DUBLIN, Ohio, Feb. 26, 2020 // PRNewswire // - The Wendy's Company (Nasdaq: WEN) today reported results for the fourth quarter and fiscal year ended December 29, 2019.
Wendy's® was founded in 1969 by Dave Thomas in Columbus, Ohio. Dave built his business on the premise, “Quality is our Recipe®,” which remains the guidepost of the Wendy’s system. Wendy’s is best known for its made-to-order square hamburgers, using fresh, never frozen beef*, freshly-prepared salads, and other signature items like chili, baked potatoes and the Frosty® dessert. The Wendy’s Company (Nasdaq: WEN) is committed to doing the right thing and making a positive difference in the lives of others. This is most visible through the Company’s support of the Dave Thomas Foundation for Adoption® and its signature Wendy’s Wonderful Kids® program, which seeks to find every child in the North American foster care system a loving, forever home. Today, Wendy’s and its franchisees employ hundreds of thousands of people across more than 6,700 restaurants worldwide with a vision of becoming the world’s most thriving and beloved restaurant brand. For details on franchising, connect with us at www.wendys.com/franchising. Visit www.wendys.com and www.squaredealblog.com for more information and connect with us on Twitter and Instagram using @wendys, and on Facebook at www.facebook.com/wendys.
*Fresh beef available in the contiguous U.S., Alaska, and Canada.
"We delivered a very strong year of sales growth and have laid the foundation in 2019 to set the Wendy's® brand up for future success," President and Chief Executive Officer Todd Penegor said. "We have momentum in our business as evidenced by our accelerating sales growth in the second half of the year, which sets us up well going into 2020. Our focus remains on efficient, accelerated growth behind our three major growth pillars: entering the breakfast daypart, growing our digital business, and expanding our International footprint. We are well positioned to drive growth in 2020 and I'm more confident than ever that we will achieve our vision of becoming the world's most thriving and beloved restaurant brand."
Fourth Quarter and Full Year 2019 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.
Fourth Quarter Financial Highlights
Revenues and Adjusted Revenues
The increase in revenues and adjusted revenues was primarily driven by higher sales at Company-operated restaurants and an increase in franchise royalty revenue. Higher sales at Company-operated restaurants was the result of positive same-restaurant sales and an increase in the number of restaurants in operation. The increase in franchise royalty revenue was primarily driven by positive same-restaurant sales and new restaurant development. Revenues and adjusted revenues also benefited from an increase in franchise rental income which was driven by approximately $9 million in pass-through payments related to subleases as the result of the new lease accounting standard. This incremental revenue was completely offset by a corresponding gross up in franchise rental expense.
Company-Operated Restaurant Margin
The decrease in Company-operated restaurant margin was primarily the result of labor rate inflation, higher insurance costs, higher commodity costs, and customer count declines, partially offset by pricing actions and positive mix benefits.
General and Administrative Expense
The decrease in general and administrative expense was primarily due to the $27.5 million legal reserve that was recorded in the fourth quarter of 2018 relating to the settlement of the Financial Institutions case. Excluding this reserve, general and administrative expense would have increased by approximately $10 million, or 23 percent, primarily driven by a higher incentive compensation accrual.
Operating Profit
The decrease in operating profit resulted primarily from an increase in franchise support and other costs, mainly due to the investments to support the U.S. system in advance of its breakfast launch, higher reorganization and realignment costs, and a decrease in net rental income, partially offset by lower general and administrative expense and an increase in franchise royalty revenue and fees.
Net Income
The increase in net income resulted primarily from a cash settlement related to a previously held investment, partially offset by a decrease in operating profit and a higher provision for income taxes.
Adjusted EBITDA
The decrease in adjusted EBITDA resulted primarily from an increase in franchise support and other costs, mainly due to the investments to support the U.S. system in advance of its breakfast launch, an increase in general and administrative expense (excluding the legal reserve recorded in Q4 2018 relating to the settlement of the Financial Institutions case), and a decrease in net rental income, partially offset by an increase in franchise royalty revenue and fees.
