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2: EX-10.1 Second Amendment to Class A-1 Note Purchase HTML 42K
Agreement
3: EX-31.1 CEO Certification Pursuant to Section 302 HTML 26K
4: EX-31.2 CFO Certification Pursuant to Section 302 HTML 26K
5: EX-32.1 CEO and CFO Certification Pursuant to Section 906 HTML 23K
11: R1 Document and Entity Information HTML 74K
12: R2 Condensed Consolidated Balance Sheets HTML 158K
13: R3 Condensed Consolidated Statements of Operations HTML 122K
14: R4 Condensed Consolidated Statements of Comprehensive HTML 46K
Income
15: R5 Condensed Consolidated Statements of Stockholders' HTML 92K
Equity
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Franchise Fees (Details)
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Disposition Activity (Details)
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Sale (Details)
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(Details)
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Organizational Redesign Accrual Rollforward
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Comprehensive Loss (Details)
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(Exact name of registrant as specified in its charter)
iDelaware
i38-0471180
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
iOne Dave Thomas Blvd.
iDublin,
iOhio
i43017
(Address
of principal executive offices)
(Zip Code)
(i614) i764-3100
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title
of each class
Trading Symbol(s)
Name of each exchange on which registered
iCommon Stock, $.10 par value
iWEN
iThe
Nasdaq Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYes☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). iYes☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
iLarge
accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging growth company
i☐
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes i☐ No ☒
There
were i206,259,422 shares of The Wendy’s Company common stock outstanding as of October 26, 2023.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(1) iBasis
of Presentation
The accompanying unaudited condensed consolidated financial statements (the “Financial Statements”) of The Wendy’s Company (“The Wendy’s Company” and, together with its subsidiaries, the “Company,”“we,”“us” or “our”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and, therefore, do not include all information and footnotes required by GAAP for complete financial statements. In our opinion, the Financial Statements contain all adjustments of a normal recurring nature necessary to present fairly our financial position as of October 1, 2023, the results of our operations for
the three and nine months ended October 1, 2023 and October 2, 2022 and cash flows for the nine months ended October 1, 2023 and October 2, 2022. The results of operations for the nine months ended October 1, 2023 are not necessarily indicative of the results to be expected for the full 2023 fiscal year. The Financial Statements should be read in conjunction with the audited consolidated financial statements for The Wendy’s Company and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended January 1, 2023 (the “Form 10-K”).
The principal 100% owned subsidiary
of the Company is Wendy’s International, LLC and its subsidiaries (“Wendy’s”). The Company manages and internally reports its business in the following segments: (1) Wendy’s U.S., (2) Wendy’s International and (3) Global Real Estate & Development. See Note 17 for further information.
We report on a fiscal year consisting of 52 or 53 weeks ending on the Sunday closest to or on December 31. All three- and nine-month periods presented herein contain 13 weeks and 39 weeks, respectively. All references to years, quarters and months relate to fiscal periods rather than calendar periods.
Our
significant interim accounting policies include the recognition of advertising funds expense in proportion to advertising funds revenue.
(2) iRevenue
Disaggregation of Revenue
i
The
following tables disaggregate revenue by segment and source:
Receivables, which are included in “Accounts and notes receivable, net” (b)
$
i54,931
$
i54,497
Receivables,
which are included in “Advertising funds restricted assets”
i66,676
i70,422
Deferred
franchise fees (c)
i99,889
i99,208
_______________
(a)Excludes
funds collected from the sale of gift cards, which are primarily reimbursed to franchisees upon redemption at franchised restaurants and do not ultimately result in the recognition of revenue in the Company’s condensed consolidated statements of operations.
(b)Includes receivables related to “Sales” and “Franchise royalty revenue and fees.”
(c)The current portion of deferred franchise fees is included in “Accrued expenses and other current liabilities” and the long-term portion of deferred franchise fees is included in “Deferred franchise fees” and totaled $i10,526
and $i89,363, respectively, as of October 1, 2023, and $i8,977 and $i90,231,
respectively, as of January 1, 2023.
/
i
Significant changes in deferred franchise fees are as follows:
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
Anticipated Future Recognition of Deferred Franchise Fees
i
The
following table reflects the estimated franchise fees to be recognized in the future related to performance obligations that are unsatisfied at the end of the period:
Estimate for fiscal year:
2023 (a)
$
i6,332
2024
i6,090
2025
i5,908
2026
i5,797
2027
i5,689
Thereafter
i70,073
$
i99,889
_______________
(a)Represents
franchise fees expected to be recognized for the remainder of 2023, which includes development-related franchise fees expected to be recognized over a duration of one year or less.
/
(3) iSystem Optimization Gains, Net
The
Company’s system optimization initiative included a shift from Company-operated restaurants to franchised restaurants over time, through acquisitions and dispositions, as well as facilitating franchisee-to-franchisee restaurant transfers (“Franchise Flips”). As of January 1, 2017, the Company achieved its plan to reduce its ongoing Company-operated restaurant ownership to approximately i5% of the total system. While the
Company has no plans to move its ownership away from approximately i5% of the total system, the Company expects to continue to optimize the Wendy’s system through Franchise Flips, as well as evaluating strategic acquisitions of franchised restaurants and strategic dispositions of Company-operated restaurants to existing and new franchisees, to further strengthen the franchisee base and drive new restaurant development. During the nine months ended October 1, 2023 and October 2,
2022, the Company facilitated i88 and i54 Franchise Flips, respectively. Additionally, during the nine months ended October 2, 2022, the
Company completed the sale of i1 Company-operated restaurant to a franchisee. iNo Company-operated restaurants were sold to franchisees during the nine months ended October 1, 2023.
Gains
and losses recognized on dispositions are recorded to “System optimization gains, net” in our condensed consolidated statements of operations. Costs related to acquisitions and dispositions under our system optimization initiative are recorded to “Reorganization and realignment costs.” All other costs incurred related to facilitating Franchise Flips are recorded to “Franchise support and other costs.”
Post-closing
adjustments on sales of restaurants (c)
i537
i—
i537
i3,522
Gain
(loss) on sales of restaurants, net
i537
(i416)
i537
i3,106
(Loss)
gain on sales of other assets, net (d)
(i417)
i868
(i418)
i1,032
System
optimization gains, net
$
i120
$
i452
$
i119
$
i4,138
_______________
(a)In
addition to the proceeds noted herein, the Company received cash proceeds of $i126 and $i284 during the three and nine months ended October 2,
2022, respectively, related to a note receivable issued in connection with the sale of the Manhattan Company-operated restaurants.
(b)Net assets sold consisted primarily of equipment.
(c)Represents the recognition of deferred gains as a result of the resolution of certain contingencies related to the extension of lease terms for restaurants previously sold to franchisees.
(d)During the nine months ended October 1, 2023, the Company received net cash proceeds of $i280
primarily from the sale of surplus and other properties. During the three and nine months ended October 2, 2022, the Company received net cash proceeds of $i2,510 and $i3,368,
respectively, primarily from the sale of surplus and other properties.
/
Assets Held for Sale
As of October 1, 2023 and January 1, 2023, the Company had assets held for sale of $i1,320
and $i1,661, respectively, primarily consisting of surplus properties. Assets held for sale are included in “Prepaid expenses and other current assets.”
(4) iReorganization
and Realignment Costs
i
The following is a summary of the initiatives included in “Reorganization and realignment costs:”
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
Organizational Redesign
In February 2023, the Board of Directors approved a plan to redesign the Company’s organizational structure to better support the execution of the Company’s long-term growth strategy by maximizing organizational efficiency
and streamlining decision making (the “Organizational Redesign Plan”). As a result of the Organizational Redesign Plan, the Company expects to hold its general and administrative expense in 2023 and 2024 relatively flat compared with 2022. The Company expects to incur total costs of approximately $i11,000 to $i13,000
related to the Organizational Redesign Plan. During the nine months ended October 1, 2023, the Company recognized costs totaling $i7,986, which primarily included severance and related employee costs and share-based compensation. The Company expects to incur additional costs aggregating approximately $i3,000
to $i5,000, comprised of (1) severance and related employee costs of approximately $i1,500, (2) recruitment and relocation costs of approximately $i500,
(3) third-party and other costs of approximately $i500 and (4) share-based compensation of approximately $i1,500. The
Company expects costs related to the Organizational Redesign Plan to continue into 2026, with approximately three-fourths of the total costs to be recognized during 2023.
i
The following is a summary of the costs recorded as a result of the Organizational Redesign Plan:
(a)Primarily
represents the accelerated recognition of share-based compensation resulting from the termination of employees under the Organizational Redesign Plan.
/
i
As of October 1, 2023, the accruals for the Organizational Redesign Plan are included in “Accrued expenses and other current liabilities”. The table below presents a rollforward of our accruals for the Organizational
Redesign Plan.
Costs incurred under the Company’s other reorganization and realignment plans were not material during the nine months ended October 1, 2023 and October 2, 2022. The Company does not expect to incur any material additional costs under these plans.
Wendy’s has a i50% share in a partnership in a Canadian restaurant real estate joint venture (“TimWen”) with a subsidiary of Restaurant Brands International Inc., a quick-service restaurant company that owns the Tim Hortons® brand (Tim Hortonsis a registered trademark of Tim Hortons USA Inc.). The Company has significant influence over
this investee. Such investment is accounted for using the equity method, under which our results of operations include our share of the income of the investee in “Other operating income, net.”
i
Presented below is activity related to our investment in TimWen included in our condensed consolidated financial statements:
Foreign
currency translation adjustment included in “Other comprehensive (loss) income” and other
i151
(i3,027)
Balance
at end of period
$
i32,723
$
i33,375
_______________
(a)Purchase
price adjustments that impacted the carrying value of the Company’s investment in TimWen are being amortized over the average original aggregate life of ii21/
years.
/
Other Investments in Equity Securities
During 2021, the Company made an investment in equity securities of $i10,000 and, during the nine months ended October 2,
2022, recognized a gain of $i2,107 as a result of an observable price change for a similar investment of the same issuer. During the nine months ended October 1, 2023, the Company recorded impairment charges of $i10,389
for the difference between the estimated fair value and the carrying value of the investment.
