributable to Wendy’s | $33.1 million | $26.4 million |
| Diluted EPS | $0.08 | $0.07 |
Fourth-quarter revenue declined primarily because of company-owned restaurant sales reductions from closures and dispositions, partly offset by higher average customer checks and franchise-related revenue.
Material changes versus the prior comparable period
- The company sold 244 company-owned restaurants to franchisees under its system optimization initiative, reducing company-operated units from 1,427 to 1,183 and increasing franchised units from 5,133 to 5,374.
- Sales declined $32.5 million, principally due to $116.1 million of lower sales from restaurants closed or sold, partly offset by $74.2 million of sales from restaurants opened or acquired. Canadian currency translation reduced sales by $7.2 million.
- Franchise revenues increased $14.7 million, aided by same-restaurant sales and initial franchise fees and rental income associated with restaurant dispositions.
- Cost of sales declined to 84.9% of sales from 85.6%, benefiting from menu pricing, sales mix, lower breakfast advertising costs and favorable beverage contracts, partly offset by commodity inflation.
- Operating profit increased despite higher depreciation and amortization, general and administrative expense, and a $9.4 million goodwill impairment charge.
- Cash flow from operations rose substantially, while investing cash use declined because proceeds from restaurant dispositions increased by $128.1 million year over year.
- The company paid $70.7 million of dividends and repurchased $69.3 million of common stock during 2013, compared with no repurchases in 2012.
Guidance, outlook, risks and unusual items
Management expected 2014 sales to benefit from menu improvement, product innovation, operational execution and the Image Activation program, but anticipated continued negative sales effects from restaurants sold or expected to be sold. The company planned to reimage approximately 200 company-owned restaurants and open approximately 15 new Image Activation company-owned restaurants. Franchisees were expected to reimage 150 to 200 restaurants and open approximately 45 new Image Activation restaurants.
For 2014, management expected depreciation and amortization to decline as the restaurant portfolio shifted toward franchising, despite accelerated depreciation from Image Activation. Interest expense was expected to decline because of the full-year benefit of the 2013 refinancing. Commodity costs were expected to be broadly flat as higher beef costs were offset by lower chicken costs.
- The system optimization initiative generated a $4.9 million net charge in 2013, including $20.5 million of asset remeasurement, $16.9 million of accelerated amortization, $9.7 million of severance and related costs, and a $46.7 million net gain on restaurant sales. Estimated 2014 initiative costs were approximately $8.9 million, excluding uncertain future gains or losses on restaurant sales.
- The Bakery recorded a $13.5 million estimated withdrawal liability after exiting a multiemployer pension plan. The final liability remained subject to discussions with the plan administrator and resolution of a labor-related charge.
- The company recorded a $9.4 million impairment of all goodwill assigned to its international franchise restaurants reporting unit. North America goodwill was not impaired.
- The company incurred $28.6 million of losses on early extinguishment of debt related to the 2013 refinancing and redemption of the 6.20% Senior Notes.
- Total contractual obligations were $3.1 billion, including $1.0 billion of operating lease obligations and $1.8 billion of long-term debt obligations including interest.
- Guarantees and other contingencies included $42.6 million of lease guarantees, $11.5 million of franchisee loan recourse and $18.8 million of letters of credit, substantially all cash collateralized.
- Key risks include intense price competition, commodity and labor-cost inflation, food safety and reputational events, franchisee financial performance, execution and financing of Image Activation, leverage and interest-rate exposure, lease obligations, legal and environmental matters, and regulatory changes.
After year-end, the company completed a $275.0 million modified Dutch auction tender offer, repurchasing 29.7 million shares on February 19, 2014. It also subsequently sold assets associated with 70 restaurants for approximately $33.3 million and expected a pre-tax gain of approximately $14.7 million in the first quarter of 2014.
Most important facts to verify
- Reconcile the reported improvement in profit and cash flow with declining total sales and the substantial contribution from restaurant dispositions, Arby’s dividends and other unusual items.
- Assess whether the shift from company-owned restaurants to franchising improves recurring margins and cash flow after accounting for lost restaurant sales, royalties, rents and franchise incentives.
- Review debt maturities, variable-rate exposure, covenant compliance and the effect of the $275.0 million post-year-end share repurchase on liquidity and leverage.
- Evaluate the execution, cost and franchisee financing requirements of Image Activation and the remaining system optimization initiative.
- Confirm the final multiemployer pension withdrawal liability, legal contingencies, tax exposures and potential future impairment charges.
- Separate recurring operating performance from non-recurring gains, impairments, refinancing costs, asset sales, investment income and other unusual items.