The Wendy’s Company Reports Second Quarter 2017 Results

DUBLIN, Ohio, Aug. 9, 2017 (hospitalitybusinessnews.com) — The Wendy’s Company today reported unaudited results for the second quarter ended July 2, 2017.

The Wendy's Company is the world's third-largest quick-service hamburger company. The Wendy's system includes approximately 6,500 franchise and Company-operated restaurants in the United States and 28 countries and U.S. territories worldwide. For more information, visit  www.aboutwendys.com . (PRNewsFoto/The Wendy's Company)

“After recording our 18th consecutive quarter of positive same-restaurant sales and as we continue to strengthen the Wendy’s® brand through new restaurant development and Image Activation, we are pleased with our progress and remain confident in our long-term targets,” President and Chief Executive Officer Todd Penegor said. “More than one-third of the global system is now Image Activated and we continue advancing towards our global expansion goals with 35 new restaurant openings during the second quarter and 68 openings year-to-date. We, along with our exceptional and dedicated franchisees across the globe, remain committed to delighting every customer and to our brand purpose of creating joy and opportunity through our food, family and community.”

Second Quarter 2017 Summary
See “Disclosure Regarding Non-GAAP Financial Measures” and the reconciliation tables that accompany this release for a discussion and reconciliation of certain non-GAAP financial measures included in this release.

 

Operational Highlights Three Months Ended
July 2, 2017 July 3, 2016
(Unaudited)
North America Same-Restaurant Sales Growth(1) 3.2% 0.4%
Global Restaurant Openings
North America – Total / Net 10 / -11 12 / 2
International – Total / Net 25 / 24 7 / 6
Global Restaurant Openings – Total / Net 35 / 13 19 / 8
Global Systemwide Sales (In US$ Millions)(2)
North America $2,521.2 $2,426.5
International(3) $118.8 $103.5
Global Systemwide Sales $2,640.0 $2,530.0
Global Systemwide Sales Growth(1)
North America 4.1% 1.8%
International(3) 16.4% 2.5%
Global Systemwide Sales Growth 4.6% 1.8%
(1) Same-restaurant sales growth and systemwide sales growth are calculated on a constant currency basis and include sales by both Company-operated and franchise restaurants.
(2) Systemwide sales include sales at both Company-operated and franchise restaurants. Sales by franchise restaurants are not recorded as Company revenues. However, the Company’s royalty revenues are computed as percentages of sales made by franchisees and, as a result, sales by franchisees have a direct effect on the Company’s royalty revenues and therefore on the Company’s profitability.
(3) Excludes Venezuela.

 

