The Wendy’s Company has reported its unaudited results for the second quarter 2016.
"In the face of challenging industry conditions, we remain confident that Wendy'scan win in the [quick serve] space," says Todd Penegor, president and CEO. "The North America system has now recorded 14 consecutive quarters of positive same-restaurant sales, which demonstrates the long-term strength and relevance of our brand. We also believe that momentum from our strategic growth initiatives and continued improvement in key brand health metrics, such as quality and value perception, will set us up for sustainable growth in the future.”
"As we near completion of the third phase of our system optimization initiative, we are increasingly focused on driving adjusted EBITDA margin growth," says Gunther Plosch, CFO. "We have added this key metric to our 2020 goals to signify how important this measure will be to our business going forward. Based on a review of all revenues and costs, we are now increasing our long-term adjusted EBITDA margin target. We will provide details on the timing and progress in early 2017."
Second-quarter 2016 summary highlights include:
· On a two-year basis, second-quarter 2016 same-restaurant sales increased 2.6 percent for the North America system.
· Revenues were $382.7 million in the second quarter of 2016, compared to $489.5 million in the second quarter of 2015. The 21.8 percent decrease resulted primarily from the ownership of 361 fewer company-operated restaurants at the end of the 2016 second quarter compared to the beginning of the 2015 second quarter.
· Franchise revenues were $123.5 million in the second quarter of 2016, compared to $104.5 million in the second quarter of 2015. The 18.2 percent increase resulted from higher rental income and royalty revenue primarily as a result of the company's system optimization initiative.
· North America company-operated restaurant margin was 21.9 percent in the second quarter of 2016, compared to 18.2 percent in the second quarter of 2015. The 370 basis-point increase was primarily the result of the positive impact of lower commodity costs and the favorable impact from the company's Image Activation program.
· General and administrative expense was $61.1 million in the second quarter of 2016, compared to $60.8 million in the second quarter of 2015.
· Operating profit was $65.6 million in the second quarter of 2016, compared to $64.3 million in the second quarter of 2015. The 2.0 percent increase resulted primarily from higher franchise revenues, a year-over-year decrease in depreciation and amortization and lower Impairment of long-lived assets, partly offset by a year-over-year decrease in system optimization gains, net and a year-over-year increase in other operating expense, net.
· Interest expense was $28.6 million in the second quarter of 2016, compared to $17.2 million in the second quarter of 2015. The increase resulted primarily from higher total debt levels related to the company's debt restructuring completed in the second quarter of 2015.
· Income from continuing operations was $26.5 million in the second quarter of 2016, compared to $24.8 million in the second quarter of 2015. The 6.9 percent increase resulted from year-over-year decreases in loss on early extinguishment of debt and provision for income taxes, in addition to the items mentioned above.
· Net income was $26.5 million in the second quarter of 2016, compared to $40.2 million in the second quarter of 2015. The 34.1 percent decrease resulted primarily from a year-over-year decrease in gain on disposal of discontinued operations, net of income taxes, in addition to the items mentioned above.
The company remains on track with its plan to reduce its company-operated restaurant ownership to approximately 5 percent of the total system by the end of 2016. As part of this plan, the company intends to sell a total of approximately 315 restaurants to franchisees during 2016. Through the end of the second quarter, the company has sold a total of 55 restaurants. It now expects the third phase of system optimization to generate pretax proceeds of approximately $435 million.
"We are now in the final stages of our system optimization initiative," Penegor says. "We have awarded all remaining markets to be sold in 2016 to strong operators who have demonstrated a commitment to Image Activation and opening new restaurants. We are confident we will strengthen the Wendy's brand as a result of these transactions."
The company and its franchisees plan to reimage a total of 430 North America system restaurants and build 110 new North America restaurants in 2016. This is in addition to the 519 total North America system reimages and new restaurants built during 2015.
Wendy’s repurchased 5.9 million shares for $61.0 million in the second quarter at an average price of $10.37 per share. The company has approximately $248 million remaining on its $1.4 billion share repurchase authorization, which expires at the end of 2016.