Dublin / OH. (twc) The Wendy´s Company reported unaudited results for the third quarter ended September 29, 2013, including an Adjusted Ebitda increase of 17 percent, compared to the third quarter of 2012.
Third-Quarter 2013 Summary
- Wendy´s North America Company-operated restaurants generated a same-store sales increase of 3,2 percent, compared to 2,7 percent last year. Franchise same-store sales in North America increased 3,1 percent, compared to 2,9 percent last year.
- Consolidated revenues were 640,8 million USD, compared to 636,3 million USD last year. The revenue increase resulted primarily from:
- The same-store sales increases
- Technical assistance fees and higher rental income from the sale of restaurants to franchisees pursuant to the Company´s system optimization initiative
- Company-operated North America restaurant margin was 15,6 percent, compared to 13,9 percent last year. The margin improvement was due to a favourable sales mix, with lower paper and beverage costs, partly offset by a 100 basis-point increase in commodity costs.
- Adjusted Ebitda was 98,7 million USD, up 17 percent compared to 84,5 million USD last year.
- The Company reported operating profit of 26,8 million USD, compared to 31,2 million USD last year. Significant items negatively affecting this year´s reported operating profit include a 22,3 million USD pre-tax net charge related to facilities actions (including system optimization) and a 5,3 million USD impairment charge. Significant items negatively affecting last year´s reported operating income include an 11,4 million USD pre-tax net charge for facilities actions.
- The Company reported a net loss of 1,9 million USD. This compares to a net loss of 26,2 million USD last year. Significant items negatively affecting this year´s reported net loss, in addition to those mentioned above, include a 28,3 million USD negative year-over-year variance in the Company´s provision for income taxes. Significant items negatively affecting last year´s reported net loss, in addition to those mentioned above, include a 49,9 million USD pre-tax loss on early extinguishment of debt.
- Adjusted Earnings Per Share were 0,08 USD, compared to 0,02 USD last year. Last year´s third-quarter Adjusted Earnings Per Share results of 0,03 USD have decreased by 0,01 USD to reflect tax matters from prior years.
- The Company reported a loss per share of approximately 0,00 USD in the third quarter of 2013, compared to a loss per share of 0,07 USD in the third quarter of 2012.
Wendy´s President and Chief Executive Officer Emil Brolick said the strong sales and high-quality earnings reflect continued momentum from the Company´s brand transformation. «We are contemporizing our consumer touch points and transforming our brand, with bold restaurant designs, new packaging and innovative menu introductions such as our Pretzel Bacon Cheeseburger», Brolick said. «The most recent iterations of our transformation, including people activation and system optimization, are reinforcing our commitment to deliver «A Cut Above» brand experience and continually increase operating efficiency».
«Our third-quarter two-year Company-operated same-store sales increase of 5,9 percent was our strongest comp growth since 2005, driven by the highly successful Pretzel Bacon Cheeseburger promotion», Brolick said. «We have also seen a solid response to our October Pretzel Pub Chicken sandwich promotion and our third-quarter results give us the confidence to raise our 2013 Adjusted Ebitda outlook to approximately 365 million USD».
System Optimization Initiative on Schedule …
The Company announced in July that it plans to help optimize its restaurant ownership with the sale of about 425 Company-operated restaurants. The Company continues to target the second quarter of 2014 for the completion of these transactions.
Brolick said the system optimization initiative will create growth opportunities for the Company and for strong franchise operators by expanding participation in the Wendy´s Image Activation program and, ultimately, growing new restaurant development. «We are very happy with the strong interest in our system optimization strategy from our franchisee community», Brolick said. «We view this as an excellent opportunity to recognize existing and new franchisees who have demonstrated leadership in operational excellence, have a strong balance sheet and have an expressed commitment to growth and our Image Activation strategy».
«We expect to generate a higher operating margin and stronger free cash flow, while enhancing earnings quality through a more predictable revenue mix», Brolick said. «We believe that the system optimization initiative will be Ebitda neutral on an annualized basis due to increased royalties and rental income, in addition to lower G+A expense». A key element of the system optimization strategy includes generating ongoing rental income from the leasing of real estate.
