Industry News | November 3, 2000

Wendy's Reports Strong Third Quarter Performance

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Wendy's International, Inc. (NYSE: WEN) announced today its results for the third quarter, which ended on October 1, 2000. Sales growth in the company's core businesses, particularly at Tim Hortons®, drove strong earnings performance. Highlights in the quarter included:

• Total diluted earnings per share were $0.41, a 17% increase over $0.35
reported in the same period a year ago. EPS in the third quarter a year ago included $0.01 in asset gains. Excluding those asset gains, EPS grew 21% in the quarter.
•  Systemwide sales were up 8.9% to a record $2.0 billion.
• Total revenues increased 8.5% to a record $578 million.

"We continue to deliver performance that exceeds our long-term goal of 12% to 15% earnings per share growth,'' said Jack Schuessler, chief executive officer and president. "This was the seventh consecutive quarter in which EPS, excluding asset gains, grew by at least 17%. It was a balanced quarter with Wendy's performing well and Tim Hortons continuing to perform above our expectations.

"We have good sales momentum at Wendy's® U.S. and at Tim Hortons in Canada and the U.S. We've been able to deliver high teens EPS growth despite various food, labor and restaurant operating cost pressures and we continue to execute strategies to create shareholder value,'' Schuessler added.

Analysts at Salomon Smith Barney reiterate their 1H (Buy, High Risk) rating of Wendy's, Inc. stock. Salomon Smith Barney has taken up its price target on the company's shares from $24 to $26.

Same-store sales at Wendy's U.S. company restaurants grew by 2.8% for the quarter, on top of 7.1% a year ago, and are up 3.0% year to date. The domestic operating margin for the quarter was the same as a year ago at 16.8%. Tom Mueller, president and chief operating officer of Wendy's North America, said, "Wendy's continued to expand same-store sales at company and franchise stores on top of the excellent growth a year ago. We also made good progress on our new unit opening program and we are on track with our plan to open about 285 new Wendy's in the U.S. this year, including about 80 company stores.

"From an operations perspective, we continue to implement our Service Excellence® program throughout the Wendy's system, our late night program continues to grow and we are integrating productivity initiatives in our restaurants,'' Mueller said.

The Bacon Mushroom Melt(TM) hamburger was Wendy's October national promotion. Later this month, Wendy's will begin featuring its popular Spicy Chicken(TM) sandwich on national television along with a Kids' Meal(TM) movie tie-in with the Universal Studios film "The Grinch®'', starring Jim Carrey.

Same-store sales at Tim Hortons restaurants in Canada grew by 8.9% in the quarter, on top of a 12.5% increase during the same period a year ago. Same- store sales at Tim Hortons in the U.S. grew 11.1% in the quarter and have increased at double-digit rates for six consecutive quarters.

Paul House, president and chief operating officer of Tim Hortons, said "our core coffee business is stronger than ever and it continues to be the cornerstone of our success. We are driving traffic and average check with a range of restaurant operation initiatives including speed of service programs, improved pick-up window performance, expansion of our lunch program and products like our new chicken stew in a bread bowl promotion for November.

"In the U.S., we are very encouraged with the sales trends and customer acceptance of the Tim Hortons brand in our upper New York, Michigan and central Ohio markets,'' House said.

The company's International Wendy's segment includes 685 restaurants in Canada and the regions of Latin America-Caribbean, Asia-Pacific and Europe-Middle East. Management is focusing its international resources on improving Wendy's global brand image and supporting its franchisees' business plans.

Wendy's sales performance has been strong in several markets including Canada, Venezuela, Mexico, Puerto Rico and several Caribbean islands. Pretax income from the International Wendy's segment improved in the third quarter compared to a year ago and is up year to date. The International Wendy's segment generated annual pretax income of $1.1 million in 1999 and $6.1 million year to date in 2000.

Performance continues to be weak in Argentina, where the company currently operates 18 restaurants and has a year-to-date pretax operating loss of $3.2 million. The Argentine market faces difficult economic and competitive conditions. The company has implemented its Service Excellence program in the restaurants and initiated new marketing and pricing programs in an effort to increase customer traffic and reverse a trend of declining sales. The company is conducting a review of its investment in Argentina and is evaluating a range of strategic alternatives.

The company's long-term goal for EPS growth continues to be in the 12% to 15% range, excluding asset gains and unusual items. The EPS goal for 2000 continues to be in the 14% to 17% range, excluding asset gains and unusual items.

"Our business is healthy and producing strong results in 2000 after a great year in 1999,'' said Kerrii Anderson, executive vice president and chief financial officer. "Our revenue growth is encouraging as we continue to deliver good sales results and open new restaurants. We expect to reach our goal of opening more than 500 new restaurants systemwide in 2000. In addition, we continue to focus on effective capital allocation and improving returns.''

Management continued its share repurchase program during the quarter buying 333,800 common shares for $6.3 million, bringing the total amount of shares repurchased since 1998 to 21.9 million for $491 million.

The company announced preliminary sales for October (Period 10), which ends on November 5. Same-store sales at Wendy's U.S. company restaurants have increased in the 3.0% to 3.5% range, on top of an 8.5% increase during the same period a year ago. Same-store sales at Tim Hortons in Canada have increased in the 8% to 9% range, on top of a 7.5% improvement a year ago.