Financial Highlights

  • Total revenues were $320.3 million in the second quarter of 2017, compared to $382.7 million in the second quarter of 2016. The 16.3 percent decrease resulted primarily from the ownership of 251 fewer Company-operated restaurants at the end of the second quarter 2017 compared to the beginning of the second quarter 2016, which resulted in fewer sales at Company-operated restaurants, partly offset by higher franchise royalty revenue and fees and franchise rental income.
  • Company-operated restaurant margin was 19.6 percent in the second quarter of 2017, compared to 21.9 percent in the second quarter of 2016. The 230 basis-point decrease was primarily the result of increased labor rates and higher commodity costs.
  • General and administrative expense was $51.3 million in the second quarter of 2017, compared to $61.1 million in the second quarter of 2016. The 16.1 percent decrease resulted primarily from cost savings related to the Company’s system optimization initiative, lower professional fees and legal reserves, and a year-over-year decrease in incentive compensation accruals.
  • Operating profit was $25.8 million in the second quarter of 2017, compared to $65.6 million in the second quarter of 2016. The 60.7 percent decrease resulted primarily from system optimization losses that were related to the DavCo-NPC transactions (see below for further information). Reorganization and realignment costs related to the G&A expense savings initiative also contributed to the year-over-year decrease in operating profit.
  • The Company reported a net loss of $1.8 million in the second quarter of 2017, compared to net income of $26.5 million in the second quarter of 2016. The year-over-year decrease resulted primarily from system optimization losses that were related to the DavCo-NPC transactions (see below for further information) and reorganization and realignment costs related to the G&A expense savings initiative.
  • Adjusted EBITDA was $116.1 million in the second quarter of 2017, compared to $102.5 million in the second quarter of 2016, despite the ownership of 251 fewer Company-operated restaurants at the end of the second quarter of 2017 compared to the beginning of the second quarter of 2016. Franchise fees driven by Buy and Flip activity also contributed to the 13.3 percent year-over-year increase in adjusted EBITDA.
  • Adjusted EBITDA margin (adjusted EBITDA divided by total revenues) was 36.2 percent in the second quarter of 2017, compared to 26.8 percent in the second quarter of 2016. The 940 basis-point improvement reflects the positive impact of the Company’s system optimization initiative.
  • The Company recorded a reported diluted loss per share of $0.01 in the second quarter of 2017, compared to a reported diluted earnings per share of $0.10 in the second quarter of 2016.
  • Adjusted earnings per share were $0.15 in the second quarter of 2017, compared to $0.10 in the second quarter of 2016. The 50.0 percent increase resulted primarily from the items discussed above and reflects a 6.2 percent year-over-year reduction in the weighted average diluted shares outstanding.
  • Year-to-date cash flows from operations through the second quarter of 2017 were $120.6 million, compared to $105.8 million through the second quarter of 2016. The 14.0 percent increase was the result of an increase in net income adjusted for non-cash expenses and a favorable change in working capital.
  • Year-to-date capital expenditures through the second quarter of 2017 were $32.1 million, compared to $68.5 million through the second quarter of 2016.
  • Year-to-date free cash flow (cash flows from operations minus capital expenditures) through the second quarter of 2017 was $88.5 million, compared to $37.3 million through the second quarter of 2016. The 137.2 percent increase resulted primarily from a year-over-year decrease in capital expenditures, in addition to the items discussed above.

Image Activation
Image Activation, which includes reimaging existing restaurants and building new restaurants, remains an integral part of our global growth strategy. With 36 percent of the global system featuring the new image, the Company and its franchisees continue to expect that approximately 42 percent of the global system will be image activated by the end of 2017. The Company is reiterating its 2017 net new unit growth expectations of approximately 1 percent in North America and raising its International expectations from approximately 12.5 percent to approximately 14 percent.

The Company continues to facilitate franchisee-to-franchisee restaurant transfers (“Buy and Flips”) to ensure that restaurants are operated by well-capitalized franchisees that are committed to long-term growth. In addition, Buy and Flips also contribute to the Company’s improved quality of earnings by generating franchise fees and net rental income. During the second quarter, the Company facilitated 294 Buy and Flips, which includes the DavCo-NPC transactions, and expects to complete approximately 475 in 2017.

DavCo-NPC transactions
As previously announced on June 1, 2017, the Company successfully completed a series of transactions of strategic importance. Under the transactions, the Company acquired 140 restaurants in the Maryland, Virginia, and Washington, D.C. markets from DavCo Restaurants, LLC (“DavCo”), which were immediately sold to NPC International, Inc. (“NPC”). The Company did not operate the restaurants prior to the disposition to NPC. As part of the transaction, NPC has agreed to remodel 90 restaurants by the end of 2021 and build 15 new restaurants by the end of 2022. Prior to the closing of the transactions, seven restaurants in these markets were closed. The acquisition of Wendy’s restaurants from DavCo was not contingent on executing the sale agreement with NPC; as such, the Company accounted for the transactions as an acquisition and subsequent disposition of a business. Due to the unique nature of the transactions, the Company incurred a total pre-tax loss of $43.1 million and a net cash outflow, exclusive of franchise fees received, of $17.8 million in the second quarter.

“NPC is a great franchise partner and best-in-class operator. We are excited about NPC’s commitment to help these important growth markets reach their full potential through aggressive reimaging, building new restaurants, implementing key in-restaurant technology, and starting to participate in national programs such as the 50¢ Frosty®,” Penegor said.

