Business Context and Reporting Period
The Wendy’s Company operates and franchises quick-service restaurants, primarily in North America, with one reportable segment. As of June 30, 2019, the system included 6,719 restaurants, including 358 company-operated and 6,361 franchised locations. The fiscal second quarter and first six months contained 13 and 26 weeks, respectively. This Form 10-Q covers the quarter ended June 30, 2019, compared with July 1, 2018.
Key Financial Metrics
| Metric | Three months ended June 30, 2019 | Three months ended July 1, 2018 | Six months ended June 30, 2019 | Six months ended July 1, 2018 |
|---|---|---|---|---|
| Revenue | $435.3 million | $411.0 million | $843.9 million | $791.6 million |
| Operating profit | $80.6 million | $71.5 million | $146.8 million | $126.7 million |
| Net income | $32.4 million | $29.9 million | $64.3 million | $50.0 million |
| Diluted EPS | $0.14 | $0.12 | $0.27 | $0.20 |
| Operating margin | 18.5% | 17.4% | 17.4% | 16.0% |
| Restaurant margin | 16.5% | 17.4% | 15.8% | 15.8% |
| Operating cash flow | Not separately provided | Not separately provided | $154.1 million | $148.4 million |
Second-quarter revenue increased 5.9%, operating profit increased 12.7%, and net income increased 8.4%. Six-month revenue increased 6.6%, operating profit increased 15.9%, and net income increased 28.5%.
- Second-quarter same-restaurant sales increased 1.4% systemwide in North America and 1.6% globally, on a constant-currency basis. Six-month increases were 1.4% and 1.5%, respectively.
- Second-quarter global systemwide sales increased 3.3% to $2.8 billion on a constant-currency basis. Six-month global systemwide sales increased 3.3% to $5.4 billion.
- Restaurant margin declined to 16.5% in the second quarter from 17.4%, primarily because of higher labor and commodity costs, lower customer count, and other operating costs. Strategic pricing and product mix partly offset these pressures.
- Cash, cash equivalents and restricted cash totaled $484.3 million at June 30, 2019, compared with $486.5 million at December 30, 2018.
- Long-term debt, including the current portion and excluding unamortized debt issuance costs and purchase accounting adjustments, totaled approximately $2.34 billion. The Company was in compliance with its debt covenants.
- Total liabilities were $4.52 billion and stockholders’ equity was $648.0 million at June 30, 2019.
Material Changes Versus the Prior Comparable Period
- Sales increased $13.8 million in the second quarter and $27.7 million in the first six months, primarily from a larger company-operated restaurant base and positive company-operated same-restaurant sales.
- Franchise royalty revenue increased $4.6 million in the quarter and $9.6 million year to date, supported by franchise same-restaurant sales growth and a net increase in franchised restaurants. Franchise fees declined because no franchisee-to-franchisee restaurant transfers were facilitated in 2019.
- Franchise rental income and franchise rental expense increased significantly following adoption of the new lease accounting standard, which caused certain reimbursed executory costs to be recorded gross. The change materially increased reported assets and liabilities and limits direct comparability with 2018.
- The Company recognized $7.2 million of debt extinguishment loss in the second quarter related to refinancing its securitized financing facility, compared with no such charge in the prior-year quarter. The prior-year six-month period included an $11.5 million debt extinguishment loss.
- On June 26, 2019, the Company issued $850.0 million of Series 2019-1 fixed-rate senior secured notes, repaid $870.8 million of Series 2015-1 notes, and established a $150.0 million revolving facility. No amounts were drawn under the revolving facility at quarter-end.
- Six-month cash flow from operations increased $5.7 million, while cash used in investing activities increased $7.3 million and cash used in financing activities increased $34.9 million.
- The Company repurchased 2.8 million shares for $49.7 million during the first six months and paid $46.2 million in dividends. The February 2019 authorization had $196.7 million remaining at June 30, 2019.
- The Company adopted the new lease standard in the first quarter, recognizing approximately $1.01 billion of operating lease liabilities and $934 million of related right-of-use assets at transition. Prior periods were not restated.
Guidance, Outlook, Commentary, Risks and Unusual Items
- Management expects full-year 2019 capital expenditures of approximately $75 million to $80 million, including approximately $50 million to $55 million during the remainder of the year.
- Management expects available cash and operating cash flow to provide sufficient liquidity for operating requirements over the next 12 months.
- The Company expects approximately $46.1 million of additional 2019 cash dividends if quarterly dividends continue at $0.10 per share, and retains authorization for potential share repurchases.
- The general and administrative realignment plan is expected to incur approximately $1.7 million of additional costs during the remainder of 2019 and approximately $35 million to $38 million in total costs, with expected total G&A expense reductions of approximately $35 million. Management is evaluating the organizational structure and expects a change in reportable segments by year-end.
- Key risks include competition and pricing pressure, food safety, consumer preferences, labor and commodity inflation, franchisee financial health, restaurant development and reimaging execution, technology and cybersecurity, legal and regulatory matters, debt covenant and refinancing risk, and the ability to realize anticipated G&A savings.
- The Company guarantees certain former company-operated restaurant leases and other obligations totaling $69.0 million, with leases extending through 2056. Outstanding letters of credit totaled $25.1 million. Management reported no material expected loss from the letters of credit and no lease-guarantee defaults as of June 30, 2019.
- Legal proceedings remain subject to uncertainty; the filing states that the aggregate possible loss cannot be estimated and that future developments could materially affect a reporting period.
Important Facts for Investors to Verify
- Verify the effect of the 2019 lease accounting adoption on revenue, rental expense, assets, liabilities, and year-over-year comparability.
- Assess whether same-restaurant sales growth and systemwide sales growth can offset pressure from labor, commodity, occupancy, and customer-count trends.
- Review the refinancing terms, scheduled principal payments, fixed-rate debt exposure, revolving facility availability, and covenant compliance.
- Track progress toward the stated G&A savings target and the remaining restructuring costs.
- Reconcile cash generation with dividends, share repurchases, capital expenditures, acquisitions, and lease obligations.
- Monitor franchisee liquidity, development and reimaging activity, legal contingencies, food safety, cybersecurity, and the proposed Financial Institutions case settlement referenced in the risk factors.