(b)Wendy’s ii7/%
debentures are unsecured and were reduced to fair value in connection with the 2008 merger of Triarc Companies, Inc. and Wendy’s International, Inc. (the “Wendy’s Merger”). The fair value adjustment is being accreted and the related charge included in “Interest expense, net” until the debentures mature. During the nine months ended October 1, 2023, Wendy’s repurchased $i39,266 in principal of its ii7/%
debentures for $i39,343. As a result, the Company recognized a loss on early extinguishment of debt of $i1,585 during the nine months
ended October 1, 2023. Subsequent to October 1, 2023 through October 26, 2023, the Company repurchased $i1,164 in principal of its ii7/%
debentures for $i1,174.
(7) iFair Value Measurements
Fair
value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Valuation techniques under the accounting guidance related to fair value measurements are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect our market assumptions. These inputs are classified into the following hierarchy:
•Level 1 Inputs - Quoted prices for identical assets or liabilities in active markets.
•Level 2 Inputs - Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not
active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
•Level 3 Inputs - Pricing inputs are unobservable for the assets or liabilities and include situations where there is little, if any, market activity for the assets or liabilities. The inputs into the determination of fair value require significant management judgment or estimation.
(a)The fair value of our other investments in equity securities is based on our review of information provided by the investment manager, which was based on observable price changes.
(b)The fair values were based on quoted market prices in markets that are not considered active markets.
/
The carrying amounts of cash, accounts payable and accrued expenses approximate fair value due to the short-term nature of those items. The carrying amounts of accounts
and notes receivable, net (both current and non-current) approximate fair value due to the effect of the related allowance for doubtful accounts. Our cash equivalents are the only financial assets measured and recorded at fair value on a recurring basis.
Non-Recurring Fair Value Measurements
Assets and liabilities remeasured to fair value on a non-recurring basis resulted in impairment that we have recorded to “Impairment of long-lived assets” in our condensed consolidated statements of operations.
Total impairment losses may reflect the impact of remeasuring long-lived assets held and used (including land, buildings, leasehold improvements, favorable lease assets and right-of-use assets) to fair value as a result of (1) the deterioration
in operating performance of certain Company-operated restaurants and (2) the Company’s decision to lease and/or sublease the land and/or buildings to franchisees in connection with the sale or anticipated sale of restaurants, including any subsequent lease modifications. The fair values of long-lived assets held and used presented in the tables below represent the remaining carrying value and were estimated based on either discounted cash flows of future anticipated lease and sublease income or discounted cash flows of future anticipated Company-operated restaurant performance.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
Total impairment losses may also include the impact of remeasuring long-lived assets held for sale. The fair values of long-lived assets held for sale presented in the tables below represent the remaining carrying value and were estimated based on current market values. See Note 8 for further information on impairment of our long-lived assets.
The Company records impairment charges as a result of (1) the deterioration in operating performance of certain Company-operated restaurants, (2) the Company’s decision to lease and/or sublease properties to franchisees in connection with the sale or anticipated sale of Company-operated restaurants, including any subsequent lease modifications and (3) closing Company-operated
restaurants and classifying such surplus properties as held for sale.
i
The following is a summary of impairment losses recorded, which represent the excess of the carrying amount over the fair value of the affected assets and are included in “Impairment of long-lived assets:”
The Company’s effective tax rate for the three months ended October 1, 2023 and October 2, 2022 was i25.5%
and i26.9%, respectively. The Company’s effective tax rate varied from the U.S. federal statutory rate of i21% for
the three months ended October 1, 2023 primarily due to state income taxes, including discrete changes to state deferred income taxes.
The Company’s effective tax rate for the nine months ended October 1, 2023 and October 2, 2022 was i25.8% and i26.6%,
respectively. The Company’s effective tax rate varied from the U.S. federal statutory rate of i21% for the nine months ended October 1, 2023 primarily due to state income taxes, including discrete changes to state deferred income taxes, and a one-time adjustment to our foreign deferred income taxes related to prior periods.
There were iiiino///
significant changes to the unrecognized tax benefits or related interest and penalties for the three and nine months ended October 1, 2023. During the next twelve months, we believe it is reasonably possible the Company will reduce unrecognized tax benefits by up to $i582 due to lapses of statutes of limitations.
The current portion of refundable income taxes was $i8,062
and $i3,236 as of October 1, 2023 and January 1, 2023, respectively, and is included in “Accounts and notes receivable, net.” There were iino/
long-term refundable income taxes as of October 1, 2023 and January 1, 2023.
Dilutive
effect of stock options and restricted shares
i1,768
i1,796
i2,185
i1,971
Weighted
average diluted shares outstanding
i210,602
i214,601
i212,853
i216,003
Net
income per share:
Basic
$
i.28
$
i.24
$
i.75
$
i.64
Diluted
$
i.28
$
i.24
$
i.74
$
i.63
/
Basic
net income per share for the three and nine months ended October 1, 2023 and October 2, 2022 was computed by dividing net income amounts by the weighted average number of shares of common stock outstanding. Diluted net income per share was computed by dividing net income by the weighted average number of basic shares outstanding plus the potential common share effect of dilutive stock options and restricted shares. We excluded potential common shares of i5,204
and i4,719 for the three and nine months ended October 1, 2023, respectively, and i4,298
and i4,377 for the three and nine months ended October 2, 2022, respectively, from our diluted net income per share calculation as they would have had anti-dilutive effects.
(11) iStockholders’
Equity
Dividends
During each of the first, second and third quarters of 2023, the Company paid dividends per share of $iii.25//. During
each of the first, second and third quarters of 2022, the Company paid dividends per share of $iii.125//.
Repurchases
of Common Stock
In January 2023, our Board of Directors authorized a repurchase program for up to $i500,000 of our common stock through February 28, 2027, when and if market conditions warrant and to the extent legally permissible (the “January 2023 Authorization”). During the nine months ended October 1, 2023, the Company
repurchased i6,730 shares under the January 2023 Authorization with an aggregate purchase price of $i144,320, of which $i2,001
was accrued as of October 1, 2023, and excluding excise tax of $i1,293 and commissions of $i94. As of October 1, 2023, the
Company had $i355,680 of availability remaining under the January 2023 Authorization. Subsequent to October 1, 2023 through October 26, 2023, the Company repurchased i1,232
shares under the January 2023 Authorization with an aggregate purchase price of $i23,596, excluding applicable excise tax and commissions.
In February 2022, our Board of Directors authorized a repurchase program for up to $i100,000
of our common stock through February 28, 2023, when and if market conditions warranted and to the extent legally permissible (the “February 2022 Authorization”). In April 2022, the Company’s Board of Directors approved an increase of $i150,000 to the February 2022 Authorization, resulting in an aggregate authorization of $i250,000
that was set to expire on February 28, 2023. During the nine months ended October 2, 2022, the Company repurchased i2,759 shares under the February 2022 Authorization with an aggregate purchase price of $i51,911,
excluding commissions of $i39. In connection with the January 2023 Authorization, the remaining portion of the February 2022 Authorization was canceled.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
In February 2020, our Board of Directors authorized a repurchase program for up to $i100,000 of our common stock through February 28, 2021, when and if market conditions warranted and to the extent legally permissible (the “February 2020 Authorization”). In July 2020, the
Company’s Board of Directors approved an extension of the February 2020 Authorization by one year, through February 28, 2022. In addition, the Board of Directors approved increases totaling $i200,000 to the February 2020 Authorization, resulting in an aggregate authorization of $i300,000
that continued to expire on February 28, 2022. In November 2021, the Company entered into an accelerated share repurchase agreement (the “2021 ASR Agreement”) with a third-party financial institution to repurchase common stock as part of the February 2020 Authorization. Under the 2021 ASR Agreement, the Company paid the financial institution an initial purchase price of $i125,000
in cash and received an initial delivery of i4,910 shares of common stock, representing an estimated i85% of the total shares expected to be delivered under the 2021 ASR Agreement. In February 2022, the
Company completed the 2021 ASR Agreement and received an additional i715 shares of common stock. The total number of shares of common stock ultimately purchased by the Company under the 2021 ASR Agreement was based on the average of the daily volume-weighted average prices of the common stock during the term of the 2021 ASR Agreement, less an agreed upon discount. In total, i5,625
shares were delivered under the 2021 ASR Agreement at an average purchase price of $i22.22 per share. With the completion of the 2021 ASR Agreement in February 2022 as described above, the Company completed the February 2020 Authorization.
Accumulated Other Comprehensive Loss
i
The
following table provides a rollforward of accumulated other comprehensive loss, which is entirely comprised of foreign currency translation:
The Company operates restaurants that are located on sites owned by us and sites leased by us from third parties. In addition, the Company owns sites and leases sites from third parties, which it leases and/or subleases to franchisees. At October 1, 2023,
Wendy’s and its franchisees operated i7,166 Wendy’s restaurants. Of the i415 Company-operated Wendy’s restaurants, Wendy’s owned the land and building for i159
restaurants, owned the building and held long-term land leases for i144 restaurants and held leases covering the land and building for i112 restaurants. Wendy’s also owned i488
and leased i1,186 properties that were either leased or subleased principally to franchisees. The Company also leases restaurant, office and transportation equipment.
(a)Includes
expenses for executory costs of $i9,777 and $i8,943 for the three months ended October 1, 2023 and October 2, 2022, respectively, and $i29,797
and $i27,796 for the nine months ended October 1, 2023 and October 2, 2022, respectively, for which the Company is reimbursed by sublessees.
(b)Includes $i31,824
and $i31,559 for the three months ended October 1, 2023 and October 2, 2022, respectively, and $i94,751 and $i92,555
for the nine months ended October 1, 2023 and October 2, 2022, respectively, recorded to “Franchise rental expense” for leased properties that are subsequently leased to franchisees. Also includes $i7,570 and $i7,357
for the three months ended October 1, 2023 and October 2, 2022, respectively, and $i22,981 and $i22,130 for the nine months ended October 1,
2023 and October 2, 2022, respectively, recorded to “Cost of sales” for leases for Company-operated restaurants.
