7 October 2024
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The Wendy’s Company Reports Strong Q1/2016 Results

Dublin / OH. (twc) The Wendy’s Company reported unaudited results for the first quarter ended April 03, 2016. President and Chief Financial Officer Todd Penegor said that the Company’s first-quarter results exceeded its expectations. «Our strong first-quarter demonstrates the continued momentum of our core business, as well as the positive impact of our system optimization and Image Activation growth initiatives», Penegor said. «Our two-year North America system comparable sales performance of 6.8 percent is our strongest in more than a decade, and due to our first-quarter outperformance relative to our annual operating plan, we are increasing our 2016 outlook for both Adjusted Earnings per Share and Adjusted Ebitda».

«As we look to the second quarter, the performance of our «4 for 4 USD» promotion remains solid with the addition of our Crispy Chicken BLT to the offering», Penegor said. «We are committed to our High-Low marketing strategy and driving growth in the premium component of our business to complement the growth we have seen in the value segment. We remain confident in our full-year same-restaurant sales outlook of approximately 3 percent for the North America system and expect to generate second-quarter same-restaurant sales growth somewhat below our full year target».

First-quarter 2016 results

A summary of the Company’s first-quarter results is below. See «Disclosure Regarding Non-GAAP Financial Measures» for a reconciliation of the non-GAAP measures included herein, i.e., Adjusted Ebitda, Adjusted Ebitda margin and Adjusted Earnings per Share. Due to the May 2015 sale of its bakery business, the Company has presented its bakery results as discontinued operations for all periods presented in its consolidated financial statements.

First-quarter 2016 summary

  • Same-restaurant sales increased 3.6 percent at North America system restaurants in the first quarter of 2016.
  • On a two-year basis, first-quarter 2016 same-restaurant sales increased 6.8 percent for the North America system.
  • Revenues were 378.8 million USD in the first quarter of 2016, compared to 451.8 million USD in the first quarter of 2015. The 16.2 percent decrease resulted primarily from the ownership of 375 fewer Company-operated restaurants at the end of the 2016 first quarter compared to the beginning of the 2015 first quarter.
  • Franchise revenues were 119.5 million USD in the first quarter of 2016, compared to 94.2 million USD in the first quarter of 2015. The 26.8 percent increase resulted primarily from higher rental income, royalty revenue and franchise fees primarily as a result of the Company’s system optimization initiative, in addition to an increase in same-restaurant sales.
  • North America Company-operated restaurant margin was 17.2 percent in the first quarter of 2016, compared to 14.7 percent in the first quarter of 2015. The 250 basis-point increase was primarily the result of higher same-restaurant sales and the positive impact of lower commodity costs.
  • General and administrative expense was 64.6 million USD in the first quarter of 2016, compared to 59.7 million USD in the first quarter of 2015. The 8.2 percent increase resulted primarily from a 3.7 million USD increase in professional fees and legal reserves, along with a year-over-year increase of approximately 1.2 million USD in incentive compensation accruals due to the Company’s first-quarter outperformance relative to its targets.
  • Adjusted Ebitda from continuing operations was 98.1 million USD in the first quarter of 2016, a 21.4 percent increase compared to 80.8 million USD in the first quarter of 2015, despite the ownership of 375 fewer Company-operated restaurants at the end of the 2016 first quarter compared to the beginning of the 2015 first quarter. The Company’s 2016 results include a year-over-year net positive impact of approximately 9.6 million USD from a lease buyout, which is included in the «Other operating expense, net» line. Partly offsetting this gain was an increase in professional fees and legal reserves, along with higher incentive compensation accruals (see «General and administrative expense» above).
  • Adjusted Ebitda margin was 25.9 percent in the first quarter of 2016, compared to 17.9 percent in the first quarter of 2015. The 800-basis point improvement reflects the positive impact of the Company’s system optimization initiative, as well as the lease buyout gain mentioned above.
  • Operating profit was 63.8 million USD in the first quarter of 2016, compared to 37.9 million USD in the first quarter of 2015. The 68.3 percent increase resulted primarily from higher franchise revenues, a year-over-year increase in net gains from the Company’s system optimization initiative and lower Other operating expense, net, partly offset by a year-over-year increase in impairment charges and higher G+A expense.
  • Operating profit margin was 16.9 percent in the first quarter of 2016, compared to 8.4 percent in the first quarter of 2015, an improvement of 850 basis points.
  • Interest expense was 28.1 million USD in the first quarter of 2016, compared to 12.7 million USD in the first quarter of 2015. The increase resulted primarily from higher total debt levels related to the Company’s debt restructuring completed in the second quarter of 2015.
  • Income from continuing operations was 25.4 million USD in the first quarter of 2016, compared to 18.2 million USD in the first quarter of 2015.
  • Net income was 25.4 million USD in the first quarter of 2016, compared to 27.5 million USD in the first quarter of 2015.
  • Reported diluted earnings per share from continuing operations were 0.09 USD in the first quarter of 2016, compared to 0.05 USD in the first quarter of 2015. The increase is partly the result of a 26.4 percent year-over-year reduction in the weighted average diluted shares outstanding.
  • Reported diluted earnings per share were 0.09 USD in the first quarter of 2016, compared to 0.07 USD in the first quarter of 2015.
  • Adjusted Earnings per Share from continuing operations were 0.11 USD in the first quarter of 2016, compared to 0.06 USD in the first quarter of 2015.

Leadership succession proceeding as planned

As previously announced, Chief Executive Officer Emil Brolick intends to retire from management duties with the Company at the time of the Company’s Annual Meeting of Stockholders on May 26, 2016. Brolick will be succeeded as CEO by current President and Chief Financial Officer Todd Penegor. Penegor will transition his duties as CFO to Gunther Plosch during the month of May, and Penegor will retain his position as President upon his appointment as CEO. The Company expects that Brolick will continue to serve on the Company’s Board of Directors following his retirement to ensure continuity of leadership and strategic focus for the Company.