As part of its system optimization initiative, the Company has sold 118 total restaurants through November 07, 2013, for total proceeds of 66 million USD. The transactions include the following:
- 24 restaurants, along with two future locations, in the Seattle market to Cedar Enterprises Inc., a long-time Wendy´s franchisee
- 30 restaurants in the St. Louis market to BB St. Louis LLC, a partnership headed by current Wendy´s franchisee and former National Basketball Association great Junior Bridgeman, along with current NBA star Chauncey Billups
- 24 restaurants in the Kansas City market to a subsidiary of NPC International Inc., the eighth-largest restaurant operator in the United States with more than 1’200 restaurants
- A total of 40 restaurants to eight franchisees in other markets
Image Activation on Track; Continues to Drive Compelling Sales Growth
«Our Image Activation program, which started in 2011, has accelerated over the past two years, producing increased traffic and higher sales», Brolick said. «We have developed a standard ultra-modern design with optional upgrades that provide investment flexibility to meet the needs of our diverse system. We are confident our solutions will work for 85 to 90 percent of our franchisees».
The Company is offering an incentive program to qualified franchisees commencing Image Activation restaurant re-images during 2013. About 100 of these restaurants are currently in various stages of active process and the Company believes most of them will be open or under construction by the end of 2013.
In addition to the expected 2013 increase in Image Activation new builds and re-images, the Company continues to expect further acceleration in Image Activation re-images for both Company-operated and franchise restaurants during 2014.
Re-Financings, Dividends and Share Repurchases
The Company recently announced that its indirect wholly owned subsidiary, Wendy´s International Inc., borrowed an additional 225 million USD in Term A loans under its credit agreement and redeemed 225 million USD aggregate principal amount of 6,2 percent senior notes due June 2014. The Company expects this refinancing to generate approximately two million USD in annualized net interest expense savings, as part of the more than 20 million USD in annualized net interest expense savings from 2013 refinancing actions.
On October 31, 2013, the Company announced the declaration of its quarterly cash dividend of 0,05 USD per share. The dividend is payable on December 16, 2013, to stockholders of record as of December 02, 2013.
In the third quarter of 2013, the Company repurchased approximately 5,5 million USD shares of common stock at an average price of 7,55 USD per share. The number of shares outstanding at the end of the third quarter was approximately 391,6 million. Approximately 59 million USD remains available under the current repurchase authorization, which will expire at the end of 2013.
«Our recent dividend increases and share repurchases are important elements of our financial management strategy», Chief Financial Officer Todd Penegor said. «We are committed to continuing to deploy capital to drive the organic growth of our restaurant business, in addition to returning cash to shareholders».
For 2013, the Company is raising its Adjusted Ebitda outlook to approximately 365 million USD and its Adjusted Earnings Per Share outlook to approximately 0,25 USD.
Due to its strong year-to-date performance, the Company intends to make incremental fourth-quarter investments to drive future growth. As a result, the Company projects that its fourth-quarter Adjusted Ebitda will decline approximately ten percent compared to the fourth quarter of 2012.
Estimated 2013 Adjusted Earnings Per Share excludes approximately 40 million USD of anticipated pre-tax depreciation for existing assets to be replaced as part of the Image Activation initiative. This amount is up from the previous guidance of 20 to 25 million USD, due to accelerated depreciation from the 2014 class of Company-operated Image Activation re-imaged restaurants. The Company expects its total 2013 depreciation and amortization expense to increase approximately 20 percent compared to 2012, up from the previous outlook of 15 to 20 percent due to the anticipated net impact of system optimization and Image Activation.
The Company is increasing its 2013 Company-operated restaurant margin outlook to approximately 15,0 percent, compared to 14,0 percent in 2012, due to higher same-store sales, ongoing cost control initiatives and favourability in its commodities forecast. Also included in the Company´s 2013 outlook is:
- Average same-store sales growth of approximately 2,0 percent at North America Company-operated restaurants, based on year-to-date same-store sales of 1,5 percent, along with the expectation of strong same-store sales in the fourth quarter.
- New restaurant development and restaurant closures as follows:
- North America Company-operated: 25 openings, with 20 to 30 closures
- North America franchise: 40 openings with 90 to 100 closures
- International: 45 openings with 15 to 20 closures
- The re-imaging of 100 Company-operated restaurants.
- Approximately ten million USD in incremental year-over-year general and administrative expense associated with the Image Activation franchisee incentive program.
- Capital expenditures of approximately 235 million USD, compared to 198 million USD in 2012. This estimate includes 145 million USD for Image Activation designs, with 25 new and 100 re-imaged Company-operated restaurants in North America.