Adjusted Earnings Per Share
The decrease in adjusted earnings per share resulted primarily from a decrease in adjusted EBITDA.
Full Year Financial Highlights
Revenues and Adjusted Revenues
The increase in revenues and adjusted revenues was primarily driven by higher sales at Company-operated restaurants and an increase in franchise royalty revenue. Higher sales at Company-operated restaurants was the result of positive same-restaurant sales and an increase in the number of restaurants in operation. The increase in franchise royalty revenue was primarily driven by positive same-restaurant sales and new restaurant development. Revenues and adjusted revenues also benefited from an increase in franchise rental income which was driven by approximately $38 million in pass-through payments related to subleases as the result of the new lease accounting standard. This incremental revenue was completely offset by a corresponding gross up in franchise rental expense.
Company-Operated Restaurant Margin
The decrease in Company-operated restaurant margin was primarily the result of labor rate inflation, higher commodity costs, and customer count declines, partially offset by pricing actions and positive mix benefits.
General and Administrative Expense
The decrease in general and administrative expense was primarily due to the $27.5 million legal reserve that was recorded in the fourth quarter of 2018 relating to the settlement of the Financial Institutions case. In the third quarter of 2019, the Company had a $2.8 million reduction in a legal reserve as a result of an increase in anticipated insurance proceeds available for use related to the settlement of the Financial Institutions case. Excluding these impacts, general and administrative expense would have increased by approximately $13 million, or 7 percent, primarily driven by a higher incentive compensation accrual.
Operating Profit
The increase in operating profit resulted primarily from an increase in franchise royalty revenue and lower general and administrative expense, partially offset by an increase in franchise support and other costs, mainly due to the investments to support the U.S. system in advance of its breakfast launch and the Company's investment in scanners on behalf of the North America system, as well as higher reorganization and realignment costs.
Net Income
The decrease in net income resulted primarily from the sale of our ownership interest in Inspire Brands in the third quarter of 2018 for $450 million (~$352 million, net of tax).
Adjusted EBITDA
The decrease in adjusted EBITDA resulted primarily from an increase in franchise support and other costs, mainly due to the investments to support the U.S. system in advance of its breakfast launch and the Company's investment in scanners on behalf of the North America system, and an increase in general and administrative expense (excluding the legal reserve recorded in Q4 2018 relating to the settlement of the Financial Institutions case and the adjustment to this legal reserve in Q3 2019), partially offset by an increase in franchise royalty revenue and an increase in restaurant margin dollars due to an increase in the number of restaurants in operation.
Adjusted Earnings Per Share
Adjusted earnings per share was flat to the prior year as the result of fewer shares outstanding due to the Company's share repurchase programs, offset by an increase in income taxes due to a higher tax rate.
Free Cash Flow
The decrease in free cash flow resulted primarily from an increase in capital expenditures and unfavorable changes in working capital.
Company Repurchases 10.2 million shares for $217.7 million in 2019; Board of Directors Approves a New $100 Million Share Repurchase Program
The Company repurchased 10.2 million shares for $217.7 million in 2019. The Company has repurchased 1.9 million shares for $28.8 million in the first quarter of 2020 to date which resulted in the completion of its $225 million share repurchase authorization that was set to expire on March 1, 2020. The Company's Board of Directors has approved a new $100 million share repurchase authorization, expiring on February 28, 2021.
Segment Reporting Changes
During 2019, the Company realigned its management and operating structure to increase efficiencies and to accelerate long-term growth. The Company changed its previous North America and International segments by (1) combining its Canadian business with its International segment and (2) separating its real estate and development operations into its own segment. As a result of these changes, the Company is now comprised of the following segments and will report on these moving forward: (1) Wendy's U.S., (2) Wendy's International and (3) Global Real Estate & Development. For more information regarding the changes related to our new segment reporting structure and for our 2017-2019 (including 2019 by quarter) results as reported under this new structure, please reference the Segment Reporting Update presentation that is publicly available in the Financials - Supplemental Financial Information section of the Company's Investor Relations website at www.irwendys.com.