(b)Includes sublease income of $i42,545 and $i43,540 recognized during the three months ended October 1, 2023 and October 2,
2022, respectively, and $i128,457 and $i130,394 recognized during the nine months ended October 1, 2023 and October 2, 2022, respectively. Sublease income includes lessees’ variable payments to the
Company for executory costs of $i9,811 and $i8,947 for the three months ended October 1, 2023 and October 2, 2022, respectively, and $i29,704
and $i27,732 for the nine months ended October 1, 2023 and October 2, 2022, respectively.
Reconciliation of cash, cash equivalents and restricted cash at end of period:
Cash and cash equivalents
$
i598,025
$
i745,889
Restricted
cash
i36,727
i35,203
Restricted
cash, included in Advertising funds restricted assets
i38,125
i50,709
Total
cash, cash equivalents and restricted cash
$
i672,877
$
i831,801
/
(14)
iTransactions with Related Parties
Except as described below, the Company did not have any significant changes in or transactions with its related parties during the current fiscal period since those reported in the Form 10-K.
TimWen Lease and Management Fee Payments
A wholly-owned subsidiary of Wendy’s
leases restaurant facilities from TimWen, which are then subleased to franchisees for the operation of Wendy’s/Tim Hortons combo units in Canada. Wendy’s paid TimWen $i15,713 and $i15,148 under these lease agreements during the nine months ended October 1,
2023 and October 2, 2022, respectively, which has been recorded to “Franchise rental expense.” In addition, TimWen paid Wendy’s a management fee under the TimWen joint venture agreement of $i181 and $i166 during the nine months ended October 1, 2023 and
October 2, 2022, respectively, which has been included as a reduction to “General and administrative.”
Transactions with Yellow Cab
Certain family members and affiliates of Mr. Nelson Peltz, our Chairman, and Mr. Peter May, our Senior Vice Chairman, as well as Mr. Matthew Peltz, our Vice Chairman, hold indirect, minority ownership interests in Yellow Cab Holdings, LLC (“Yellow Cab”) and operating companies managed by Yellow Cab, a Wendy’s franchisee, that as of October 1, 2023 owned and operated i83
Wendy’s restaurants. During the nine months ended October 1, 2023 and October 2, 2022, the Company recognized $i11,143 and $i9,942,
respectively, in royalty, advertising fund, lease and other income from Yellow Cab and related entities. As of October 1, 2023 and January 1, 2023, $i1,116 and $i1,125,
respectively, was due from Yellow Cab for such income, which is included in “Accounts and notes receivable, net” and “Advertising funds restricted assets.”
Transactions with AMC
In February 2023, Ms. Kristin Dolan, a director of the Company, was appointed as the Chief Executive Officer of AMC Networks Inc. (“AMC”). During the nine months ended October 1, 2023, the Company purchased approximately $i1,800
of advertising time from a subsidiary of AMC. As of October 1, 2023, approximately $i16 was due to AMC for advertising time, which is included in “Advertising funds restricted liabilities.”
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(15) iGuarantees and Other Commitments and Contingencies
Except
as described below, the Company did not have any significant changes in guarantees and other commitments and contingencies during the current fiscal period since those reported in the Form 10-K. Refer to the Form 10-K for further information regarding the Company’s additional commitments and obligations.
Franchisee Image Activation Incentive Programs
To promote new restaurant development, Wendy’s has provided franchisees with certain incentive programs for qualifying new restaurants. In February 2023, Wendy’s announced a new restaurant development incentive program in the U.S. and Canada that provides for waivers of royalty, national advertising and
technical assistance fees for up to the first ithree years of operation for qualifying new restaurants (referred to as the “Pacesetter” program). Wendy’s previously offered and will continue to offer a restaurant development incentive program that provides for reductions in royalty and national advertising fees for up to the first itwo
years of operation for qualifying new restaurants (referred to as the “Groundbreaker” program). Wendy’s U.S. and Canadian franchisees may elect either the Pacesetter program or the Groundbreaker program when committing to new multi-unit development agreements or adding incremental commitments to existing development agreements. Wendy’s also provides franchisees with the option of an early i20-year or i25-year
renewal of their franchise agreement upon completion of reimaging utilizing certain approved Image Activation reimage designs.
Lease Guarantees
Wendy’s has guaranteed the performance of certain leases and other obligations, primarily from former Company-operated restaurant locations now operated by franchisees, amounting to $i92,673 as of October 1, 2023. These leases extend through
2045. We have had no judgments against us as guarantor of these leases as of October 1, 2023. In the event of default by a franchise owner where Wendy’s is called upon to perform under its guarantee, Wendy’s has the ability to pursue repayment from the franchise owner. The liability recorded for our probable exposure associated with these lease guarantees was not material as of October 1, 2023.
Letters of Credit
As of October 1, 2023, the Company had outstanding letters of credit with various parties totaling $i28,843. Substantially
all of the outstanding letters of credit include amounts outstanding against the 2021-1 Variable Funding Senior Secured Notes, Class A-1. We do not expect any material loss to result from these letters of credit.
(16) iLegal and Environmental Matters
The Company is involved in litigation
and claims incidental to our business. We provide accruals for such litigation and claims when we determine it is probable that a liability has been incurred and the loss is reasonably estimable. The Company believes it has adequate accruals for all of our legal and environmental matters. We cannot estimate the aggregate possible range of loss for our existing litigation and claims due to various reasons, including, but not limited to, many proceedings being in preliminary stages, with various motions either yet to be submitted or pending, discovery yet to occur and significant factual matters unresolved. In addition, most cases seek an indeterminate amount of damages and many involve multiple parties. Predicting the outcomes of settlement discussions or judicial or arbitral decisions is thus inherently difficult and future developments could cause these actions or claims, individually
or in aggregate, to have a material adverse effect on the Company’s financial condition, results of operations, or cash flows of a particular reporting period.
Depreciation
and amortization (exclusive of amortization of cloud computing arrangements shown separately below)
(i34,288)
(i34,252)
(i101,258)
(i100,911)
Amortization
of cloud computing arrangements
(i3,844)
(i888)
(i7,692)
(i888)
System
optimization gains, net
i120
i452
i119
i4,138
Reorganization
and realignment costs
(i611)
(i8)
(i8,100)
(i628)
Impairment
of long-lived assets
(i59)
(i206)
(i513)
(i2,682)
Unallocated
other operating income, net
i52
i8,590
i180
i8,911
Interest
expense, net
(i30,957)
(i31,916)
(i93,798)
(i90,406)
Loss
on early extinguishment of debt
(i319)
i—
(i1,585)
i—
Investment
(loss) income, net
i—
i—
(i10,389)
i2,107
Other
income, net
i7,637
i2,910
i22,546
i4,355
Income
before income taxes
$
i77,964
$
i69,129
$
i212,129
$
i185,353
_______________
(a)Wendy’s
U.S. includes advertising funds expense of $i2,779 and $i8,101 for the three and nine months ended October 2, 2022, respectively, related to the
Company’s funding of incremental advertising.
(b)Wendy’s International includes advertising funds expense of $i596 and $i1,802
for the three and nine months ended October 1, 2023, respectively, and $i1,002 and $i2,924 for the three and nine months ended October 2,
2022, respectively, related to the Company’s funding of incremental advertising in Canada. In addition, Wendy’s International includes other international-related advertising surplus (deficit) of $i535 and $(i789) for the three and nine months ended October 1,
2023, respectively, and $i538 and $(i984) for the three and nine months ended October 2, 2022, respectively.
(c)Includes corporate overhead costs, such as employee compensation and related benefits.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(18)iNew Accounting Standards
New
Accounting Standards
Common-Control Lease Arrangements
In March 2023, the Financial Accounting Standards Board (“FASB”) issued an update to amend certain lease accounting guidance that applies to arrangements between related parties under common control. The amendment requires a lessee in a common-control lease arrangement to amortize leasehold improvements that it owns over the useful life of the improvements to the common-control group, regardless of the lease term, if the lessee continues to control the use of the underlying asset through a lease. The standard is effective beginning with our 2024 fiscal year. The Company does not expect the guidance to have a material impact on our condensed consolidated financial
statements.
New Accounting Standards Adopted
Reference Rate Reform
In March 2020, the FASB issued guidance to provide temporary optional expedients and exceptions to current reference rate reform guidance to ease the financial reporting burdens related to the market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates. During the nine months ended October 1, 2023, certain of the Company’s subsidiaries executed amendments to the
2021-1 Variable Funding Senior Secured Notes, Class A-1 and the U.S. advertising fund revolving line of credit to transition from LIBOR to the Secured Overnight Financing Rate (“SOFR”), plus any applicable margin. In connection with these contract amendments, the Company adopted the reference rate reform guidance during the second quarter of 2023. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements.
Business Combinations
In October 2021, the FASB issued an amendment to improve the accounting for revenue contracts
with customers acquired in a business combination. The amendment requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with current revenue recognition guidance as if the acquirer had originated the contracts. The Company adopted this amendment during the first quarter of 2023. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements.
25
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Introduction
This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of The Wendy’s Company (“The Wendy’s Company” and, together with its subsidiaries, the “Company,”“we,”“us,” or “our”) should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and the related notes included elsewhere within this report and “Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended January 1, 2023 (the “Form 10-K”). There have been no material changes as of October 1, 2023 to the application of our critical accounting policies as described in Item 7 of the Form 10-K. Certain statements we make under this Item 2 constitute “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. See “Special Note Regarding Forward-Looking Statements and Projections” in “Part II. Other Information” of this report. You should consider our forward-looking statements in light of the risks discussed in “Item 1A. Risk Factors” in “Part II. Other Information” of this report and our unaudited condensed consolidated financial statements, related notes and other financial information appearing elsewhere
in this report, the Form 10-K and our other filings with the Securities and Exchange Commission (the “SEC”).
The Wendy’s Company is the parent company of its 100% owned subsidiary holding company, Wendy’s Restaurants, LLC (“Wendy’s Restaurants”). Wendy’s Restaurants is the parent company of Wendy’s International, LLC (formerly known as Wendy’s International, Inc). Wendy’s International, LLC is the indirect parent company of (1) Quality Is Our Recipe, LLC (“Quality”), which is the owner and franchisor of the Wendy’s restaurant system in the United States (the “U.S.”) and all international jurisdictions except for Canada, and (2) Wendy’s Restaurants of Canada Inc., which is the owner and franchisor of the Wendy’s restaurant system in Canada. As used herein, unless the context requires otherwise, the term “Company” refers to The Wendy’s Company and its
direct and indirect subsidiaries, and “Wendy’s” refers to Quality when the context relates to the ownership or franchising of the Wendy’s restaurant system and to Wendy’s International, LLC when the context refers to the Wendy’s brand.
