Wendy’s: Company Reports 2014 Third-Quarter Results

Dublin / OH. (twc) The Wendy´s Company reported unaudited results for the third quarter ended September 28, 2014. The Company also announced a plan to realign its resources and further reduce its general and administrative expense.

«The third quarter was challenging, but our strategic brand initiatives remain on track, as we opened our 600th Image Activation restaurant in October», President and Chief Executive Officer Emil Brolick said. «While our third-quarter same-restaurant sales growth at Company-operated restaurants was slightly less than our expectations, our two-year comps were quite strong at 5.2 percent. We also remain on track to achieve our full-year 2014 Adjusted Earnings Per Share guidance, despite third-quarter Adjusted Ebitda results that were slightly below our projections».

«Our expectations for the third quarter included a 20-percent year-over-year revenue decline from the sale of Company-operated restaurants to franchisees», Brolick said. «We also absorbed beef costs that were much higher than our initial projections. In addition, a year-over-year increase in temporary Image Activation restaurant closure weeks of nearly two and a half times had a negative impact on our revenue and profitability».

«The performance of our BBQ Pulled Pork Sandwich, BBQ Pulled Pork Cheeseburger and BBQ Pulled Pork Cheese Fries promotion in October was in line with our expectations», Brolick said. «However, we lost momentum in our value segment late in the third quarter and early in the fourth quarter. We have taken action to address this by adding incremental media weight to promote our «Right Price Right Size Menu», concurrent with our BBQ Pulled Pork advertising».

«As we look to 2015 and beyond, we anticipate that wage inflation and the implementation of the Affordable Care Act will add pressure to our cost structure», Brolick said. «In addition, we anticipate that the record-high beef costs we are currently facing will continue. As a result, we are realigning and reinvesting our resources to focus primarily on accelerated restaurant development and consumer-facing technology to drive our long-term growth. We expect these actions, coupled with the anticipated savings from the planned sale of our Canadian restaurants, to result in the reduction of approximately 30 million USD in general and administrative expense».

«We continue to evolve our plans for restaurant ownership optimization as part of our brand transformation», Brolick said. «This includes the selective buying of restaurants, along with selling restaurants to franchisees who have expressed or demonstrated a commitment to Image Activation and new restaurant development. We believe this initiative will lead to a growing and more efficient Wendy´s system supported by brand and economic model relevance. We expect that the net result will be a reduction in the number of Company-operated restaurants over time. We believe our realignment and reinvestment of resources will effectively support our restaurant ownership optimization strategy, which we intend to discuss in greater detail at our Investor Day on February».

Third-quarter 2014 summary

  • Wendy´s Company-operated restaurants generated a same-restaurant sales increase of 2.0 percent in the third quarter of 2014. Franchise same-restaurant sales in North America increased 0.5 percent during the quarter. The differential between Company-operated and franchise same-restaurant sales was primarily due to a higher number of Company-operated Image Activation restaurants in operation during the quarter.
  • Consolidated revenues were 512.5 million USD in the third quarter of 2014, compared to 640.8 million USD in the third quarter of 2013. The 20.0 percent decrease resulted from lost revenue following the sale of Company-operated restaurants to franchisees as part of the Company´s system optimization initiative, as well as the impact of temporary restaurant closures related to the Company´s Image Activation re-imaging program.
  • North America Company-operated restaurant margin was 15.5 percent in the third quarter of 2014, compared to 15.6 percent in the third quarter of 2013. The ten-basis point margin decrease was due mostly to an increase in commodity costs of 70 basis points (primarily from higher beef prices) and an increase in temporary Image Activation restaurant closure weeks of nearly two and a half times, partly offset by the positive impact of system optimization.
  • General and administrative expense was 65.8 million USD in the third quarter of 2014, compared to 76.5 million USD in the third quarter of 2013. The decrease resulted primarily from cost savings related to the Company´s system optimization initiative, as well as lower incentive compensation and a reduction in Image Activation incentive expense, which resulted from the previously announced change in its franchisee incentive program structure.
  • Adjusted Ebitda was 94.1 million USD in the third quarter of 2014, down 4.7 percent compared to third-quarter 2013 Adjusted Ebitda of 98.7 million USD. The decrease was due primarily to a 4.2 million USD year-over-year reduction in gains on asset sales and the impact of lost revenue from Image Activation restaurant closures.
  • Operating profit was 46.9 million USD in the third quarter of 2014, compared to 26.8 million USD in the third quarter of 2013. The 75.0 percent increase resulted primarily from year-over-year reductions in general and administrative expense, Facilities action charges and depreciation and amortization expense. The 2014 results include Other operating expense of 8.8 million USD, primarily related to increased rent expense from real estate subleased to franchisees, compared to Other operating income of 3.6 million USD in 2013. (The Company had previously recorded lease expense on these properties in cost of sales.)
  • Net income attributable to The Wendy´s Company was 22.8 million USD in the third quarter of 2014, compared to a Net loss attributable to The Wendy´s Company of 1.9 million USD in the third quarter of 2013. In addition to the items cited in Operating profit above, the Net income results include an effective tax rate of 33.0 percent in the third quarter of 2014 compared to 116.1 percent in the third quarter of 2013.
  • Adjusted Earnings Per Share were 0.08 USD in the third quarter of both 2014 and 2013.
  • Reported earnings per share were 0.06 USD in the third quarter of 2014, compared to earnings per share of 0.00 USD in the third quarter of 2013. The 2014 results include a year-over-year reduction in Facilities action charges.

Company plans to realign, reinvest resources to focus on restaurant growth

The Company announced a plan to realign and reinvest its resources to focus primarily on restaurant development and consumer-facing technology. The Company believes this initiative, coupled with the previously announced sale of its Canadian Company-operated restaurants, will yield a total cost reduction of approximately 30 million USD. The Company expects to realize a small benefit from this initiative in 2014 and expects to achieve the remainder of the savings in 2015.