The company's board of directors named Kerrii Anderson as a director, effective immediately. Anderson joined the company in August as executive vice president and chief financial officer. Anderson is responsible for accounting, corporate finance, audit, information technology and treasury functions for the company, including financial reporting, investor and government relations, risk management and franchise finance. She previously was senior vice president and CFO at M/I Schottenstein Homes, Inc., a $1 billion NYSE company.

The board of directors approved a quarterly dividend of $0.06 per share, payable on November 28 to shareholders of record as of November 13. It will be the company's 91st consecutive dividend payment to shareholders.

The company plans to web cast on the Internet its quarterly conference call with investors at 4:00 p.m. (Eastern Time) on Thursday, November 2. To access the web cast on the Internet, go to www.wendys.com , select "investor information/news releases'' and then select "Third Quarter Conference Call.''

The company will host its biennial analyst and investor meeting on November 15-16, 2000, in Columbus, Ohio. The meeting will be web cast on the Internet. Contact the company's investor relations department (614-764-3521) for more information or with questions.

Wendy's International, Inc. is one of the world's largest restaurant operating and franchising companies, with $7.1 billion in 1999 systemwide sales and two quality brands - Wendy's and Tim Hortons. Wendy's Old Fashioned Hamburgers® was founded in 1969 by Dave Thomas and is the third largest quick-service hamburger chain in the world with more than 5,600 restaurants in the United States, Canada and international markets. Tim Hortons was founded in 1964 by Tim Horton and Ron Joyce and is the largest coffee and fresh baked goods chain in Canada. There are more than 1,750 restaurants in Canada and 115 in the U.S.Competition. The quick-service restaurant industry is intensely competitive with respect to price, service, location, personnel and type and quality of food. The company and its franchisees compete with international, regional and local organizations primarily through the quality, variety and value perception of food products offered. The number and location of units, quality and speed of service, attractiveness of facilities, effectiveness of advertising and marketing programs, and new product development by the company and its competitors are also important factors. The company anticipates that intense competition will continue to focus on pricing. Certain of the company's competitors have substantially larger marketing budgets.

Economic, Market and Other Conditions. The quick-service restaurant industry is affected by changes in international, national, regional, and local economic conditions, consumer preferences and spending patterns, demographic trends, consumer perceptions of food safety, weather, traffic patterns and the type, number and location of competing restaurants. Factors such as inflation, food costs, labor and benefit costs, legal claims, and the availability of management and hourly employees also affect restaurant operations and administrative expenses. The ability of the company and its franchisees to finance new restaurant development, improvements and additions to existing restaurants, and the acquisition of restaurants from, and sale of restaurants to franchisees is affected by economic conditions, including interest rates and other government policies impacting land and construction costs and the cost and availability of borrowed funds.

Importance of Locations. The success of company and franchised restaurants is dependent in substantial part on location. There can be no assurance that current locations will continue to be attractive, as demographic patterns change. It is possible the neighborhood or economic conditions where restaurants are located could decline in the future, thus resulting in potentially reduced sales in those locations.

Government Regulation. The company and its franchisees are subject to various federal, state, and local laws affecting their business. The development and operation of restaurants depend to a significant extent on the selection and acquisition of suitable sites, which are subject to zoning, land use, environmental, traffic, and other regulations. Restaurant operations are also subject to licensing and regulation by state and local departments relating to health, sanitation and safety standards, federal and state labor laws (including applicable minimum wage requirements, overtime, working and safety conditions, and citizenship requirements), federal and state laws which prohibit discrimination and other laws regulating the design and operation of facilities, such as the Americans with Disabilities Act of 1990. Changes in these laws and regulations, particularly increases in applicable minimum wages, may adversely affect financial results. The operation of the company's franchisee system is also subject to regulation enacted by a number of states and rules promulgated by the Federal Trade Commission. The company cannot predict the effect on its operations, particularly on its relationship with franchisees, of the future enactment of additional legislation regulating the franchise relationship.

Growth Plans. The company plans to increase the number of systemwide Wendy's and Tim Hortons restaurants open or under construction. There can be no assurance that the company or its franchisees will be able to achieve growth objectives or that new restaurants opened or acquired will be profitable.

The opening and success of restaurants depends on various factors, including the identification and availability of suitable and economically viable locations, sales levels at existing restaurants, the negotiation of acceptable lease or purchase terms for new locations, permitting and regulatory compliance, the ability to meet construction schedules, the financial and other development capabilities of franchisees, the ability of the company to hire and train qualified management personnel, and general economic and business conditions.

International Operations. The company's business outside of the United States is subject to a number of additional factors, including international economic and political conditions, differing cultures and consumer preferences, currency regulations and fluctuations, diverse government regulations and tax systems, uncertain or differing interpretations of rights and obligations in connection with international franchise agreements and the collection of royalties from international franchisees, the availability and cost of land and construction costs and the availability of experienced management, appropriate franchisees, and joint venture partners. Although the company believes it has developed the support structure required for international growth, there is no assurance that such growth will occur or that international operations will be profitable.

Disposition of Restaurants. The disposition of company operated restaurants to new or existing franchisees is part of the company's strategy to develop the overall health of the system by acquiring restaurants from, and disposing of restaurants to, franchisees where prudent. The realization of gains from future dispositions of restaurants depends in part on the ability of the company to complete disposition transactions on acceptable terms.

Transactions to Improve Return on Investment. The sale of real estate previously leased to franchisees is generally part of the program to improve the company's return on invested capital. There are various reasons why the program might be unsuccessful, including changes in economic, credit market, real estate market or other conditions, and the ability of the company to complete sale transactions on acceptable terms and at or near the prices estimated as attainable by the company.