Wendy’s is primarily engaged in the business of operating, developing and franchising a system of distinctive quick-service restaurants serving high quality food. Wendy’s opened its first restaurant in Columbus, Ohio in 1969. Today, Wendy’s is the second largest quick-service restaurant company in the hamburger sandwich segment in the U.S. based on traffic share, and the third largest globally with 7,166 restaurants in the U.S. and 32 foreign countries and U.S. territories as of October 1, 2023.
Each
Wendy’s restaurant offers an extensive menu specializing in hamburger sandwiches and featuring filet of chicken breast sandwiches, which are prepared to order with the customer’s choice of toppings and condiments. Wendy’s menu also includes chicken nuggets, chili, french fries, baked potatoes, freshly prepared salads, soft drinks, Frosty® desserts and kids’ meals. In addition, Wendy’s restaurants sell a variety of promotional products on a limited time basis. Wendy’s also offers breakfast across the U.S. system and in Canada. Wendy’s breakfast menu features a variety of breakfast sandwiches such as the Breakfast Baconator® and sides such as seasoned potatoes.
The Company is comprised of the following segments:
(1) Wendy’s U.S., (2) Wendy’s International and (3) Global Real Estate & Development. Wendy’s U.S. includes the operation and franchising of Wendy’s restaurants in the U.S. and derives its revenues from sales at Company-operated restaurants and royalties, fees and advertising fund collections from franchised restaurants. Wendy’s International includes the operation and franchising of Wendy’s restaurants in countries and territories other than the U.S. and derives its revenues from sales at Company-operated restaurants and royalties, fees and advertising fund collections from franchised restaurants. Global Real Estate & Development includes real estate activity for owned sites and sites leased from third parties, which are leased and/or subleased to franchisees, and also includes our share of the income of our TimWen real estate joint venture. In addition, Global Real Estate & Development earns fees from facilitating franchisee-to-franchisee restaurant
transfers (“Franchise Flips”) and providing other development-related services to franchisees. In this “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations,”the Company reports on the segment profit for each of the three segments described above. The Company measures segment profit using segment adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”). Segment adjusted EBITDA excludes certain unallocated general and administrative expenses and other items that vary from period to period without correlation to
26
the
Company’s core operating performance. See “Results of Operations” below and Note 17 to the Condensed Consolidated Financial Statements contained in Item 1 herein for segment financial information.
The Company’s fiscal reporting periods consist of 52 or 53 weeks ending on the Sunday closest to December 31. All three- and nine-month periods presented herein contain 13 weeks and 39 weeks, respectively. All references to years, quarters and months relate to fiscal periods rather than calendar periods.
Executive Overview
Our Business
As of October 1,
2023, the Wendy’s restaurant system was comprised of 7,166 restaurants, with 6,010 Wendy’s restaurants in operation in the U.S. Of the U.S. restaurants, 403 were operated by the Company and 5,607 were operated by a total of 215 franchisees. In addition, at October 1, 2023, there were 1,156 Wendy’s restaurants in operation in 32 foreign countries and U.S. territories. Of the international restaurants, 1,144 were operated by a total of 106 franchisees and 12 were operated by the Company in the United Kingdom (the “U.K.”).
The revenues from our restaurant business are derived from two principal sources: (1) sales at Company-operated restaurants and (2) franchise-related
revenues, including royalties, national advertising funds contributions, rents and franchise fees received from Wendy’s franchised restaurants. Company-operated restaurants comprised approximately 5% of the total Wendy’s system as of October 1, 2023.
Wendy’s operating results are impacted by a number of external factors, including commodity costs, labor costs, intense price competition, unemployment and consumer spending levels, general economic and market trends and weather.
Wendy’s long-term growth opportunities include delivering accelerated global growth through (1) driving strong same-restaurant sales momentum across all dayparts, (2) accelerating our implementation of consumer-facing digital platforms and technologies and (3) expanding the
Company’s footprint through global restaurant expansion.
Key Business Measures
We track our results of operations and manage our business using the following key business measures, which includes a non-GAAP financial measure:
•Same-Restaurant Sales - We report same-restaurant sales commencing after new restaurants have been open for 15 continuous months and as soon as reimaged restaurants reopen. Restaurants temporarily closed for more than one week are excluded from same-restaurant sales. The table summarizing same-restaurant sales below in “Results of Operations” provides the same-restaurant sales percent changes.
•Restaurant
Margin - We define restaurant margin 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. Cost of sales excludes certain costs that support restaurant operations that are not allocated to individual restaurants, which are included in “General and administrative.” Cost of sales also excludes depreciation and amortization expense and impairment of long-lived assets. Therefore, as restaurant margin as presented excludes certain costs as described above, its usefulness may be limited and may not be comparable to other similarly titled measures of other companies in our industry.
Restaurant margin is influenced by factors such as price increases, the effectiveness of our advertising and marketing initiatives, featured
products, product mix, fluctuations in food and labor costs, restaurant openings, remodels and closures and the level of our fixed and semi-variable costs.
•Systemwide Sales - Systemwide sales is a non-GAAP financial measure, which includes sales by both Company-operated restaurants and franchised restaurants. Franchised restaurants’ sales are reported by our franchisees and represent their revenues from sales at franchised Wendy’s restaurants. The Company’s consolidated financial statements do not include sales by franchised restaurants to their customers. The Company’s royalty and advertising funds revenues are computed as percentages of sales made by Wendy’s franchisees. As a result, sales by
Wendy’s franchisees have a direct effect on the Company’s royalty and advertising funds revenues and profitability.
27
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.
Same-restaurant sales and systemwide sales exclude sales from Argentina due to that country’s highly inflationary economy. The Company considers economies that have had cumulative inflation in excess of 100% over a three-year period as highly inflationary.
The Company believes its presentation of same-restaurant sales, restaurant margin and systemwide sales provide a meaningful perspective of the underlying operating performance of the Company’s current business and enables investors to better understand and evaluate the
Company’s historical and prospective operating performance. The Company believes that these metrics are important supplemental measures of operating performance because they highlight trends in the Company’s business that may not otherwise be apparent when relying solely on GAAP financial measures. The Company believes investors, analysts and other interested parties use these metrics in evaluating issuers and that the presentation of these measures facilitates a comparative assessment of the Company’s operating performance. With respect to same-restaurant sales and systemwide sales, the
Company also believes that the data is useful in assessing consumer demand for the Company’s products and the overall success of the Wendy’s brand.
The non-GAAP financial measure discussed above does not replace the presentation of the Company’s financial results in accordance with GAAP. Because all companies do not calculate non-GAAP financial measures in the same way, this measure as used by other companies may not be consistent with the way the Company calculates such measure.
Third Quarter Financial Highlights
•Revenue
increased 3.4% to $550.6 million in the third quarter of 2023 compared with $532.6 million in the third quarter of 2022;
•Global same-restaurant sales increased 2.8%, U.S. same-restaurant sales increased 2.2% and international same-restaurant sales increased 7.8% compared with the third quarter of 2022. On a two-year basis, global same-restaurant sales increased 9.7%;
•Global Company-operated restaurant margin was 15.0% in the third quarter of 2023, an increase of 70 basis points compared with the third quarter of 2022; and
•Net income increased 14.9% to $58.0 million in the third quarter of 2023 compared with $50.5 million in the third quarter of 2022.
Year-to-Date
Financial Highlights
•Revenue increased 5.3% to $1.64 billion in the first nine months of 2023 compared with $1.56 billion in the first nine months of 2022;
•Global same-restaurant sales increased 5.2%, U.S. same-restaurant sales increased 4.7% and international same-restaurant sales increased 9.4% compared with the first nine months of 2022. On a two-year basis, global same-restaurant sales increased 9.6%;
•Global Company-operated restaurant margin was 15.1% in the first nine months of 2023, an increase of 160 basis points compared with the first nine months of 2022; and
•Net
income increased 15.7% to $157.5 million in the first nine months of 2023 compared with $136.1 million in the first nine months of 2022.
Global Same-Restaurant Sales
Wendy’s long-term growth opportunities include driving strong same-restaurant sales momentum across all dayparts through our ownable core products, exciting menu innovation, compelling value offerings and improvements in speed, consistency and accuracy in our restaurants. Global same-restaurant sales increased 2.8% in the third quarter of 2023 and
28
increased 9.7% on a two-year basis. Global same-restaurant sales increased 5.2% in the
first nine months of 2023 and increased 9.6% on a two-year basis.
Digital
Wendy’s long-term growth opportunities include accelerated implementation of consumer-facing digital platforms and technologies. The Company has invested significant resources to focus on consumer-facing technology, including activating mobile ordering via Wendy’s mobile app, launching the Wendy’s Rewards loyalty program in the U.S. and Canada and establishing delivery agreements with third-party vendors. The Company is also partnering with key technology providers to help execute our digital, restaurant technology and enterprise technology initiatives and support our
technology innovation and growth. During the second quarter of 2023, the Company revised its definition of digital sales to reflect our full digital portfolio by including in-restaurant mobile scans, in addition to our previously included delivery, mobile order and kiosk digital channels. Under the revised definition, the Company’s digital business represented approximately 12.8% and 10.7% of global systemwide sales during the nine months ended October 1, 2023 and October 2, 2022, respectively.
New Restaurant Development
Wendy’s long-term growth
opportunities include expanding the Company’s footprint through global restaurant expansion. To promote new restaurant development, the Company has provided franchisees with certain incentive programs for qualifying new restaurants, in addition to our $100.0 million build to suit development fund. In February 2023, the Company announced a new restaurant development incentive program in the U.S. and Canada that provides for waivers of royalty, national advertising and technical assistance fees for up to the first three years of operation for qualifying new restaurants. In addition, the Company has development agreements in place with a number
of franchisees that contractually obligate such franchisees to open additional Wendy’s restaurants over a specified timeframe. During the nine months ended October 1, 2023, the Company and its franchisees added 71 net new restaurants across the Wendy’s system.
