Written by Lorimer Wilson

The Wendy's Company (NASDAQ: WEN) today reported unaudited results for the second quarter ended July 2, 2017, which included its18th consecutive quarter of positive same-restaurant sales (an increase of 3.2% compared to Q2, 2016) 

About Wendy's

The Wendy's Company is the world's third-largest quick-service hamburger company with approximately 6,500 franchise and Company-operated restaurants in the United States and 28 countries and U.S. territories worldwide.

Q2 2017 Financial Highlights

• Total revenues: DOWN 16.3% to $320.3 million from Q2 of 2016 due primarily to a reduction in ownership of 251 fewer Company-operated which resulted in fewer sales at Company-operated restaurants, partly offset by higher franchise royalty revenue and fees and franchise rental income.
• Company-operated restaurant margin: DOWN to 19.6% percent in Q2 of 2017, compared to 21.9% in Q2 of 2016, due primarily to increased labor rates and higher commodity costs.
• General and administrative expense: DOWN 16.1% to $51.3 million due primarily from cost savings related to the Company's system optimization initiative, lower professional fees, and legal reserves, and a year-over-year decrease in incentive compensation accruals.
• Operating profit: UP 60.7% to $25.8 million due primarily from system optimization losses that were related to the DavCo-NPC transactions and reorganization and realignment costs related to the G&A expense savings initiative also contributed to the year-over-year decrease in operating profit.
• Net income: DOWN 106.8% to a net loss of $1.8 million due primarily from system optimization losses that were related to the DavCo-NPC transactions and reorganization and realignment costs related to the G&A expense savings initiative.
• Adjusted EBITDA: UP 13.3% to $116.1 million despite the ownership of 251 fewer Company-operated restaurants and increased franchise fees driven by Buy and Flip activity.
• Adjusted EBITDA margin (adjusted EBITDA divided by total revenues): UP 36.2% reflecting the positive impact of the Company's system optimization initiative.
• Diluted earnings per share: DOWN to a net loss of $0.01 from $0.10 in Q2 of 2016.
• Adjusted earnings per share: UP 50.0% to $0.15 due primarily from the items discussed above and reflects a 6.2% year-over-year reduction in the weighted average diluted shares outstanding.

Terminology Definitions

• Image Activation: includes the re-imaging of existing restaurants and building of new restaurants
• Buy and Flip: the transfer of franchisee-to-franchisee restaurants to ensure that restaurants are operated by well-capitalized franchisees that are committed to long-term growth.
• DavCo-NPC Transactions: The purchase of 140 DavCo Restaurants which were immediately sold to NPC International, Inc. The acquisition of Wendy's restaurants from DavCo was not contingent on executing the sale agreement with NPC and, as such, the Company accounted for the transactions as an acquisition and subsequent disposition of a business. Due to the unique nature of the transactions, the Company incurred a total pre-tax loss of $43.1 million and a net cash outflow, exclusive of franchise fees received, of $17.8 million in Q2.

2017 Outlook

During 2017, the Company now expects:

• Commodity cost inflation of 3-4% compared to 2016.
• Company-operated restaurant margin of 18.0-18.5% which compares with 19.6% percent in Q2 of 2017 and 21.9% in Q2 of 2016
• Net franchise rental income of $100-$105 million.
• Adjusted EBITDA of $404-$410 million, an increase of 3-5% compared to 2016.

In addition, the Company continues to expect:

• Same-restaurant sales growth of 2-3% for the North America system.
• Labor inflation of approximately 4%.
• General and administrative expense at the low end of its previously issued range of $210-$220 million.
• An adjusted tax rate of 32-34%.
• Adjusted earnings per share of $0.45-$0.47, UP 13-18% compared to 2016.

2020 Goals

The Company continues to expect to achieve the following goals by the end of 2020:

• Global system-wide sales (in constant currency and excluding Venezuela) of ~$12 billion.
• Global restaurant count of ~7,500.
• Global Image Activation of at least 70%
• Adjusted EBITDA margin of 38-40%.
• Free cash flow of ~$275 million (capital expenditures of ~$65 million).

Executive Commentary

President and Chief Executive Officer Todd Penegor said in today's press release:

"...we continue to strengthen the Wendy's^® brand through new restaurant development - 35 new restaurants were open during the second quarter - and more than one-third of the global system is now Image Activated.

We are pleased with our progress and remain confident in our long-term targets..."