The Wendy’s Company 2019 Q3 Form 10-Q Summary
Business context and reporting period
The filing covers the 13-week quarter and 39-week year-to-date period ended September 29, 2019, compared with September 30, 2018. Wendy’s operates and franchises quick-service hamburger restaurants, primarily in North America, and reported one operating segment for the period. The system included 6,743 restaurants, including 356 company-operated and 6,387 franchised restaurants.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | YTD 2019 | YTD 2018 |
|---|---|---|---|---|
| Revenue | $437.9 million | $400.6 million | $1,281.8 million | $1,192.1 million |
| Operating profit | $79.0 million | $77.3 million | $225.9 million | $204.1 million |
| Net income | $46.1 million | $391.2 million | $110.4 million | $441.3 million |
| Diluted EPS | $0.20 | $1.60 | $0.47 | $1.79 |
| Operating cash flow | Not separately provided | Not separately provided | $237.5 million | $229.7 million |
- Q3 revenue increased 9.3%; year-to-date revenue increased 7.5%.
- Operating margin was approximately 18.0% in Q3 and 17.6% year to date, compared with approximately 19.3% and 17.1%, respectively, in the prior comparable periods.
- Restaurant margin improved to 16.2% in Q3 and 15.9% year to date, from 15.7% and 15.8%, respectively.
- North America systemwide same-restaurant sales increased 4.4% in Q3 and 2.4% year to date. Global systemwide sales increased 5.7% and 4.1%, respectively, on a constant-currency basis.
- Net income and EPS declined sharply because 2018 included a $450.0 million gain from the sale of the Company’s Inspire Brands investment. Excluding that unusual comparison item, operating performance improved.
- Cash, cash equivalents and restricted cash totaled $497.7 million at September 29, 2019, compared with $486.5 million at December 30, 2018.
- Capital expenditures were $41.0 million year to date. Cash used in investing activities was $45.7 million, while cash used in financing activities was $183.4 million.
- Total long-term debt, including the current portion and excluding unamortized issuance costs, was approximately $2.34 billion. The balance sheet reported $2.29 billion of long-term debt net of issuance costs, plus finance and operating lease liabilities.
- 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.
Material changes versus the prior comparable period
- Company-operated same-restaurant sales rose 4.7% in Q3 and 2.5% year to date, supported by higher average checks, strategic pricing and product mix, partly offset by lower customer counts.
- Franchise royalty revenue increased $6.8 million in Q3 and $16.4 million year to date, primarily from higher franchise same-restaurant sales and more franchised restaurants.
- Franchise rental income and expense increased largely because of the 2019 adoption of the new lease accounting standard, which added operating lease assets and liabilities to the balance sheet and required certain reimbursed costs to be presented gross.
- Cost of sales declined to 83.8% of company-operated sales in Q3 from 84.3%; food and paper and occupancy costs improved, while restaurant labor costs increased.
- Interest expense declined by $1.7 million in Q3 and $3.0 million year to date, primarily due to lower debt balances following refinancing.
- On June 26, 2019, the Company issued $850.0 million of Series 2019-1 senior secured notes at fixed rates of 3.783% and 4.080%, repaid the outstanding Series 2015-1 Class A-2-II Notes, and recorded a $7.2 million loss on early extinguishment of debt.
- Year-to-date share repurchases were $76.2 million for 4.2 million shares, compared with $141.5 million for 8.3 million shares in the prior-year period. The Company paid $69.3 million of dividends, compared with $60.8 million previously.
- The Company adopted the lease standard at the beginning of 2019, recognizing approximately $1.01 billion of operating lease liabilities and $934 million of related right-of-use assets. Prior-period results were not restated.
Guidance, outlook, risks and unusual items
- Wendy’s planned to launch breakfast across the U.S. system in the first quarter of 2020 and expected approximately $20 million of 2019 investments for equipment, menu boards, recruiting and related preparation. The Company and franchisees expected to hire approximately 20,000 crew members.
- Management expected 2019 capital expenditures of approximately $75 million to $80 million, including $34 million to $39 million during the remainder of the year.
- The G&A realignment plan was expected to incur approximately $2.7 million of additional costs, with total costs of approximately $35 million to $38 million and anticipated total G&A expense reductions of approximately $35 million.
- The Company announced a fourth-quarter 2019 accelerated share repurchase program of approximately $100 million and declared a quarterly dividend of $0.12 per share payable in December 2019.
- A proposed settlement of the Financial Institutions cybersecurity litigation required a $50 million payment if finally approved; after insurance, the Company expected to pay approximately $25 million. Final court approval was pending at the filing date.
- Wendy’s guaranteed certain leases and other obligations totaling $74.9 million, and had outstanding letters of credit totaling $25.1 million.
- Key risks include competition and pricing pressure, food and labor cost inflation, commodity volatility, franchisee financial health, execution of the breakfast launch, cybersecurity, legal proceedings, debt covenant and refinancing risks, international expansion, and the availability of qualified restaurant labor.
Investor verification points
- Reconcile reported revenue growth and margin changes for the effects of lease accounting and gross presentation of reimbursed franchise costs.
- Separate recurring operating performance from the prior-year $450 million Inspire Brands investment gain and the 2019 debt-refinancing charge.
- Assess leverage, scheduled debt repayments, lease obligations, fixed-rate exposure and remaining revolving borrowing capacity.
- Verify the economics, franchisee participation, staffing requirements and potential cannibalization risks of the 2020 breakfast launch.
- Monitor the Financial Institutions cybersecurity settlement, lease guarantees, letters of credit and other legal contingencies.
- Compare subsequent share repurchases and dividends with operating cash generation and planned capital expenditures.