The FINANCIAL — The Wendy’s Company on August 10 reported unaudited results for the second quarter ended July 3, 2016.
“In the face of challenging industry conditions, we remain confident that Wendy’s can win in the QSR space,” President and Chief Executive Officer Todd Penegor said. “The North America system has now recorded 14 consecutive quarters of positive same-restaurant sales, which demonstrates the long-term strength and relevance of our brand. We also believe that momentum from our strategic growth initiatives and continued improvement in key brand health metrics, such as quality and value perception, will set us up for sustainable growth in the future.”
“In the second quarter, we were able to maintain strong performance on the bottom line even as sales came in lower than we anticipated,” Penegor said. “While we are not fully satisfied with this outcome, this is a testament to the improved quality of our earnings as a result of transitioning to a predominantly franchised model, with royalties and rental income contributing a higher amount of earnings.”
“As we near completion of the third phase of our system optimization initiative, we are increasingly focused on driving adjusted EBITDA margin growth,” Chief Financial Officer Gunther Plosch said. “We have added this key metric to our 2020 goals to signify how important this measure will be to our business going forward. Based on a review of all revenues and costs, we are now increasing our long-term adjusted EBITDA margin target. We will provide details on the timing and progress in early 2017.”
Same-restaurant sales increased 0.4 percent at North America system restaurants in the second quarter of 2016. On a two-year basis, second-quarter 2016 same-restaurant sales increased 2.6 percent for the North America system.
Revenues were $382.7 million in the second quarter of 2016, compared to $489.5 million in the second quarter of 2015. The 21.8 percent decrease resulted primarily from the ownership of 361 fewer Company-operated restaurants at the end of the 2016 second quarter compared to the beginning of the 2015 second quarter, according to the Wendy’s Company.
Franchise revenues were $123.5 million in the second quarter of 2016, compared to $104.5 million in the second quarter of 2015. The 18.2 percent increase resulted from higher rental income and royalty revenue primarily as a result of the Company’s system optimization initiative.
North America Company-operated restaurant margin was 21.9 percent in the second quarter of 2016, compared to 18.2 percent in the second quarter of 2015. The 370 basis-point increase was primarily the result of the positive impact of lower commodity costs and the favorable impact from the Company’s Image Activation program.
General and administrative expense was $61.1 million in the second quarter of 2016, compared to $60.8 million in the second quarter of 2015.
Operating profit was $65.6 million in the second quarter of 2016, compared to $64.3 million in the second quarter of 2015. The 2.0 percent increase resulted primarily from higher franchise revenues, a year-over-year decrease in Depreciation and amortization and lower Impairment of long-lived assets, partly offset by a year-over-year decrease in System optimization gains, net and a year-over-year increase in Other operating expense, net.
Interest expense was $28.6 million in the second quarter of 2016, compared to $17.2 million in the second 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 $26.5 million in the second quarter of 2016, compared to $24.8 million in the second quarter of 2015. The 6.9 percent increase resulted from year-over-year decreases in Loss on early extinguishment of debt and Provision for income taxes, in addition to the items mentioned above.
Net income was $26.5 million in the second quarter of 2016, compared to $40.2 million in the second quarter of 2015. The 34.1 percent decrease resulted primarily from a year-over-year decrease in Gain on disposal of discontinued operations, net of income taxes, in addition to the items mentioned above.
Adjusted EBITDA from continuing operations was $102.5 million in the second quarter of 2016, compared to $104.3 million in the second quarter of 2015. The 1.7 percent decrease resulted primarily from the ownership of 361 fewer Company-operated restaurants at the end of the 2016 second quarter compared to the beginning of the 2015 second quarter.
Adjusted EBITDA margin (adjusted EBITDA divided by total revenues) was 26.8 percent in the second quarter of 2016, compared to 21.3 percent in the second quarter of 2015. The 550 basis-point improvement reflects the positive impact of the Company’s system optimization initiative.
Reported diluted earnings per share from continuing operations were $0.10 in the second quarter of 2016, compared to $0.07 in the second quarter of 2015. The increase is primarily the result of a 27.1 percent year-over-year reduction in the weighted average diluted shares outstanding.
Reported diluted earnings per share were $0.10 in the second quarter of 2016, compared to $0.11 in the second quarter of 2015.
Adjusted earnings per share from continuing operations were $0.10 in the second quarter of 2016, compared to $0.08 in the second quarter of 2015.
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 by the end of 2016. As part of this plan, the Company intends to sell a total of approximately 315 restaurants to franchisees during 2016. Through the end of the second quarter, the Company has sold a total of 55 restaurants. The Company now expects the third phase of system optimization to generate pretax proceeds of approximately $435 million.
“We are now in the final stages of our system optimization initiative,” Penegor said. “We have awarded all remaining markets to be sold in 2016 to strong operators who have demonstrated a commitment to Image Activation and opening new restaurants. 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 facilitating 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 a total of 430 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 12 new restaurants during the second quarter and we expect to deliver the first year of net new restaurant openings since 2010. With more than 26 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 repurchases 5.9 million shares for $61.0 million in second quarter
The Company repurchased 5.9 million shares for $61.0 million in the second quarter at an average price of $10.37 per share. The Company has approximately $248 million remaining on its $1.4 billion share repurchase authorization, which expires at the end of 2016.
The Company is increasing its outlook for 2016 adjusted earnings per share to $0.39 to $0.40 from its prior guidance of $0.38 to $0.40 and increasing its outlook for 2016 adjusted EBITDA to flat to up 1 percent compared to 2015 from its prior guidance of down 1 percent to up 1 percent.
The Company now expects:
Same-restaurant sales growth of approximately 1.0 to 2.0 percent for the North America system.
Restaurant margin of approximately 19.0 percent at North America Company-operated restaurants.
Commodity costs to decrease approximately 5 to 6 percent compared to 2015.
In addition, the Company continues to expect:
Cash flows from operations of approximately $185 to $220 million.
Capital expenditures of approximately $135 to $145 million.
Free cash flow (cash flows from operations minus capital expenditures) of approximately $50 to $75 million.
General and administrative expense of approximately $245 to $250 million, which includes absorbing the incremental cost related to the unusual payment card activity, as well as increased legal reserves.
Interest expense of approximately $110 million.
Depreciation and amortization expense of approximately $130 to $135 million, including accelerated depreciation of approximately $5 million.
An adjusted tax rate of approximately 32 to 34 percent.
The Company’s 2016 outlook includes the impact of overlapping a 53rd operating week in 2015.
Company on track to achieve 2020 North America system goals, adds adjusted EBITDA margin as new 2020 Company goal
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.
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 (approximately 500 net).
The reimaging of at least 60 percent of North America total system restaurants.
The Company now expects to achieve adjusted EBITDA margin of 38 to 40 percent, an increase from its prior long-term target of greater than 35 percent.