Organizational Redesign
In February 2023, the Board of Directors approved a plan to redesign the Company’s organizational structure to better support the execution of the Company’s long-term growth strategy by maximizing organizational efficiency and streamlining
decision making (the “Organizational Redesign Plan”). As a result of the Organizational Redesign Plan, the Company expects to hold its general and administrative expense in 2023 and 2024 relatively flat compared with 2022. The Company expects to incur total costs of approximately $11 million to $13 million related to the Organizational Redesign Plan, of which approximately $9 million to $11 million will be cash expenditures. The cash expenditures are expected to continue into 2025, with approximately two-thirds of the total cash expenditures occurring in 2023. Costs related to the Organizational Redesign Plan are recorded to “Reorganization and realignment costs.” During the nine months ended October 1, 2023, the
Company recognized costs totaling $8.0 million, which primarily included severance and related employee costs and share-based compensation. The Company expects to incur additional costs aggregating approximately $3 million to $5 million, comprised of (1) severance and related employee costs of approximately $1.5 million, (2) recruitment and relocation costs of approximately $0.5 million, (3) third-party and other costs of approximately $0.5 million and (4) share-based compensation of approximately $1.5 million. The Company expects costs related to the Organizational Redesign Plan to continue into 2026, with approximately three-fourths of the total costs to be recognized during 2023.
29
Results
of Operations
The tables included throughout this Results of Operations set forth in millions the Company’s condensed consolidated results of operations for the third quarter and the first nine months of 2023 and 2022.
Third
Quarter
Nine Months
2023
2022
Change
2023
2022
Change
Revenues:
Sales
$
234.7
$
228.8
$
5.9
$
703.4
$
668.9
$
34.5
Franchise
royalty revenue and fees
149.4
141.7
7.7
444.0
414.2
29.8
Franchise rental income
57.6
58.5
(0.9)
173.4
174.9
(1.5)
Advertising
funds revenue
108.9
103.6
5.3
320.1
301.0
19.1
550.6
532.6
18.0
1,640.9
1,559.0
81.9
Costs
and expenses:
Cost of sales
199.5
196.2
3.3
597.1
578.5
18.6
Franchise
support and other costs
14.8
12.7
2.1
41.9
34.5
7.4
Franchise rental expense
31.9
31.7
0.2
94.9
92.7
2.2
Advertising
funds expense
107.9
108.3
(0.4)
319.2
317.0
2.2
General and administrative
59.3
62.5
(3.2)
184.3
186.5
(2.2)
Depreciation
and amortization (exclusive of amortization of cloud computing arrangements shown separately below)
34.3
34.3
—
101.3
100.9
0.4
Amortization of cloud computing arrangements
3.8
0.9
2.9
7.7
0.9
6.8
System
optimization gains, net
(0.1)
(0.5)
0.4
(0.1)
(4.1)
4.0
Reorganization and realignment costs
0.6
—
0.6
8.1
0.6
7.5
Impairment
of long-lived assets
0.1
0.2
(0.1)
0.5
2.7
(2.2)
Other operating income, net
(3.1)
(11.8)
8.7
(9.4)
(20.5)
11.1
449.0
434.5
14.5
1,345.5
1,289.7
55.8
Operating
profit
101.6
98.1
3.5
295.4
269.3
26.1
Interest expense, net
(31.0)
(31.9)
0.9
(93.8)
(90.4)
(3.4)
Loss
on early extinguishment of debt
(0.3)
—
(0.3)
(1.6)
—
(1.6)
Investment (loss) income, net
—
—
—
(10.4)
2.1
(12.5)
Other
income, net
7.7
2.9
4.8
22.5
4.4
18.1
Income before income taxes
78.0
69.1
8.9
212.1
185.4
26.7
Provision
for income taxes
(20.0)
(18.6)
(1.4)
(54.6)
(49.3)
(5.3)
Net income
$
58.0
$
50.5
$
7.5
$
157.5
$
136.1
$
21.4
30
Third
Quarter
Nine Months
2023
% of Total Revenues
2022
% of Total Revenues
2023
% of Total Revenues
2022
% of Total Revenues
Revenues:
Sales
$
234.7
42.6
%
$
228.8
43.0
%
$
703.4
42.9
%
$
668.9
42.9
%
Franchise
royalty revenue and fees:
Franchise royalty revenue
130.1
23.6
%
124.5
23.4
%
384.3
23.5
%
361.4
23.2
%
Franchise
fees
19.3
3.5
%
17.2
3.2
%
59.7
3.6
%
52.8
3.4
%
Total
franchise royalty revenue and fees
149.4
27.1
%
141.7
26.6
%
444.0
27.1
%
414.2
26.6
%
Franchise
rental income
57.6
10.5
%
58.5
11.0
%
173.4
10.6
%
174.9
11.2
%
Advertising
funds revenue
108.9
19.8
%
103.6
19.4
%
320.1
19.5
%
301.0
19.3
%
Total
revenues
$
550.6
100.0
%
$
532.6
100.0
%
$
1,640.9
100.0
%
$
1,559.0
100.0
%
Third
Quarter
Nine Months
2023
% of Sales
2022
% of Sales
2023
% of Sales
2022
% of Sales
Cost of sales:
Food
and paper
$
74.5
31.7
%
$
75.0
32.8
%
$
224.1
31.9
%
$
219.6
32.8
%
Restaurant
labor
74.9
31.9
%
72.8
31.8
%
223.8
31.8
%
216.3
32.3
%
Occupancy,
advertising and other operating costs
50.1
21.4
%
48.4
21.1
%
149.2
21.2
%
142.6
21.4
%
Total
cost of sales
$
199.5
85.0
%
$
196.2
85.7
%
$
597.1
84.9
%
$
578.5
86.5
%
Third
Quarter
Nine Months
2023
% of Sales
2022
% of Sales
2023
% of Sales
2022
% of Sales
Company-operated restaurant margin:
U.S.
$
35.5
15.6
%
$
33.3
14.8
%
$
108.8
15.9
%
$
92.2
14.0
%
Global
35.2
15.0
%
32.6
14.3
%
106.3
15.1
%
90.4
13.5
%
31
The
table below presents certain of the Company’s key business measures, which are defined and further discussed in the “Executive Overview” section included herein.
Third Quarter
Nine Months
2023
2022
2023
2022
Key
business measures:
U.S. same-restaurant sales:
Company-operated
0.7
%
6.8
%
3.6
%
4.2
%
Franchised
2.3
%
6.3
%
4.8
%
3.2
%
Systemwide
2.2
%
6.4
%
4.7
%
3.3
%
International
same-restaurant sales (a)
7.8
%
10.8
%
9.4
%
13.3
%
Global same-restaurant sales:
Company-operated
1.0
%
6.8
%
3.8
%
4.2
%
Franchised
(a)
3.0
%
6.9
%
5.4
%
4.4
%
Systemwide (a)
2.8
%
6.9
%
5.2
%
4.4
%
Systemwide
sales (b):
U.S. Company-operated
$
227.7
$
225.2
$
685.2
$
659.6
U.S. franchised
2,885.3
2,780.6
8,557.2
8,058.9
U.S.
systemwide
3,113.0
3,005.8
9,242.4
8,718.5
International Company-operated
7.1
3.6
18.2
9.3
International
franchised (a)
460.3
409.7
1,328.6
1,182.7
International systemwide (a)
467.4
413.3
1,346.8
1,192.0
Global
systemwide (a)
$
3,580.4
$
3,419.1
$
10,589.2
$
9,910.5
_______________
(a)Excludes Argentina due to the impact of that country’s highly inflationary economy.
(b)During the third quarter of 2023 and 2022,
global systemwide sales increased 4.8% and 8.9%, respectively, U.S. systemwide sales increased 3.6% and 7.7%, respectively, and international systemwide sales increased 13.6% and 18.3%, respectively, on a constant currency basis. During the first nine months of 2023 and 2022, global systemwide sales increased 7.2% and 6.3%, respectively, U.S. systemwide sales increased 6.0% and 4.6%, respectively, and international systemwide sales increased 15.6% and 20.1%, respectively, on a constant currency basis.
The
increase in sales during the third quarter and the first nine months of 2023 was primarily due to (1) a 1.0% and 3.8% increase in global Company-operated same-restaurant sales of $3.5 million and $25.4 million, respectively, and (2) net new restaurant development of $2.5 million and $10.2 million, respectively. Company-operated same-restaurant sales increased due to higher average check, partially offset by a decrease in customer count.
Franchise
Royalty Revenue and Fees
Third Quarter
Nine Months
2023
2022
Change
2023
2022
Change
Franchise royalty revenue
$
130.1
$
124.5
$
5.6
$
384.3
$
361.4
$
22.9
Franchise
fees
19.3
17.2
2.1
59.7
52.8
6.9
$
149.4
$
141.7
$
7.7
$
444.0
$
414.2
$
29.8
Franchise
royalty revenue during the third quarter of 2023 increased $5.6 million, of which (1) $3.2 million was due to net new restaurant development and (2) $2.4 million was due to a 3.0% increase in global franchise same-restaurant sales. Franchise royalty revenue during the first nine months of 2023 increased $22.9 million, of which (1) $14.8 million was due to a 5.4% increase in global franchise same-restaurant sales and (2) $9.4 million was due to net new restaurant development. Franchise same-restaurant sales during the third quarter and the first nine months of 2023 increased due to higher average check, partially offset by a decrease in customer count.
The increase in franchise fees during the third quarter of 2023 was primarily due to higher fees for providing information technology services to franchisees of $1.9 million. The increase in franchise fees during the first nine months of
2023 was primarily due to (1) higher fees for providing information technology services to franchisees of $3.8 million and (2) an increase in fees as a result of Franchise Flips and other miscellaneous fees of $3.0 million.