Company provides update regarding G&A expense savings initiative
During the second quarter, the Company commenced its previously announced G&A expense savings initiative in order to further reduce G&A expense to approximately 1.5 percent of global systemwide sales by 2020. The Company recognized costs totaling $17.2 million during the second quarter, which primarily included severance and related employee costs and share-based compensation. The Company did not incur significant cash expenditures in the second quarter, but expects cash expenditures to begin in the second half of 2017. The Company expects to incur total costs aggregating approximately $28 million to $33 million, of which $23 million to $27 million will be cash expenditures.

Company repurchases 2.3 million shares for $34.6 million in second quarter
The Company repurchased 2.3 million shares for $34.6 million in the second quarter at an average price of $15.11 per share. As of the end of the quarter, the Company had approximately $98 million remaining on its existing $150 million share repurchase authorization, which expires March 4, 2018.

2017 outlook

During 2017, the Company now expects:

  • Commodity cost inflation of approximately 3 to 4 percent compared to 2016.
  • Company-operated restaurant margin of approximately 18.0 to 18.5 percent.
  • Net franchise rental income of approximately $100 to $105 million.
  • Adjusted EBITDA of approximately $404 to $410 million, an increase of approximately 3 to 5 percent compared to 2016.
  • Interest expense of approximately $115 to $120 million.
  • Depreciation and amortization expense of approximately $120 to $125 million, including accelerated depreciation of approximately $1 million.

In addition, the Company continues to expect:

  • Same-restaurant sales growth of approximately 2 to 3 percent for the North America system.
  • Labor inflation of approximately 4 percent.
  • General and administrative expense at the low end of its previously issued range of approximately $210 to $220 million.
  • An adjusted tax rate of approximately 32 to 34 percent.
  • Adjusted earnings per share of approximately $0.45 to $0.47, an increase of approximately 13 percent to 18 percent compared to 2016.
  • Cash flows from operations of approximately $240 to $275 million.
  • Capital expenditures of approximately $80 to $90 million.
  • Free cash flow of approximately $160 to $185 million.

Company on track to achieve 2020 goals
The Company continues to expect to achieve the following goals by the end of 2020:

  • Global systemwide sales (in constant currency and excluding Venezuela) of ~$12 billion.
  • Global restaurant count of ~7,500.
  • Global Image Activation of at least 70 percent.
  • Adjusted EBITDA margin of 38 to 40 percent.
  • Free cash flow of ~$275 million (capital expenditures of ~$65 million).
The Wendys Company and Subsidiaries
Condensed Consolidated Statements of Operations
Three and Six Month Periods Ended July 2, 2017 and July 3, 2016
(In Thousands Except Per Share Amounts)
(Unaudited)
Three Months Ended Six Months Ended
2017 2016 (a) 2017 2016 (a)
Revenues:
Sales $ 160,859 $ 259,235 $ 309,071 $ 518,567
Franchise royalty revenue and fees 112,548 88,952 207,238 177,847
Franchise rental income 46,935 34,531 89,852 65,091
320,342 382,718 606,161 761,505
Costs and expenses:
Cost of sales 129,360 202,554 252,767 417,290
Franchise rental expense 21,897 17,493 40,765 32,150
General and administrative 51,280 61,124 103,730 125,770
Depreciation and amortization 31,309 30,749 60,474 63,094
System optimization losses (gains), net 41,050 (1,924) 39,643 (10,350)
Reorganization and realignment costs 17,699 2,487 17,880 5,737
Impairment of long-lived assets 253 5,525 763 12,630
Other operating expense (income), net 1,700 (938) 3,625 (14,293)
294,548 317,070 519,647 632,028
Operating profit 25,794 65,648 86,514 129,477
Interest expense (28,935) (28,643) (57,910) (56,752)
Other income, net 2,844 276 3,233 538
(Loss) income before income taxes (297) 37,281 31,837 73,263
Provision for income taxes (1,548) (10,801) (11,341) (21,420)
Net (loss) income $ (1,845) $ 26,480 $ 20,496 $ 51,843
Basic and diluted net (loss) income per share $ (.01) $ .10 $ .08 $ .19
Number of shares used to calculate basic (loss) income per share 245,261 265,915 245,933 268,065
Number of shares used to calculate diluted (loss) income per share 245,261 270,265 253,896 272,507
(a) 2016 condensed consolidated statements of operations reflect reclassifications to conform to the current year presentation.

