Wendy's shares fall after company misses Q4 revenue expectations

Wendy's shares fall after company misses Q4 revenue expectations

Wendy's shares fall after company misses Q4 revenue expectations

The FINANCIAL -- The Wendy's Company on February 21 reported preliminary unaudited results for the fourth quarter and full year ended December 31, 2017.

The Company plans to release its audited financial results on or before February 28, 2018.

"Our strong 2017 results demonstrate the strength of the Wendy's brand and are a testament to our successful transition to a predominantly franchised business model," President and Chief Executive Officer Todd Penegor said. "We are very proud of the fact that we have now recorded 20 consecutive quarters of positive same-restaurant sales in North America, two consecutive years of positive global net new restaurant growth and that North America AUVs have reached an all-time high of $1.61 million. Thanks to our significantly increased cash flows and resilient bottom line, we continue to reward shareholders through dividends and share repurchases, with $196 million of cash returned to shareholders in 2017. Our relentless focus on executing every element of The Wendy's Way by providing food our customers love, friendly service, value, and an inviting atmosphere will continue to drive growth in the future."

Preliminary Fourth Quarter Financial Highlights

Total revenues were $309.2 million in the fourth quarter of 2017, compared to $309.9 million in the fourth quarter of 2016. Total revenues were essentially flat year-over-year despite the ownership of 90 fewer Company-operated restaurants at the end of the fourth quarter 2017 compared to the beginning of the fourth quarter 2016, which resulted in fewer sales at Company-operated restaurants, offset by higher franchise royalty revenue, fees and rental income.

Company-operated restaurant margin was 17.5 percent in the fourth quarter of 2017, compared to 18.8 percent in the fourth quarter of 2016. The 130 basis-point decrease was primarily the result of higher commodity and labor costs, partially offset by lower other operating costs.

General and administrative expense was $51.9 million in the fourth quarter of 2017, compared to $61.2 million in the fourth quarter of 2016. The 15.2 percent decrease resulted primarily from lower professional fees and cost savings related to the Company's system optimization initiative.

Operating profit was $66.6 million in the fourth quarter of 2017, compared to $79.2 million in the fourth quarter of 2016. The 15.9 percent decrease resulted primarily from a year-over-year decrease in gains from the Company's system optimization initiative, in addition to the items discussed above.

Net income was $159.3 million in the fourth quarter of 2017, compared to net income of $28.9 million in the fourth quarter of 2016. In addition to the items discussed above, the year-over-year increase of 451.3 percent resulted primarily from a decrease in the effective tax rate due to revaluing deferred tax assets and liabilities at the lower U.S. corporate tax rate as a result of the Tax Cuts and Jobs Act of 2017.

Adjusted EBITDA was $104.0 million in the fourth quarter of 2017, compared to $91.1 million in the fourth quarter of 2016. Adjusted EBITDA increased 14.2 percent year-over-year, despite the ownership of 90 fewer Company-operated restaurants at the end of the fourth quarter 2017 compared to the beginning of the fourth quarter 2016. General and administrative expense savings and an increase in franchise net rental income, fees and royalties contributed to the year-over-year improvement.

Adjusted EBITDA margin was 33.6 percent in the fourth quarter of 2017, compared to 29.4 percent in the fourth quarter of 2016. The 420 basis-point improvement reflects the positive impact of the Company's system optimization initiative.

Reported diluted earnings per share were $0.64 in the fourth quarter of 2017, compared to $0.11 in the fourth quarter of 2016.

Adjusted earnings per share were $0.11 in the fourth quarter of 2017, compared to $0.08 in the fourth quarter of 2016. The 37.5 percent increase resulted primarily from the items discussed above and reflects a 2.9 percent year-over-year reduction in the weighted average diluted shares outstanding. The net positive impact from the Tax Cuts and Jobs Act of 2017, primarily the result of revaluing the Company's deferred tax assets and liabilities, has been excluded from the Company's adjusted earnings per share results, according to the Wendy's Company.

Preliminary Full Year 2017 Financial Highlights

Total revenues were $1,223.4 million in 2017, compared to $1,435.4 million in 2016. The 14.8 percent decrease resulted primarily from the ownership of 295 fewer Company-operated restaurants at the end of 2017 compared to the beginning of 2016, which resulted in fewer sales at Company-operated restaurants, partly offset by higher franchise royalty revenue, fees and rental income.

Company-operated restaurant margin was 17.6 percent in 2017, compared to 19.1 percent in 2016. The 150 basis-point decrease was primarily the result of higher labor and commodity costs, partially offset by lower other operating costs.

General and administrative expense was $208.6 million in 2017, compared to $245.9 million in 2016. The 15.2 percent decrease resulted primarily from lower professional fees and cost savings related to the Company's system optimization initiative.

Operating profit was $214.8 million in 2017, compared to $314.8 million in 2016. The 31.8 percent decrease resulted primarily from a year-over-year decrease in gains from the Company's system optimization initiative and higher reorganization and realignment costs related to the Company's G&A savings initiative, in addition to the items discussed above.

Net income was $194.0 million in 2017, compared to net income of $129.6 million in 2016. In addition to the items discussed above, the year-over-year increase of 49.7 percent resulted primarily from a decrease in the effective tax rate due to revaluing deferred tax assets and liabilities at the lower U.S. corporate tax rate as a result of the Tax Cuts and Jobs Act of 2017.

