Wendy’s/Arby’s Group, Inc. — Fiscal 2010 Second-Quarter Form 10-Q
Reporting period: Quarter ended July 4, 2010; the quarter contained 13 weeks and the first half contained 26 weeks. The filing is for Wendy’s/Arby’s Group, Inc., the parent of the Wendy’s and Arby’s restaurant systems.
Business Context
- At July 4, 2010, the system comprised 10,231 restaurants: 6,546 Wendy’s locations and 3,685 Arby’s locations.
- The company operated 2,543 company-owned restaurants and had 7,688 franchised restaurants.
- Management cited weak industry trends, high unemployment, economic pressure, competition, and reduced advertising as factors affecting sales.
Financial Performance and Position
| Metric | Three months ended July 4, 2010 | Comparable 2009 period | Six months ended July 4, 2010 | Comparable 2009 period |
|---|---|---|---|---|
| Total revenues | $877.0 million | $912.7 million | $1,714.5 million | $1,776.7 million |
| Operating profit | $72.7 million | $56.5 million | $99.0 million | $70.4 million |
| Net income | $10.7 million | $14.9 million | $7.3 million | $4.0 million |
| Basic and diluted EPS | $0.03 | $0.03 | $0.02 | $0.01 |
| Operating margin | 8.3% | 6.2% | 5.8% | 4.0% |
- Second-quarter revenue declined 3.9%, while operating profit increased 28.7%. Net income declined 28.2%, primarily because of a $26.2 million loss on early extinguishment of debt and higher interest expense.
- First-half revenue declined 3.5%, but operating profit increased 40.6% and net income increased 82.5%. The comparison benefited from lower restructuring, impairment, depreciation, and investment-loss charges in 2010.
- Second-quarter company restaurant margin was 15.4%, down from 15.6%. Wendy’s margin improved to 16.4% from 15.9%, while Arby’s declined to 13.4% from 14.9%.
- First-half company restaurant margin improved to 14.7% from 14.0%; Wendy’s increased to 15.9%, while Arby’s declined to 12.1%.
- Six-month cash flow from operations was $102.2 million, down from $146.4 million. Cash capital expenditures were $52.7 million, compared with $40.0 million.
- Cash and cash equivalents were $508.4 million at July 4, 2010, compared with $591.7 million at January 3, 2010. Total current assets were $829.1 million and current liabilities were $437.6 million.
- Total debt, including the current portion, was $1.5746 billion; long-term debt excluding the current portion was $1.5566 billion.
- Stockholders’ equity declined to $2.1685 billion from $2.3363 billion, primarily reflecting $167.7 million of common-stock repurchases and dividends.
Material Changes Versus the Prior Comparable Period
- Wendy’s second-quarter North America system-wide same-store sales declined 1.7%; Arby’s declined 7.4%. First-half declines were 0.5% for Wendy’s and 9.4% for Arby’s.
- Second-quarter sales decreased $33.5 million, including declines of $8.5 million at Wendy’s and $26.8 million at Arby’s. First-half sales decreased $58.5 million, driven primarily by a $57.5 million Arby’s decline.
- General and administrative expense decreased $15.2 million in the quarter and $14.6 million for the first half, reflecting lower incentive compensation, staffing, integration costs, and services-agreement fees.
- Impairment expense declined to $2.4 million from $8.7 million in the quarter and to $14.0 million from $15.6 million for the first half.
- On May 24, 2010, the company entered into a $650.0 million credit agreement consisting of a $500.0 million senior secured term loan and a $150.0 million revolving facility. The term loan carried a 5.00% interest rate at July 4, 2010 and matures in 2017.
- Term-loan proceeds were used to refinance approximately $253.8 million of existing debt, redeem the Wendy’s 6.25% senior notes, and pay related fees.
- The company repurchased $173.5 million of common stock during the first half and had approximately $79.5 million remaining under the authorized repurchase program at July 4, 2010.
Guidance, Outlook, Risks, and Unusual Items
- Management stated that there were no material changes to its 2010 outlook, except that both brands’ restaurant margins were expected to be negatively affected by higher commodity costs.
- Management expected continued positive operating cash flow and believed operating cash flows and available cash would meet operating requirements for the next twelve months.
- Expected remaining-2010 cash requirements included approximately $112.3 million of capital expenditures, up to $12.5 million of dividends, $8.8 million of scheduled debt principal payments, up to $79.5 million of potential stock repurchases, and other contractual and severance payments.
- Approximately 310 Arby’s franchised restaurants had royalties, rent, or other fees at least 60 days past due. Arby’s franchisee financial difficulties contributed to restaurant closures, lower royalties, higher receivables and allowances, and reduced advertising contributions.
- AFA Service Corporation owed $9.0 million under a revolving loan arrangement; the company noted potential collectability risk if Arby’s franchisee performance deteriorates.
- The company was not in compliance with certain financial reporting requirements under some Arby’s leases for which waivers had not been obtained, although no lessor had asserted a default and management did not expect a material adverse effect.
- Legal and environmental reserves totaled $6.1 million. Certain state tax authorities had proposed assessments totaling $3.4 million, which the company disputed.
- The company recognized a $4.9 million gain from repayment of the DFR Notes and a $26.2 million loss on early extinguishment of debt. These items are unusual and affect period-to-period comparability.
- The company remained in compliance with the Credit Agreement and applicable debt indenture covenants as of July 4, 2010. Disclosure controls were assessed as effective.
Facts Investors Should Verify
- Whether Arby’s same-store sales, franchisee closures, past-due balances, and franchisee receivables stabilize or continue to deteriorate.
- The effect of commodity inflation, advertising reallocation, pricing actions, remodeling, breakfast, and value initiatives on restaurant margins and traffic.
- Available liquidity, cash generation, debt maturities, variable-rate exposure, and compliance with secured-loan and lease covenants.
- Whether the remaining stock-repurchase authorization and quarterly dividend policy remain appropriate given declining cash balances and required capital expenditures.
- The ultimate resolution of tax examinations, proposed state assessments, legal matters, and lease-reporting non-compliance.
- The filing text does not provide a clear consolidated EBITDA or net-debt measure; these should be calculated or verified from the company’s subsequent filings.