33
Franchise
Rental Income
Third Quarter
Nine Months
2023
2022
Change
2023
2022
Change
Franchise rental income
$
57.6
$
58.5
$
(0.9)
$
173.4
$
174.9
$
(1.5)
The
decrease in franchise rental income during the third quarter and the first nine months of 2023 was primarily due to the impact of assigning certain leases to franchisees, partially offset by an increase in executory costs. See Note 12 to the Condensed Consolidated Financial Statements contained in Item 1 herein for further information.
Advertising
Funds Revenue
Third Quarter
Nine Months
2023
2022
Change
2023
2022
Change
Advertising funds revenue
$
108.9
$
103.6
$
5.3
$
320.1
$
301.0
$
19.1
The
increase in advertising funds revenue during the third quarter and the first nine months of 2023 was primarily due to an increase in franchise same-restaurant sales in the U.S. and Canada.
Cost
of Sales, as a Percent of Sales
Third Quarter
Nine Months
2023
2022
Change
2023
2022
Change
Food and paper
31.7
%
32.8
%
(1.1)
%
31.9
%
32.8
%
(0.9)
%
Restaurant
labor
31.9
%
31.8
%
0.1
%
31.8
%
32.3
%
(0.5)
%
Occupancy, advertising and other operating costs
21.4
%
21.1
%
0.3
%
21.2
%
21.4
%
(0.2)
%
85.0
%
85.7
%
(0.7)
%
84.9
%
86.5
%
(1.6)
%
The
decrease in cost of sales, as a percent of sales, during the third quarter and the first nine months of 2023 was primarily due to higher average check. This impact was partially offset by (1) an increase in restaurant labor rates, (2) a decrease in customer count, (3) higher commodity costs and (4) the impact of the Company’s investments to support the entry into the U.K. market and additional inflationary pressures in the U.K.
Franchise
Support and Other Costs
Third Quarter
Nine Months
2023
2022
Change
2023
2022
Change
Franchise support and other costs
$
14.8
$
12.7
$
2.1
$
41.9
$
34.5
$
7.4
The
increase in franchise support and other costs during the third quarter and the first nine months of 2023 was primarily due to an increase in costs incurred to provide information technology and other services to franchisees.
Franchise
Rental Expense
Third Quarter
Nine Months
2023
2022
Change
2023
2022
Change
Franchise rental expense
$
31.9
$
31.7
$
0.2
$
94.9
$
92.7
$
2.2
The
increase in franchise rental expense during the third quarter and the first nine months of 2023 was primarily due to an increase in executory costs. See Note 12 to the Condensed Consolidated Financial Statements contained in Item 1 herein for further information.
Advertising
Funds Expense
Third Quarter
Nine Months
2023
2022
Change
2023
2022
Change
Advertising funds expense
$
107.9
$
108.3
$
(0.4)
$
319.2
$
317.0
$
2.2
On
an interim basis, advertising funds expense is recognized in proportion to advertising funds revenue. The Company expects advertising funds expense to be lower than advertising funds revenue by approximately $3.0 million for 2023, which includes the amount by which advertising funds expense exceeded advertising funds revenue in prior years (excluding the Company’s funding of incremental advertising) of approximately $5.0 million, partially offset by the Company’s incremental funding of advertising in Canada of approximately $2.0 million.
34
The
decrease in advertising funds expense during the third quarter of 2023 was due to a decrease in the Company’s funding of incremental advertising, partially offset by an increase in franchise same-restaurant sales in the U.S. and Canada. The increase in advertising funds expense during the first nine months of 2023 was due to an increase in franchise same-restaurant sales in the U.S. and Canada, partially offset by a decrease in the Company’s funding of incremental advertising.
General
and Administrative
Third Quarter
Nine Months
2023
2022 (a)
Change
2023
2022 (a)
Change
Share-based compensation
$
6.4
$
5.0
$
1.4
$
15.7
$
17.5
$
(1.8)
Professional
fees
13.2
15.7
(2.5)
42.8
44.2
(1.4)
Incentive compensation
5.4
6.4
(1.0)
20.4
19.2
1.2
Other,
net
34.3
35.4
(1.1)
105.4
105.6
(0.2)
$
59.3
$
62.5
$
(3.2)
$
184.3
$
186.5
$
(2.2)
_______________
(a)Certain
reclassifications have been made to the prior year presentation to conform to the current year presentation.
The decrease in general and administrative expenses during the third quarter of 2023 was primarily due to a decrease in professional fees, primarily as a result of costs associated with the Company’s enterprise resource planning (“ERP”) system implementation during the third quarter of 2022.
The decrease in general and administrative expenses during the first nine months of 2023 was primarily due to (1) a decrease in share-based compensation and (2) lower professional fees, primarily as a result of costs associated with the Company’s
ERP system implementation during the first nine months of 2022. These decreases were partially offset by an increase in incentive compensation accruals, reflecting higher operating performance as compared to plan in 2023 versus 2022.
Depreciation
and Amortization (exclusive of amortization of cloud computing arrangements shown separately below)
Third Quarter
Nine Months
2023
2022
Change
2023
2022
Change
Restaurants
$
21.9
$
21.2
$
0.7
$
63.9
$
64.3
$
(0.4)
Technology
support, corporate and other
12.4
13.1
(0.7)
37.4
36.6
0.8
$
34.3
$
34.3
$
—
$
101.3
$
100.9
$
0.4
The
increase in depreciation and amortization during the first nine months of 2023 was primarily due to depreciation and amortization for technology investments and new restaurant assets, partially offset by assets becoming fully depreciated.
Amortization
of Cloud Computing Arrangements
Third Quarter
Nine Months
2023
2022
Change
2023
2022
Change
Amortization of cloud computing arrangements
$
3.8
$
0.9
$
2.9
$
7.7
$
0.9
$
6.8
Amortization
of cloud computing arrangements primarily represents amortization of assets associated with the Company’s ERP system implementation completed in the third quarter of 2022.
System
Optimization Gains, Net
Third Quarter
Nine Months
2023
2022
Change
2023
2022
Change
System optimization gains, net
$
(0.1)
$
(0.5)
$
0.4
$
(0.1)
$
(4.1)
$
4.0
System
optimization gains, net for the first nine months of 2022 were primarily comprised of post-closing adjustments on previous sales of restaurants. See Note 3 to the Condensed Consolidated Financial Statements contained in Item 1 herein for further information.
35
Reorganization
and Realignment Costs
Third Quarter
Nine Months
2023
2022
Change
2023
2022
Change
Organizational redesign
$
0.6
$
—
$
0.6
$
8.0
$
—
$
8.0
Other
reorganization and realignment plans
—
—
—
0.1
0.6
(0.5)
$
0.6
$
—
$
0.6
$
8.1
$
0.6
$
7.5
During
the first nine months of 2023, the Company recognized costs totaling $8.0 million under the Organizational Redesign Plan, which primarily included severance and related employee costs of $5.7 million and share-based compensation of $1.1 million. See Note 4 to the Condensed Consolidated Financial Statements contained in Item 1 herein for further information.
Costs incurred under the Company’s other reorganization and realignment plans were not material during the three and nine months ended October 1, 2023 and October 2, 2022. The Company does
not expect to incur any material additional costs under these plans.
Impairment of Long-Lived Assets
Third
Quarter
Nine Months
2023
2022
Change
2023
2022
Change
Impairment of long-lived assets
$
0.1
$
0.2
$
(0.1)
$
0.5
$
2.7
$
(2.2)
The
decrease in impairment of long-lived assets during the first nine months of 2023 was primarily due to higher impairment charges in the prior year as a result of the deterioration in operating performance of certain Company-operated restaurants.
Other
Operating Income, Net
Third Quarter
Nine Months
2023
2022
Change
2023
2022
Change
Gain from insurance recoveries
$
—
$
(8.6)
$
8.6
$
—
$
(8.6)
$
8.6
Lease
buyout
0.2
—
0.2
0.2
(2.1)
2.3
Other,
net
(3.3)
(3.2)
(0.1)
(9.6)
(9.8)
0.2
$
(3.1)
$
(11.8)
$
8.7
$
(9.4)
$
(20.5)
$
11.1
The
decrease in other operating income, net during the third quarter and the first nine months of 2023 was primarily due to a gain from insurance recoveries during the third quarter of 2022. Other operating income, net during the first nine months of 2023 also decreased due to prior year lease buyout activity.
Interest
Expense, Net
Third Quarter
Nine Months
2023
2022
Change
2023
2022
Change
Interest expense, net
$
31.0
$
31.9
$
(0.9)
$
93.8
$
90.4
$
3.4
The
decrease in interest expense, net during the third quarter of 2023 was primarily due to the impact of repurchasing $39.3 million in principal of the Company’s 7% debentures during the first nine months of 2023. The increase in interest expense, net during the first nine months of 2023 was primarily due to the impact of completing a debt financing transaction under the Company’s securitized financing facility in the first quarter of 2022, partially offset by the impact of repurchasing $39.3 million in principal of the Company’s 7% debentures during the first nine months of 2023.
36
Loss
on Early Extinguishment of Debt
Third Quarter
Nine Months
2023
2022
Change
2023
2022
Change
Loss on early extinguishment of debt
$
0.3
$
—
$
0.3
$
1.6
$
—
$
1.6
During
the first nine months of 2023, the Company incurred a loss on early extinguishment of debt of $1.6 million due to the repurchase of $39.3 million in principal of the Company’s 7% debentures.
Investment
(Loss) Income, Net
Third Quarter
Nine Months
2023
2022
Change
2023
2022
Change
Investment (loss) income, net
$
—
$
—
$
—
$
(10.4)
$
2.1
$
(12.5)
During
the first nine months of 2023, the Company recorded a loss of $10.4 million due to impairment charges for the difference between the estimated fair value and the carrying value of an investment in equity securities. During the first nine months of 2022, the Company recognized a gain of $2.1 million on an investment in equity securities as a result of an observable price change.
Other
Income, Net
Third Quarter
Nine Months
2023
2022
Change
2023
2022
Change
Other income, net
$
7.7
$
2.9
$
4.8
$
22.5
$
4.4
$
18.1
The
increase in other income, net during the third quarter and the first nine months of 2023 was primarily due to interest income earned on our cash equivalents, which increased as a result of cash received from our debt financing transaction under the Company’s securitized financing facility in the first quarter of 2022.