The Company expects to realize efficiencies primarily through the realignment of its U.S. field operations and savings at its Restaurant Support Center in Dublin, Ohio. The Company expects to record total costs related to this initiative of approximately 20 million USD to 25 million USD, primarily during the fourth quarter of 2014 and first half of 2015, in the «Facilities action charges, net» line of the Company´s consolidated statement of operations.

In connection with this cost-savings initiative, the Company plans to realign and reinvest resources toward investments in consumer-facing technology and restaurant development to drive its brand transformation and long-term growth. «Returning our North America restaurant system to positive net development in the near future is a key element of our long-term strategic plan», Brolick said.

The Company expects its 2015 general and administrative expense to be approximately 250 million USD after realizing approximately 30 million USD in anticipated savings. The Company anticipates that cost increases related to higher incentive compensation, wage and benefit inflation and a 53rd operating week will partially offset these savings.

Restaurant ownership optimization initiative momentum continues

As part of its ongoing restaurant ownership optimization effort, the Company sold twelve North America restaurants to franchisees during the third quarter. The transactions generated additional restaurant re-imaging commitments for the Company´s Image Activation program, as well as commitments for the development of new franchise-operated restaurants. The Company also acquired three restaurants from franchisees during the quarter.

«We believe our restaurant ownership optimization initiative will drive future growth by expanding brand access and ensuring that our restaurants convey a contemporary image, consistent with our brand transformation», Brolick said. «Going forward, we expect that we will continue to buy and sell restaurants opportunistically, as we utilize system optimization to invigorate the franchisee base, drive development growth and increase Image Activation adoption. Our goal is to continue to improve our economic model through a stronger franchisee base and improved earnings quality, with increased royalties and rental income».

In addition, the Company´s previously announced initiative to further optimize its restaurant portfolio with the sale of approximately 135 Company-operated restaurants in Canada to new and existing franchise operators remains on track. The Company is targeting the end of the first quarter of 2015 for the completion of these transactions.

Company on track for 435 to 460 new and re-imaged systemwide restaurants in 2014

The Company remains on track to re-image 200 Company-operated restaurants and now expects 175 to 200 franchise-operated restaurants in 2014. The Company also expects 15 new Company-operated Image Activation restaurants and 45 new franchise-operated Image Activation restaurants in 2014. The Company continues to target the implementation of Image Activation in 85 percent of its Company-operated restaurants and 35 percent of the North America system by the end of 2017.

Company reaffirms outlook; expects Adj. Ebitda of about 390 million USD

For 2014, the Company continues to expect Adjusted Earnings Per Share of 0.34 USD to 0.36 USD. The Company now expects 2014 Adjusted Ebitda of approximately 390 million USD, an increase of approximately six percent compared to 2013.

The Company expects its total 2014 depreciation and amortization expense to decrease approximately ten percent compared to 2013, including the impact of accelerated depreciation in both years, primarily as a result of the Company´s system optimization initiative. Due to lower-than-anticipated average asset write-offs per re-imaged restaurant, the Company now expects to record approximately 30 million USD of pre-tax depreciation expense related to the Image Activation initiative in 2014.

Also included in the Company´s 2014 outlook are the following assumptions:

  • A reduction in interest expense of approximately 15 million USD, resulting from the Company´s 2013 debt restructuring.
  • Capital expenditures of 280 to 290 million USD, including approximately 215 million USD for Company-operated Image Activation restaurants.
  • The Company expects to re-image 200 Company-operated restaurants, including 35 scrape and rebuilds, in addition to the re-imaging of 175 to 200 franchise restaurants.
  • A reported effective tax rate of 38 to 40 percent.

Based on its year-to-date results, current sales trends and projections, the Company now expects full-year average same-restaurant sales growth of approximately 2.5 percent at Company-operated restaurants. Due primarily to its expectation for significantly higher year-over-year fourth-quarter beef costs, the Company now anticipates a full-year Company-operated restaurant margin of 15.5 to 15.7 percent.

«In the fourth quarter, we expect another quarter of positive same-restaurant sales growth, despite rolling over the strong performance of our Pretzel Pub Chicken and Bacon Portabella Melt promotions in 2013», Brolick said.

Company reaffirms long-term outlook

The Company continues to expect Adjusted Ebitda growth in the mid-to-high single-digit range in 2015, including 2015 general and administrative expense of approximately 250 million USD, followed by high single-digit growth in 2016 and low-double-digit Adjusted Ebitda growth beginning in 2017. The Company expects mid-teens Adjusted Earnings Per Share growth beginning in 2015. This outlook includes the expectation for annual same-restaurant sales growth of at least three percent beginning in 2015.

Company to enhance shareholder returns with ten percent dividend rate increase

The Company announced that its Board of Directors has authorized a ten percent increase in the quarterly cash dividend rate from 0.05 USD to 0.055 USD per share. The increase will be effective with the next quarterly cash dividend, which is payable December 15, 2014, to shareholders of record as of December 01, 2014.

During the third quarter of 2014, the Company´s Board of Directors also authorized a share repurchase program for up to 100 million USD of the Company´s common stock. During the third quarter, the Company repurchased more than 1.7 million shares for 13.9 million USD at an average price of 8.01 USD per share. As of November 6, 2014, approximately 78.7 million USD remains under the current repurchase authorization, which expires at the end of 2015.

«The dividend increase and share repurchases are important elements of our financial management strategy», Chief Financial Officer Todd Penegor said. «This is consistent with our articulated priority of first deploying capital to drive the organic growth of our restaurant business, in addition to returning cash to shareholders».