Adjusted EBITDA was $406.2 million in 2017, compared to $391.9 million in 2016. Adjusted EBITDA increased 3.7 percent year-over-year, despite the ownership of 295 fewer Company-operated restaurants at the end of 2017 compared to the beginning of 2016. General and administrative expense savings and an increase in franchise net rental income, royalties and fees contributed to the year-over-year improvement.

Adjusted EBITDA margin was 33.2 percent in 2017, compared to 27.3 percent in 2016. The 590 basis-point improvement reflects the positive impact of the Company's system optimization initiative.

Reported diluted earnings per share were $0.77 in 2017, compared to $0.49 in 2016.

Adjusted earnings per share were $0.43 in 2017, compared to $0.40 in 2016. The 7.5 percent increase resulted primarily from the items discussed above and reflects a 5.4 percent year-over-year reduction in the weighted average diluted shares outstanding. The net positive impact from the Tax Cuts and Jobs Act of 2017, primarily the result of revaluing the Company's deferred tax assets and liabilities, has been excluded from the Company's adjusted earnings per share results.

Cash flows from operations were $251.6 million in 2017, compared to $188.9 million in 2016. The 33.2 percent increase was the result of an increase in net income adjusted for non-cash expenses and a favorable change in working capital.

Capital expenditures were $81.7 million in 2017, compared to $150.0 million in 2016. The 45.5 percent decrease resulted primarily from the ownership of fewer Company-operated restaurants through the Company's system optimization initiative.

Free cash flow was $169.9 million in 2017, compared to $38.9 million in 2016. The 336.7 percent increase resulted from a year-over-year decrease in capital expenditures and higher cash flows from operations.

New Restaurant Development

In 2017, the Company achieved 1.5 percent global net new restaurant growth, which represents the Company's highest growth rate since 2004. North America contributed 0.5 percent net new restaurant growth and International grew by 14.8 percent during 2017. The Company expects 2018 global net new unit growth of approximately 2 percent, with approximately 1 percent growth in North America and approximately 16 percent growth for International.

Image Activation

Image Activation, which includes reimaging existing restaurants and building new restaurants, remains an integral part of our global growth strategy. During 2017, the Company and its franchisees reimaged 551 restaurants in North America, an increase from the 521 reimages that were completed in 2016, and built 174 global restaurants. At the end of 2017, 43 percent of the global system was image activated, slightly ahead of the Company's prior expectations. Approximately 10 percent of the global system is expected to be image activated on an annual basis through 2020.

Franchisee-to-franchisee restaurant transfers

During the fourth quarter of 2017, the Company facilitated 130 Buy and Flips, bringing the full year total to 540. The Company will continue to facilitate franchisee-to-franchisee restaurant transfers to ensure that restaurants are operated by well-capitalized franchisees that are committed to long-term growth. Franchisee-to-franchisee restaurant transfers that were previously referred to as Buy and Flips, will now be referred to as Franchise Flips, due to the Company being more selectively involved in the related real estate. The Company expects to complete approximately 200 Franchise Flips in 2018.

$196 million returned to shareholders through dividends and share repurchases in 2017

In 2017, the Company repurchased 8.6 million shares for $127.4 million and distributed $68.3 million in dividends. At the end of 2017, the Company had $22.6 million remaining on its existing $150 million share repurchase authorization, which expires on March 4, 2018.

On February 15, 2018, the Company announced that its Board of Directors authorized a 21 percent increase in its quarterly cash dividend rate and a new share repurchase program for up to $175 million of the Company's common stock through March 3, 2019. The Company's new quarterly cash dividend rate of 8.5 cents per share will be effective with its next dividend payment, which is payable on March 15, 2018, to shareholders of record as of March 1, 2018.

Arby's equity stake

At the end of 2017, the estimated fair value of the Company's 18.5 percent equity stake in Arby's was approximately $325 million. The Company's equity stake was diluted to 12.3 percent on February 5, 2018, when Arby's acquired Buffalo Wild Wings, and will encompass both brands under the newly formed combined company, Inspire Brands.

During 2018, the Company expects:

North America same-restaurant sales growth of approximately 2.0 to 2.5 percent.

Commodity inflation of approximately 1 to 2 percent.

Labor inflation of approximately 3 to 4 percent.

Company-operated restaurant margin of approximately 17 to 18 percent.

General and administrative expense of approximately $195 million.

Adjusted EBITDA of approximately $420 to $430 million, an increase of approximately 8 to 10 percent compared to recast 2017 results.

Adjusted EBITDA margin of approximately 33 to 34 percent.

Interest expense of approximately $120 million.

Depreciation and amortization expense of approximately $128 million.

An adjusted tax rate of approximately 23 to 25 percent.

Adjusted earnings per share of approximately $0.54 to $0.56, an increase of approximately 38 to 44 percent compared to recast 2017 results.

Cash flows from operations of approximately $295 to $320 million.

Capital expenditures of approximately $75 to $80 million.

Free cash flow of approximately $220 to $240 million, an increase of approximately 29 to 41 percent compared to 2017.

Company updates 2020 goals

After accounting for 2017 results and updating its long-range plan, the Company has updated certain of its 2020 goals.

By the end of 2020, the Company now expects:

Global restaurant count of ~7,250.

Adjusted EBITDA margin of 37 to 39 percent.

Free cash flow of ~$300 million (capital expenditures of ~$65 million).

In addition, the Company continues to expect to achieve the following goals by the end of 2020:

Global systemwide sales (in constant currency and excluding Venezuela) of ~$12 billion.

Global Image Activation of at least 70 percent.