Provision
for Income Taxes
Third Quarter
Nine Months
2023
2022
Change
2023
2022
Change
Income before income taxes
$
78.0
$
69.1
$
8.9
$
212.1
$
185.4
$
26.7
Provision
for income taxes
(20.0)
(18.6)
(1.4)
(54.6)
(49.3)
(5.3)
Effective tax rate on income
25.5
%
26.9
%
(1.4)
%
25.8
%
26.6
%
(0.8)
%
Our
effective tax rates for the third quarter and the first nine months of 2023 and 2022 were impacted by variations in income before income taxes, adjusted for recurring items such as non-deductible expenses and state income taxes, as well as non-recurring discrete items. The decrease in the effective tax rate for the third quarter of 2023 compared with the third quarter of 2022 was primarily due to (1) a decrease in the tax effects of our foreign operations and (2) additional net income from our national advertising funds, which are not subject to tax. These decreases were partially offset by an increase in state income taxes, including discrete changes to state deferred income taxes. The decrease in the effective tax rate for the first nine months of 2023 compared with the first nine months of 2022 was primarily due to additional net income from our advertising funds, which are not subject to tax, partially offset by an increase in the tax effects of our foreign operations.
37
Segment
Information
See Note 17 to the Condensed Consolidated Financial Statements contained in Item 1 herein for further information regarding the Company’s segments.
Wendy’s U.S.
Third
Quarter
Nine Months
2023
2022
Change
2023
2022
Change
Sales
$
227.7
$
225.2
$
2.5
$
685.2
$
659.6
$
25.6
Franchise
royalty revenue
112.7
108.8
3.9
334.0
315.6
18.4
Franchise fees
17.0
15.3
1.7
51.8
46.7
5.1
Advertising
fund revenue
99.8
96.6
3.2
296.0
281.8
14.2
Total revenues
$
457.2
$
445.9
$
11.3
$
1,367.0
$
1,303.7
$
63.3
Segment
profit
$
134.9
$
123.7
$
11.2
$
403.1
$
355.5
$
47.6
The increase in Wendy’s U.S. revenues during the
third quarter and the first nine months of 2023 was primarily due to an increase in same-restaurant sales. Same-restaurant sales increased during the third quarter and the first nine months of 2023 primarily due to higher average check, partially offset by a decrease in customer count.
The increase in Wendy’s U.S. segment profit during the third quarter and the first nine months of 2023 was primarily due to (1) higher revenues, (2) lower cost of sales, as a percent of sales for Company-operated restaurants driven by the same factors as described above for “Cost of Sales, as a Percent of Sales” (excluding the impact of the U.K. market) and (3) a decrease in the recognition of the Company’s funding of incremental advertising.
Wendy’s
International
Third Quarter
Nine Months
2023
2022
Change
2023
2022
Change
Sales
$
7.1
$
3.5
$
3.6
$
18.2
$
9.3
$
8.9
Franchise
royalty revenue
17.4
15.8
1.6
50.4
45.7
4.7
Franchise fees
1.6
1.3
0.3
4.5
3.7
0.8
Advertising
fund revenue
9.1
6.9
2.2
24.1
19.2
4.9
Total revenues
$
35.2
$
27.5
$
7.7
$
97.2
$
77.9
$
19.3
Segment
profit
$
10.8
$
8.6
$
2.2
$
26.8
$
23.4
$
3.4
The increase in Wendy’s International revenues during the
third quarter and the first nine months of 2023 was primarily due to (1) net new restaurant development in the U.K. and (2) an increase in same-restaurant sales. Same-restaurant sales increased during the third quarter and the first nine months of 2023 due to (1) higher average check and (2) an increase in customer count.
The increase in Wendy’s International segment profit during the third quarter and the first nine months of 2023 was primarily due to higher revenues. This increase was partially offset by (1) higher franchise support and other costs, (2) the Company’s investments to support the entry into the U.K. market and inflationary pressures in the U.K and (3) other international advertising expenses.
38
Global
Real Estate & Development
Third Quarter
Nine Months
2023
2022
Change
2023
2022
Change
Franchise
fees
$
0.6
$
0.6
$
—
$
3.4
$
2.5
$
0.9
Franchise rental income
57.5
58.5
(1.0)
173.4
174.9
(1.5)
Total
revenues
$
58.1
$
59.1
$
(1.0)
$
176.8
$
177.4
$
(0.6)
Segment profit
$
24.4
$
25.9
$
(1.5)
$
76.0
$
80.8
$
(4.8)
The
decrease in Global Real Estate & Development revenues during the third quarter and the first nine months of 2023 was primarily due to the impact of assigning certain leases to franchisees, partially offset by an increase in executory costs.
The decrease in Global Real Estate & Development segment profit during the third quarter and the first nine months of 2023 was primarily due to (1) a decrease in franchise rental income, reflecting the impact of assigning certain leases to franchisees, and (2) lower gains on sales-type leases.
Liquidity and Capital Resources
Cash Flows
Our
primary sources of liquidity and capital resources are cash flows from operations and borrowings under our securitized financing facility. Our principal uses of cash are operating expenses, capital expenditures, repurchases of common stock, dividends to stockholders and repurchases of debt.
Our anticipated cash requirements for the remainder of 2023, exclusive of operating cash flow requirements, consist principally of:
•capital expenditures of approximately $25.0 million to $30.0 million, resulting in total anticipated cash capital expenditures for the year of approximately $80.0 million to $85.0 million;
•cash dividends aggregating approximately $51.6 million as discussed below
in “Dividends;”
•stock repurchases under the Company’s January 2023 Authorization as discussed below in “Stock Repurchases;” and
•debt repurchases under the Company’s February 2023 Authorization as discussed below in “Long-Term Debt, Including Current Portion.”
Based on current levels of operations, the Company expects that available cash and cash flows from operations will provide sufficient liquidity to meet
operating cash requirements for the next 12 months.
We currently believe we have the ability to pursue additional sources of liquidity if needed or desired to fund operating cash requirements or for other purposes. However, there can be no assurance that additional liquidity will be readily available or available on terms acceptable to us.
The table below summarizes our cash flows from operating, investing and financing activities for the first nine months of 2023 and 2022:
Nine
Months
2023
2022
Change
Net cash provided by (used in):
Operating activities
$
269.5
$
182.6
$
86.9
Investing
activities
(55.5)
(46.1)
(9.4)
Financing activities
(373.2)
324.5
(697.7)
Effect of exchange rate changes on cash
0.3
(7.1)
7.4
Net
(decrease) increase in cash, cash equivalents and restricted cash
$
(158.9)
$
453.9
$
(612.8)
39
Operating Activities
Cash provided by operating activities consists primarily of net income, adjusted for non-cash expenses such as depreciation and amortization, deferred
income tax and share-based compensation, and the net change in operating assets and liabilities. Cash provided by operating activities was $269.5 million and $182.6 million in the first nine months of 2023 and 2022, respectively. The change was primarily due to (1) higher net income, adjusted for non-cash expenses, and (2) a decrease in payments for incentive compensation.
Investing Activities
Cash used in investing activities was $55.5 million and $46.1 million in the first nine months of 2023 and 2022, respectively. The change was primarily due to (1) an increase in capital expenditures of $5.7 million and (2) a decrease in proceeds from dispositions of $3.5 million.
Financing Activities
Cash
(used in) provided by financing activities was $(373.2) million and $324.5 million in the first nine months of 2023 and 2022, respectively. The first nine months of 2023 was primarily comprised of (1) dividends of $157.9 million, (2) repurchases of common stock of $142.4 million and (3) long-term debt activities of $61.3 million, including the impact of repurchases of the Company’s 7% debentures during the first nine months of 2023. The first nine months of 2022 was primarily comprised of long-term debt activities of $470.3 million, reflecting the impact of the completion of the Company’s debt financing transaction during the first quarter of 2022, partially offset by (1) dividends of $80.2 million and (2) repurchases of common stock of $52.0 million.
Long-Term
Debt, Including Current Portion
During the nine months ended October 1, 2023, Wendy’s repurchased $39.3 million in principal of its 7% debentures for $39.3 million.
We may from time to time seek to repurchase additional portions of our outstanding long-term debt, including our 7% debentures and/or our senior secured notes, through open market purchases, privately negotiated transactions or otherwise. In December 2022, our Board of Directors authorized debt repurchases of up to $25.0 million and, in February 2023, our Board of Directors authorized additional debt repurchases of up to $50.0 million through February 2024 (the “February 2023 Authorization”), resulting in total debt repurchase authorizations of up to $75.0 million. As of October 1,
2023, the Company had completed the December 2022 debt repurchase authorization and had $35.7 million remaining under the February 2023 Authorization. Subsequent to October 1, 2023 through October 26, 2023, the Company repurchased $29.2 million and $1.2 million in principal of its Class A-2 senior secured notes and 7% debentures, respectively, for a total of $26.1 million. In addition, in October 2023, our Board of Directors approved an increase of $10.0 million to the February 2023 Authorization, which continues to expire in February 2024. Further repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. Whether or not
to repurchase any additional debt and the size and timing of any such repurchases will be determined at our discretion.
Except as described above, there were no material changes to the Company’s debt obligations since January 1, 2023. The Company was in compliance with its debt covenants as of October 1, 2023. See Note 6 to the Condensed Consolidated Financial Statements contained in Item 1 herein for further information related to our long-term debt obligations.
Dividends
On
March 15, 2023, June 15, 2023 and September 15, 2023, the Company paid quarterly cash dividends per share of $.25, aggregating $157.9 million. On November 2, 2023, the Company announced a dividend of $.25 per share to be paid on December 15, 2023 to stockholders of record as of December 1, 2023. As a result, the Company expects that its total cash requirement for the fourth quarter of 2023 will be approximately $51.6 million based
on the number of shares of its common stock outstanding at October 26, 2023. The Company currently intends to continue to declare and pay quarterly cash dividends; however, there can be no assurance that any additional quarterly dividends will be declared or paid or of the amount or timing of such dividends, if any.