2020 Outlook
This release includes forward-looking guidance for certain non-GAAP financial measures, including systemwide sales, adjusted EBITDA, adjusted earnings per share and free cash flow. The Company excludes certain expenses and benefits from adjusted EBITDA, adjusted earnings per share and free cash flow, such as the impact from our advertising funds, including the net change in the restricted operating assets and liabilities and any excess or deficit of advertising funds revenues over advertising funds expenses, impairment of long-lived assets, reorganization and realignment costs, system optimization (gains) losses, net, loss on early extinguishment of debt, the impact of the settlement of the Financial Institutions case and the timing and resolution of certain tax matters. Due to the uncertainty and variability of the nature and amount of those expenses and benefits, the Company is unable without unreasonable effort to provide projections of net income, earnings per share or net cash provided by operating activities, or a reconciliation of those projected measures.
During 2020, the Company Expects:
Conference Call and Webcast Scheduled for 8:30 a.m. Today, February 26
The Company will host a conference call on Wednesday, February 26 at 8:30 a.m. ET, with a simultaneous webcast from the Company's Investor Relations website at www.irwendys.com. The related presentation materials will also be available on the Company's Investor Relations website. The live conference call will be available by telephone at (866) 211-4759 for domestic callers and (647) 689-6752 for international callers. An archived webcast and presentation materials will be available on the Company's Investor Relations website.
Forward-Looking Statements
This release contains certain statements that are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Generally, forward-looking statements include the words "may," "believes," "plans," "expects," "anticipates," "intends," "estimate," "goal," "upcoming," "outlook," "guidance" or the negation thereof, or similar expressions. In addition, all statements that address future operating, financial or business performance, strategies or initiatives, future efficiencies or savings, anticipated costs or charges, future capitalization, anticipated impacts of recent or pending investments or transactions and statements expressing general views about future results or brand health are forward-looking statements within the meaning of the Reform Act. Forward-looking statements are based on the Company's expectations at the time such statements are made, speak only as of the dates they are made and are susceptible to a number of risks, uncertainties and other factors. For all such forward-looking statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the Reform Act. The Company's actual results, performance and achievements may differ materially from any future results, performance or achievements expressed or implied by the Company's forward-looking statements.
Many important factors could affect the Company's future results and cause those results to differ materially from those expressed in or implied by the Company's forward-looking statements. Such factors include, but are not limited to, the following: (1) the impact of competition, including from outside the quick-service restaurant industry; (2) changes in consumer tastes and preferences and discretionary consumer spending; (3) prevailing conditions and disruptions in the national and global economies, including areas with a high concentration of Wendy's restaurants; (4) food safety events, including instances of food-borne illness, involving Wendy's, its supply chain or other food service companies; (5) the success of the Company's operating, promotional, marketing or new product development initiatives, including risks associated with its plans to enter the breakfast daypart across the U.S. system; (6) the Company's ability to achieve its growth strategy through net new restaurant development, including the availability of suitable locations and terms, and the success of its Image Activation program, including the ability of reimaged restaurants to positively affect sales; (7) changes in commodity and other operating costs, including supply, distribution and labor costs; (8) the Company's ability to attract and retain qualified restaurant personnel; (9) shortages or interruptions in the supply or distribution of food or other products and other risks associated with the Company's independent supply chain purchasing co-op; (10) consumer concerns regarding the nutritional aspects of the Company's products; (11) the effects of disease outbreaks, epidemics or pandemics; (12) the effects of negative publicity that can occur from increased use of social media; (13) risks associated with the Company's international operations, including its ability to achieve its international growth strategy; (14) risks associated with the Company's digital commerce strategy, platforms and technologies, including its ability to adapt to changes in industry trends and consumer preferences; (15) the Company's dependence on computer systems and information technology, including risks associated with the failure, interruption or breach of its systems or technology or other cyber incidents or deficiencies; (16) risks associated with the Company's plan to realign and reinvest resources in its IT organization to accelerate growth; (17) the Company's ability to effectively manage the acquisition and disposition of restaurants or successfully implement other strategic initiatives; (18) conditions beyond the Company's control, such as adverse weather conditions, natural disasters, hostilities, social unrest or other catastrophic events; (19) the availability and cost of insurance; (20) the Company's ability to protect its intellectual property; (21) the continued succession and retention of key personnel and the effectiveness of the Company's leadership structure; (22) compliance with legal or regulatory requirements, the impact of legal or regulatory proceedings and risks associated with an increased focus on environmental, social and governance issues; (23) risks associated with leasing and owning significant amounts of real estate, including a decline in the value of the Company's real estate assets or liability for environmental matters; (24) the effects of charges for impairment of goodwill or other long-lived assets; (25) risks associated with the Company's securitized financing facility and other debt agreements, including its overall debt levels; (26) the availability, terms and deployment of capital, including the amount and timing of equity and debt repurchases; and (27) other risks and uncertainties cited in the Company's releases, public statements and/or filings with the Securities and Exchange Commission, including those identified in the "Risk Factors" sections of the Company's Forms 10-K and 10-Q.