 

The Wendys Company and Subsidiaries
Condensed Consolidated Balance Sheets
As of July 2, 2017 and January 1, 2017
(In Thousands Except Per Share Amounts)
(Unaudited)
July 2,
2017
January 1,

2017 (a)

ASSETS
Current assets:
Cash and cash equivalents $ 204,543 $ 198,240
Restricted cash 39,144 57,612
Accounts and notes receivable, net 106,649 98,825
Inventories 2,922 2,851
Prepaid expenses and other current assets 27,438 19,244
Advertising funds restricted assets 60,227 75,760
Total current assets 440,923 452,532
Properties 1,254,750 1,192,339
Goodwill 742,407 741,410
Other intangible assets 1,338,645 1,322,531
Investments 56,999 56,981
Net investment in direct financing leases 213,069 123,604
Other assets 61,870 49,917
Total assets $ 4,108,663 $ 3,939,314
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt $ 28,988 $ 24,652
Accounts payable 23,963 27,635
Accrued expenses and other current liabilities 116,352 102,034
Advertising funds restricted liabilities 60,227 75,760
Total current liabilities 229,530 230,081
Long-term debt 2,699,760 2,487,630
Deferred income taxes 415,479 446,513
Other liabilities 276,845 247,354
Total liabilities 3,621,614 3,411,578
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.10 par value; 1,500,000 shares authorized; 470,424 shares issued; 244,313 and 246,574 shares outstanding, respectively 47,042 47,042
Additional paid-in capital 2,882,494 2,878,589
Accumulated deficit (302,939) (290,857)
Common stock held in treasury, at cost; 226,111 and 223,850 shares, respectively (2,085,301) (2,043,797)
Accumulated other comprehensive loss (54,247) (63,241)
Total stockholders’ equity 487,049 527,736
Total liabilities and stockholders’ equity $ 4,108,663 $ 3,939,314
(a) January 1, 2017 condensed consolidated balance sheet reflects reclassifications to conform to the current year presentation.

 

 

The Wendy’s Company and Subsidiaries
Condensed Consolidated Statements of Cash Flows
Six Month Periods Ended July 2, 2017 and July 3, 2016
(In Thousands)
(Unaudited)
Six Months Ended
2017 2016
Cash flows from operating activities:
Net income $ 20,496 $ 51,843
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 60,474 64,694
Share-based compensation 11,372 9,925
Impairment of long-lived assets 763 12,630
Deferred income tax (2,496) (10,353)
Non-cash rental income, net (5,286) (2,561)
Net receipt of deferred vendor incentives 7,077 8,230
System optimization losses (gains), net 39,643 (10,350)
Gain on sale of investments, net (2,553)
Distributions received from TimWen joint venture 5,524 5,786
Equity in earnings in joint ventures, net (3,786) (4,275)
Accretion of long-term debt 617 608
Amortization of deferred financing costs 3,974 3,769
Reclassification of unrealized losses on cash flow hedges 1,447 1,447
Other, net 3,552 1,731
Changes in operating assets and liabilities:
Restricted cash 44 135
Accounts and notes receivable, net (9,557) (26,956)
Inventories (71) 148
Prepaid expenses and other current assets (2,116) (4,638)
Accounts payable (4,484) (1,884)
Accrued expenses and other current liabilities (4,051) 5,867
Net cash provided by operating activities 120,583 105,796
Cash flows from investing activities:
Capital expenditures (32,117) (68,495)
Acquisitions (86,788) (2,209)
Dispositions 77,980 45,078
Proceeds from sale of investments 3,282
Payments for investments (375) (113)
Notes receivable, net (2,225) (3,439)
Changes in restricted cash 18,711 7,040
Other, net (17)
Net cash used in investing activities (21,532) (22,155)
Cash flows from financing activities:
Repayments of long-term debt (13,646) (12,651)
Deferred financing costs (740) (867)
Repurchases of common stock (50,527) (108,057)
Dividends (34,447) (32,152)
Proceeds from stock option exercises 6,385 6,696
Payments related to tax withholding for share-based compensation (2,956) (3,064)
Net cash used in financing activities (95,931) (150,095)
Net cash provided by (used in) operations before effect of exchange rate changes on cash 3,120 (66,454)
Effect of exchange rate changes on cash 3,183 5,418
Net increase (decrease) in cash and cash equivalents 6,303 (61,036)
Cash and cash equivalents at beginning of period 198,240 327,216
Cash and cash equivalents at end of period $ 204,543 $ 266,180