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Stock Repurchases
In January 2023, our Board of Directors authorized a repurchase program for up to $500.0 million of our common stock through February
28, 2027, when and if market conditions warrant and to the extent legally permissible (the “January 2023 Authorization”). In connection with the January 2023 Authorization, the remaining portion of the previous February 2022 authorization for $250.0 million was canceled. During the nine months ended October 1, 2023, the Company repurchased 6.7 million shares under the January 2023 Authorization with an aggregate purchase price of $144.3 million, of which $2.0 million was accrued as of October 1, 2023, and excluding excise tax of $1.3 million and commissions of $0.1 million. As of October 1, 2023, the Company had $355.7 million of availability
remaining under the January 2023 Authorization. Subsequent to October 1, 2023 through October 26, 2023, the Company repurchased 1.2 million shares under the January 2023 Authorization with an aggregate purchase price of $23.6 million, excluding applicable excise tax and commissions.
Cloud Computing Arrangements
In addition to the anticipated cash requirements for capital expenditures noted above in “Cash Flows,”the Company expects to spend approximately $30.0 million during 2023 on cloud computing arrangements (“CCA”), primarily
related to the Company’s human capital management system implementation. The Company’s cash expenditures related to CCA amounted to $25.2 million during the nine months ended October 1, 2023.
General Inflation, Commodities and Changing Prices
Inflationary pressures on labor and commodity price increases directly impacted our consolidated results of operations during the nine months ended October 1, 2023, and we expect this to continue throughout the remainder of 2023. We attempt to manage any inflationary costs and commodity price increases through
selective menu price increases and product mix. Delays in implementing such menu price increases and competitive pressures may limit our ability to recover such cost increases in the future. Inherent volatility experienced in certain commodity markets, such as those for beef, chicken, pork, cheese and grains, could have a significant effect on our results of operations and may have an adverse effect on us in the future. The extent of any impact will depend on our ability to manage such volatility through product mix and selective menu price increases.
Seasonality
Wendy’s restaurant operations are moderately seasonal. Wendy’s average restaurant sales are normally higher during the summer months than during the winter months. Because our business is moderately seasonal, results for a particular quarter
are not necessarily indicative of the results that may be achieved for any other quarter or for the full fiscal year.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
During the nine months ended October 1, 2023, certain of the Company’s subsidiaries executed amendments to the 2021-1 Variable Funding Senior Secured Notes, Class A-1 (the “Class A-1 Notes”) and the U.S. advertising fund revolving line of credit to transition
from the London Interbank Offered Rate (“LIBOR”) to the Secured Overnight Financing Rate (“SOFR”), plus any applicable margin. The Company continues to be exposed to interest rate increases under its Class A-1 Notes, its U.S. advertising fund revolving line of credit and certain other lines of credit; however, the Company had no outstanding borrowings under such lines of credit as of October 1, 2023.
Except as described above, there were no significant changes from the information contained in the Company’s Form 10-K for the fiscal year ended January 1,
2023.
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Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
The management of the Company, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined
in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of October 1, 2023. Based on such evaluations, the Chief Executive Officer and Chief Financial Officer concluded that as of October 1, 2023, the disclosure controls and procedures of the Company were effective at a reasonable assurance level in (1) recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act and (2) ensuring that information required to be disclosed by the Company in such
reports is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in the internal control over financial reporting of the Company during the third quarter of 2023 that materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
There are inherent limitations in
the effectiveness of any control system, including the potential for human error and the possible circumvention or overriding of controls and procedures. Additionally, judgments in decision-making can be faulty and breakdowns can occur because of a simple error or mistake. An effective control system can provide only reasonable, not absolute, assurance that the control objectives of the system are adequately met. Accordingly, the management of the Company, including its Chief Executive Officer and Chief Financial Officer, does not expect that the control system can prevent or detect all error or fraud. Finally, projections of any evaluation or assessment of effectiveness of a control system to future periods are subject to the risks that, over time, controls may become inadequate because of changes in an entity’s operating environment or deterioration in the degree of compliance with
policies or procedures.
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PART II. OTHER INFORMATION
Special Note Regarding Forward-Looking Statements and Projections
This Quarterly Report on Form 10-Q and oral statements made from time to time by representatives of the Company may contain or incorporate by reference 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 our 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 of our forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Reform Act. Our actual results, performance and achievements may differ materially from any future results, performance or achievements expressed or implied by our forward-looking statements. Many important factors could affect our future results and cause those results to differ materially from those expressed in or implied by our forward-looking statements. Such factors include, but are not limited to, the following:
•the impact of competition or poor customer experiences at Wendy’s restaurants;
•adverse economic conditions or disruptions, including in regions with a high concentration
of Wendy’s restaurants;
•changes in discretionary consumer spending and consumer tastes and preferences;
•the disruption to our business from the COVID-19 pandemic and the impact of the pandemic on our results of operations, financial condition and prospects;
•impacts to our corporate reputation or the value and perception of our brand;
•the effectiveness of our marketing and advertising programs and new product development;
•our ability
to manage the accelerated impact of social media;
•our ability to protect our intellectual property;
•food safety events or health concerns involving our products;
•our ability to deliver accelerated global sales growth and achieve or maintain market share across our dayparts;
•our ability to achieve our growth strategy through new restaurant development and our Image Activation program;
•our ability to effectively manage the acquisition
and disposition of restaurants or successfully implement other strategic initiatives;
•risks associated with leasing and owning significant amounts of real estate, including environmental matters;
•risks associated with our international operations, including our ability to execute our international growth strategy;
•changes in commodity and other operating costs;
•shortages or interruptions in the supply or distribution of our products and other risks associated with our independent supply chain purchasing co-op;
•the
impact of increased labor costs or labor shortages;
•the continued succession and retention of key personnel and the effectiveness of our leadership and organizational structure;
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•risks associated with our digital commerce strategy, platforms and technologies, including our ability to adapt to changes in industry trends and consumer preferences;
•our dependence on computer systems and information technology, including risks associated with the failure or interruption of our systems or
technology or the occurrence of cyber incidents or deficiencies;
•risks associated with our securitized financing facility and other debt agreements, including compliance with operational and financial covenants, restrictions on our ability to raise additional capital, the impact of our overall debt levels and our ability to generate sufficient cash flow to meet our debt service obligations and operate our business;
•risks associated with our capital allocation policy, including the amount and timing of equity and debt repurchases and dividend payments;
•risks associated with complaints and litigation, compliance with legal and regulatory requirements
and an increased focus on environmental, social and governance issues;
•risks associated with the availability and cost of insurance, changes in accounting standards, the recognition of impairment or other charges, changes in tax rates or tax laws and fluctuations in foreign currency exchange rates;
•conditions beyond our control, such as adverse weather conditions, natural disasters, hostilities, social unrest, health epidemics or pandemics or other catastrophic events;
•risks associated with our organizational redesign; and
•other risks and uncertainties
affecting us and our subsidiaries referred to in our Annual Report on Form 10-K filed with the SEC on March 1, 2023 (see especially “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”) and in our other current and periodic filings with the SEC.
In addition to the factors described above, there are risks associated with our predominantly franchised business model that could impact our results, performance and achievements. Such risks include our ability to identify, attract and retain experienced and qualified franchisees, our ability to effectively manage the transfer of restaurants between and among 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. Our 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 us or any person acting on our 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 factors that we currently deem immaterial may become material, and it is impossible for us to predict these events or how they may affect us. We assume no obligation to update
any forward-looking statements after the date of this Quarterly Report on Form 10-Q as a result of new information, future events or developments, except as required by federal securities laws, although we may do so from time to time. We do not endorse any projections regarding future performance that may be made by third parties.
Item 1. Legal Proceedings.
The Company is involved in litigation and claims incidental to our business. We provide accruals for such litigation and claims when we determine it is probable that a liability has been incurred and the loss is reasonably estimable. The
Company believes it has adequate accruals for all of its legal and environmental matters. We cannot estimate the aggregate possible range of loss for our existing litigation and claims due to various reasons, including, but not limited to, many proceedings being in preliminary stages, with various motions either yet to be submitted or pending, discovery yet to occur, and significant factual matters unresolved. In addition, most cases seek an indeterminate amount of damages and many involve multiple parties. Predicting the outcomes of settlement discussions or judicial or arbitral decisions is thus inherently difficult and future developments could cause these actions or claims, individually or in aggregate, to have a material adverse effect on the Company’s financial condition, results of operations, or cash flows of a particular reporting period.
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Item
1A. Risk Factors.
In addition to the information contained in this report, you should carefully consider the risk factors disclosed in our Form 10-K, which could materially affect our business, financial condition or future results. Except as described elsewhere in this report, there have been no material changes from the risk factors previously disclosed in our Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
The following table provides information with respect to repurchases of shares of our common stock by us and our “affiliated
purchasers” (as defined in Rule 10b-18(a)(3) under the Exchange Act) during the third quarter of 2023:
Issuer Repurchases of Equity Securities
Period
Total Number of Shares Purchased (1)
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans
Approximate
Dollar Value of Shares that May Yet Be Purchased Under the Plans (2)
(1)Includes 66,316 shares of common
stock reacquired by the Company from holders of share-based awards to satisfy certain requirements associated with the vesting or exercise of the respective award. The shares were valued at the fair market value of the Company’s common stock on the vesting or exercise date of such awards, as set forth in the applicable plan document.
(2)In January 2023, our Board of Directors authorized a repurchase program for up to $500.0 million of our common stock through February 28, 2027, when and if market conditions warrant and to the extent legally permissible.
Subsequent to
October 1, 2023 through October 26, 2023, the Company repurchased 1.2 million shares under the January 2023 Authorization with an aggregate purchase price of $23.6 million, excluding applicable excise tax and commissions.
The
following financial information from The Wendy’s Company’s Quarterly Report on Form 10-Q for the quarter ended October 1, 2023 formatted in Inline eXtensible Business Reporting Language: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Comprehensive Income, (iv) the Condensed Consolidated Statements of Stockholders’ Equity, (v) the Condensed Consolidated Statements of Cash Flows, and (vi) Notes to Condensed Consolidated Financial Statements.
104
The cover page from The Wendy’s Company’s Quarterly Report on Form 10-Q for the quarter ended October 1, 2023, formatted in Inline XBRL and contained in Exhibit 101.
Identifies a management contract or compensatory plan or arrangement.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