In addition to the factors described above, there are risks associated with the Company's predominantly franchised business model that could impact its results, performance and achievements. Such risks include the Company's ability to identify, attract and retain experienced and qualified franchisees, the business and financial health of franchisees, the ability of franchisees to meet their royalty, advertising, development, reimaging and other commitments, participation by franchisees in brand strategies and the fact that franchisees are independent third parties that own, operate and are responsible for overseeing the operations of their restaurants. The Company's predominantly franchised business model may also impact the ability of the Wendy's system to effectively respond and adapt to market changes.
All future written and oral forward-looking statements attributable to the Company or any person acting on its behalf are expressly qualified in their entirety by the cautionary statements contained or referred to above. New risks and uncertainties arise from time to time, and it is impossible for the Company to predict these events or how they may affect the Company.
The Company assumes no obligation to update any forward-looking statements after the date of this release as a result of new information, future events or developments, except as required by federal securities laws, although the Company may do so from time to time. The Company does not endorse any projections regarding future performance that may be made by third parties.
Disclosure Regarding Non-GAAP Financial Measures
In addition to the financial measures presented in this release in accordance with U.S. Generally Accepted Accounting Principles ("GAAP"), the Company has included certain non-GAAP financial measures in this release, including adjusted revenue, adjusted EBITDA, adjusted earnings per share, free cash flow and systemwide sales.
The Company uses adjusted revenue, adjusted EBITDA, adjusted earnings per share and systemwide sales as internal measures of business operating performance and as performance measures for benchmarking against the Company's peers and competitors. Adjusted EBITDA, adjusted earnings per share and systemwide sales are also used by the Company in establishing performance goals for purposes of executive compensation. The Company believes its presentation of adjusted revenue, adjusted EBITDA, adjusted earnings per share and systemwide sales provides a meaningful perspective of the underlying operating performance of our current business and enables investors to better understand and evaluate our historical and prospective operating performance. The Company believes these non-GAAP financial measures are important supplemental measures of operating performance because they eliminate items that vary from period to period without correlation to our core operating performance and highlight trends in our business that may not otherwise be apparent when relying solely on GAAP financial measures. Due to the nature and/or size of the items being excluded, such items do not reflect future gains, losses, expenses or benefits and are not indicative of our future operating performance. The Company believes investors, analysts and other interested parties use adjusted revenue, adjusted EBITDA, adjusted earnings per share and systemwide sales in evaluating issuers, and the presentation of these measures facilitates a comparative assessment of the Company's operating performance in addition to the Company's performance based on GAAP results.
This release also includes disclosure and guidance regarding the Company's free cash flow. Free cash flow is a non-GAAP financial measure that is used by the Company as an internal measure of liquidity. Free cash flow is also used by the Company in establishing performance goals for purposes of executive compensation. The Company defines free cash flow as cash flows from operations minus (i) capital expenditures and (ii) the net change in the restricted operating assets and liabilities of the advertising funds and any excess/deficit of advertising funds revenue over advertising funds expense included in net income, as reported under GAAP. The impact of our advertising funds is excluded because the funds are used solely for advertising and are not available for the Company's working capital needs. The Company may also make additional adjustments for certain non-recurring or unusual items as detailed in the reconciliation tables that accompany this release. The Company believes free cash flow is an important liquidity measure for investors and other interested persons because it communicates how much cash flow is available for working capital needs or to be used for repurchasing shares, paying dividends, repaying or refinancing debt, financing possible acquisitions or investments or other uses of cash.