System optimization continues to yield positive results

The Company remains on track with its plan to reduce its Company-operated restaurant ownership to approximately 5 percent of the total system. As part of this plan, the Company intends to sell a total of approximately 315 restaurants to franchisees during 2016, including 55 restaurants that were sold in the first quarter. The planned sale of these restaurants follows the sale of 826 restaurants in 2013, 2014 and 2015 as part of the Company’s system optimization initiative.

«We believe our system optimization initiative will drive future growth by providing opportunities for expanded restaurant ownership to strong operators who have demonstrated a commitment to Image Activation and opening new restaurants», Penegor said. «Interest in the markets that we intend to sell during 2016 remains high from franchisees, and we are confident we will strengthen the «Wendy’s» brand as a result of these transactions».

«Going forward, we intend to buy and sell restaurants to act as a catalyst for growth by further strengthening our franchisee base, driving new restaurant development and accelerating Image Activation adoption», Penegor said. «We are also helping to facilitate franchisee-to-franchisee restaurant transfers to ensure that we are putting restaurants in the hands of well capitalized franchisees that are committed to long-term growth».

Momentum of Image Activation and new restaurant development continues

The Company and its franchisees plan to reimage 430 total North America system restaurants and build 110 new North America restaurants in 2016. This is in addition to the 519 total North America system reimages and new restaurants built during 2015.

«Our pipeline for restaurant reimaging and new restaurant development remains strong», Penegor said. «The North America system opened 25 new restaurants during the first-quarter and we expect to deliver the first year of net new restaurant openings since 2010. With more than 24 percent of the North America system now featuring our new image, we are on pace to achieve our goal of reimaging at least 60 percent of our North America restaurants by the end of 2020».

Company declares quarterly dividend

The Company today announced the declaration of its regular quarterly cash dividend of 0.06 USD per share, payable on June 15, 2016, to shareholders of record as of June 1, 2016. The approximate number of common shares outstanding as of May 5, 2016 was 266.5 million.

Company repurchases 4.9 million shares for 48.2 million USD

The Company repurchased 4.9 million shares for 48.2 million USD in the first quarter at an average price of 9.87 USD per share. This is in addition to the more than 1 billion USD in share repurchases the Company executed during 2015. The Company has approximately 308 million USD remaining on its existing share repurchase authorization, which expires at the end of 2016.

Company issues updated 2016 outlook

The Company is increasing its outlook for 2016 Adjusted Earnings per Share to 0.38 USD to 0.40 USD from its prior guidance of 0.35 USD to 0.37 USD and increasing its outlook for 2016 Adjusted Ebitda to down 1 percent to up 1 percent compared to 2015 from its prior guidance of down 2 percent to flat.

The Company now expects:

  • Commodity costs to decrease approximately 3 percent compared to 2015.
  • A reported tax rate of approximately 38 to 40 percent and an adjusted tax rate of approximately 32 to 34 percent.
  • General and administrative expense of approximately 245 to 250 million USD in 2016, primarily due to higher incentive compensation accruals and increased professional fees and legal reserves. The Company remains committed to its previously articulated goal of reducing G+A expense to a level of approximately 230 million USD in 2017.

In addition, the Company continues to expect:

  • Same-restaurant sales growth of approximately 3 percent for the North America system.
  • Restaurant margin of 18.5 to 19.0 percent at North America Company-operated restaurants.
  • Interest expense of approximately 110 million USD.
  • Depreciation and amortization expense of 130 to 135 million USD, including accelerated depreciation of approximately 5 million USD.
  • Capital expenditures of approximately 135 to 145 million USD.
  • Free cash flow (cash flow from operations minus capital expenditures) of approximately 50 to 75 million USD.

The Company’s 2016 outlook includes the impact of:

  • A year-over-year reduction of about 315 Company-operated restaurants by year end 2016.
  • The overlapping of a 53rd operating week in 2015.

Company on track to achieve 2020 North America system goals

The Company continues to expect to achieve the following North America system goals by the end of 2020:

  • Average unit sales volumes of 2.0 million USD.
  • Restaurant margins of 20 percent.
  • A sales-to-investment ratio of at least 1.3 times for new restaurants.
  • Restaurant development growth of 1’000 new restaurants (~500 net).
  • The reimaging of at least 60 percent of Wendy’s North America total system restaurants.

Update on investigation into unusual credit card activity

As previously reported, the Company engaged cybersecurity experts earlier this year to conduct a comprehensive investigation into unusual credit card activity at some Wendy’s restaurants. Investigation into this activity is nearing completion. Based on the preliminary findings of the investigation and other information, the Company believes that malware, installed through the use of compromised third-party vendor credentials, affected one particular point of sale system at fewer than 300 of approximately 5’500 franchised North America Wendy’s restaurants, starting in the fall of 2015. These findings also indicate that the Aloha point of sale system has not been impacted by this activity. The Aloha system is already installed at all Company-operated restaurants and in a majority of franchise-operated restaurants, with implementation throughout the North America system targeted by year-end 2016. The Company expects that it will receive a final report from its investigator in the near future.

The Company has worked aggressively with its investigator to identify the source of the malware and quantify the extent of the malicious cyber-attacks, and has disabled and eradicated the malware in affected restaurants. The Company continues to work through a defined process with the payment card brands, its investigator and federal law enforcement authorities to complete the investigation.

Based upon the investigation to date, approximately 50 franchise restaurants are suspected of experiencing, or have been found to have, unrelated cybersecurity issues. The Company and affected franchisees are working to verify and resolve these issues.


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