 

The Wendys Company and Subsidiaries
Reconciliation of Net (Loss) Income to Adjusted EBITDA
(In Thousands)
(Unaudited)
Three Months Ended Six Months Ended
2017 2016 2017 2016
Net (loss) income $ (1,845) $ 26,480 $ 20,496 $ 51,843
Provision for income taxes 1,548 10,801 11,341 21,420
(Loss) income before income taxes (297) 37,281 31,837 73,263
Other income, net (2,844) (276) (3,233) (538)
Interest expense 28,935 28,643 57,910 56,752
Operating profit 25,794 65,648 86,514 129,477
Plus (less):
Depreciation and amortization 31,309 30,749 60,474 63,094
System optimization losses (gains), net 41,050 (1,924) 39,643 (10,350)
Reorganization and realignment costs 17,699 2,487 17,880 5,737
Impairment of long-lived assets 253 5,525 763 12,630
Adjusted EBITDA $ 116,105 $ 102,485 $ 205,274 $ 200,588
Adjusted EBITDA margin 36.2 % 26.8 % 33.9 % 26.3 %

 

 

The Wendys Company and Subsidiaries
Reconciliation of Net (Loss) Income and Diluted (Loss) Earnings Per Share to
Adjusted Income and Adjusted Earnings Per Share
(In Thousands Except Per Share Amounts)
(Unaudited)
Three Months Ended Six Months Ended
2017 (a) 2016 2017 2016
Net (loss) income $ (1,845) $ 26,480 $ 20,496 $ 51,843
Plus (less):
Depreciation of assets that will be replaced as part of the Image Activation initiative (2) 1,393 447 3,215
System optimization losses (gains), net 41,050 (1,924) 39,643 (10,350)
Reorganization and realignment costs 17,699 2,487 17,880 5,737
Impairment of long-lived assets 253 5,525 763 12,630
Total adjustments 59,000 7,481 58,733 11,232
Income tax impact on adjustments (b) (20,002) (7,015) (20,036) (6,840)
Total adjustments, net of income taxes 38,998 466 38,697 4,392
Adjusted income $ 37,153 $ 26,946 $ 59,193 $ 56,235
Diluted (loss) earnings per share $ (.01) $ .10 $ .08 $ .19
Total adjustments per share, net of income taxes .16 .00 .15 .02
Adjusted earnings per share $ .15 $ .10 $ .23 $ .21
Reported number of shares used to calculate diluted (loss) income per share 245,261 270,265 253,896 272,507
Plus: Dilutive effect of stock options and restricted shares 8,292
Adjusted number of shares used to calculate adjusted earnings per share 253,553 270,265 253,896 272,507
(a) Adjusted earnings per share for the second quarter of 2017 includes the dilutive effect of stock options and restricted shares, which were excluded from the reported number of shares used to calculate diluted loss per share, as the impact would have been anti-dilutive. Included above is a reconciliation of the number of shares used to calculate adjusted earnings per share amounts.
(b) The (benefit from) provision for income taxes on “System optimization losses (gains), net” was $(13,013) and $(3,372) for the three months ended July 2, 2017 and July 3, 2016, respectively, and $(12,606) and $1,490 for the six months ended July 2, 2017 and July 3, 2016, respectively.  The (benefit from) provision for income taxes on “System optimization losses (gains), net” includes the impact of non-deductible goodwill disposed of in connection with our system optimization initiative, adjustments related to prior year tax matters, changes to state deferred taxes and changes to valuation allowances on state net operating loss carryforwards. The benefit from income taxes on all other adjustments was calculated using an effective tax rate of 38.94% and 38.92% for the three and six months ended July 2, 2017, respectively, and 38.70% and 38.60% for the three and six months ended July 3, 2016, respectively.

 

Share Button
About the Author