Adjusted revenue, adjusted EBITDA, adjusted earnings per share, free cash flow and systemwide sales are not recognized terms under GAAP, and the Company's presentation of these non-GAAP financial measures does not replace the presentation of the Company's financial results in accordance with GAAP. Because all companies do not calculate adjusted revenue, adjusted EBITDA, adjusted earnings per share, free cash flow and systemwide sales (and similarly titled financial measures) in the same way, those measures as used by other companies may not be consistent with the way the Company calculates such measures. The non-GAAP financial measures included in this release should not be construed as substitutes for or better indicators of the Company's performance than the most directly comparable GAAP financial measures. See the reconciliation tables that accompany this release for additional information regarding certain of the non-GAAP financial measures included herein.
Key Business Measures
The Company tracks its results of operations and manages its business using certain key business measures, including same-restaurant sales, systemwide sales and Company-operated restaurant margin, which are measures commonly used in the quick-service restaurant industry that are important to understanding Company performance.
Same-restaurant sales and systemwide sales each include sales by both Company-operated and franchise restaurants. The Company reports same-restaurant sales for new restaurants after they have been open for 15 continuous months and for reimaged restaurants as soon as they reopen.
Franchise restaurant sales are reported by our franchisees and represent their revenues from sales at franchised Wendy's restaurants. Sales by franchise restaurants are not recorded as Company revenues and are not included in the Company's consolidated financial statements. However, the Company's royalty revenues are computed as percentages of sales made by Wendy's franchisees and, as a result, sales by franchisees have a direct effect on the Company's royalty revenues and profitability.
Same-restaurant sales and systemwide sales exclude sales from Venezuela and, beginning in the third quarter of 2018, Argentina due to the highly inflationary economies of those countries.
The Company calculates same-restaurant sales and systemwide sales growth on a constant currency basis. Constant currency results exclude the impact of foreign currency translation and are derived by translating current year results at prior year average exchange rates. The Company believes excluding the impact of foreign currency translation provides better year over year comparability.
Company-operated restaurant margin is defined as sales from Company-operated restaurants less cost of sales divided by sales from Company-operated restaurants. Cost of sales includes food and paper, restaurant labor and occupancy, advertising and other operating costs.
Wendy's® was founded in 1969 by Dave Thomas in Columbus, Ohio. Dave built his business on the premise, "Quality is our Recipe®," which remains the guidepost of the Wendy's system. Wendy's is best known for its made-to-order square hamburgers, using fresh, never frozen beef*, freshly-prepared salads, and other signature items like chili, baked potatoes and the Frosty® dessert. The Wendy's Company (Nasdaq: WEN) is committed to doing the right thing and making a positive difference in the lives of others. This is most visible through the Company's support of the Dave Thomas Foundation for Adoption® and its signature Wendy's Wonderful Kids® program, which seeks to find every child in the North American foster care system a loving, forever home. Today, Wendy's and its franchisees employ hundreds of thousands of people across more than 6,700 restaurants worldwide with a vision of becoming the world's most thriving and beloved restaurant brand. For details on franchising, connect with us at www.wendys.com/franchising. Visit www.wendys.com and www.squaredealblog.com for more information and connect with us on Twitter and Instagram using @wendys, and on Facebook at www.facebook.com/wendys.
*Fresh beef available in the contiguous U.S., Alaska, and Canada.
Investor Contact:
Greg Lemenchick
Senior Director - Investor Relations & Corporate FP&A
(614) 766-3977; greg.lemenchick@wendys.com
Media Contact:
Heidi Schauer
Senior Director - Corporate Communications & Customer Care
(614) 764-3368; heidi.schauer@wendys.com
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SOURCE The Wendy's Company