The Wendy's Company reported unaudited results for the third quarter ended October 2.
The Wendy’s system includes around 6,500 franchise and company-operated restaurants in the United States and 28 countries and U.S. territories worldwide.
"Our solid third-quarter results demonstrate the positive benefits of our brand transformation efforts," says Todd Penegor, president and chief executive officer. "Despite the ownership of 433 fewer company-operated restaurants relative to last year, we were able to deliver high quality earnings, with franchise revenues contributing a higher amount to the bottom line. Driven by our balanced marketing approach and a continued focus on profitable customer count growth, the North America system accelerated same-restaurant sales in the third quarter. We have now recorded 15 consecutive quarters of positive same-restaurant sales.
"As part of our previously announced share repurchase authorization, we intend to enter into an accelerated share repurchase transaction for $150 million," Chief Financial Officer Gunther Plosch says. "This is in addition to the approximately $185 million we have already returned to shareholders this year through share repurchases. We expect to announce the execution of an accelerated share repurchase agreement in the near future. In addition, our Board of Directors has authorized an 8-percent increase in our quarterly dividend rate, from 6 cents per share to 6.5 cents per share."
Third-quarter 2016 summary
Same-restaurant sales increased 1.4 percent at North America system restaurants in the third quarter of 2016. On a two-year basis, third-quarter 2016 same-restaurant sales increased 4.5 percent for the North America system.
Revenues were $364 million in the third quarter of 2016, compared to $464.6 million in the third quarter of 2015. The 21.7 percent decrease resulted primarily from the ownership of 433 fewer company-operated restaurants at the end of the 2016 third quarter compared to the beginning of the 2015 third quarter.
Franchise revenues were $135.4 million in the third quarter of 2016, compared to $105.6 million in the third quarter of 2015. The 28.2 percent increase resulted from higher rental income, franchise fees and royalty revenue primarily as a result of the company's system optimization initiative, in addition to an increase in same-restaurant sales.
North America company-operated restaurant margin was 18.4 percent in the third quarter of 2016, compared to 18.8 percent in the third quarter of 2015. The 40 basis-point decrease was primarily the result of higher other operating costs and increased labor rates, partly offset by lower commodity costs and the favorable impact from the company's Image Activation program.
General and administrative expense was $58.9 million in the third quarter of 2016, compared to $63.7 million in the third quarter of 2015. The 7.5 percent decrease resulted primarily from cost savings related to the company's system optimization initiative, as well as lower share-based compensation and incentive compensation, partly offset by higher professional fees and legal fees related to the unusual payment card activity.
Operating profit was $106.1 million in the third quarter of 2016, compared to $55.9 million in the third quarter of 2015. The 89.8 percent increase resulted primarily from a year-over-year increase in system optimization gains, net and higher franchise revenues, partly offset by a year-over-year increase in Other operating expense, net.
Interest expense was $28.7 million in the third quarter of 2016, compared to $27.9 million in the third quarter of 2015.
Income from continuing operations was $48.9 million in the third quarter of 2016, compared to $8.3 million in the third quarter of 2015. The increase resulted from the year-over-year increase in Operating profit, partly offset by a year-over-year increase in income taxes.
Net income was $48.9 million in the third quarter of 2016, compared to $7.6 million in the third quarter of 2015.
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, which is in addition to the 227 restaurants that were sold in the second half of 2015. The company continues to expect the third phase of system optimization to generate pretax proceeds of approximately $435 million.
"We have now completed approximately 85 percent of our 2016 system optimization sales and are confident that the remaining transactions will close before the end of the year," Penegor says. "The remaining markets have been awarded to strong operators who have demonstrated a commitment to restaurant reimaging and opening new restaurants. We are confident we will strengthen the Wendy's brand as a result of these transactions."
"Going forward, we intend to buy and sell restaurants to act as a catalyst for growth by further strengthening our franchisee base, driving new restaurant development and accelerating Image Activation adoption," Penegor says. "We are also facilitating franchisee-to-franchisee restaurant transfers to ensure that we are putting restaurants in the hands of well capitalized franchisees that are committed to long-term growth."
The company and its franchisees now plan to reimage approximately 500 North America system restaurants and build approximately 100 new North America restaurants in 2016.
"Our franchisees continue to see the benefits of Image Activation and are reimaging restaurants faster than we anticipated. As a result, we are now on pace to image activate approximately 600 restaurants in 2016, which exceeds our original target by approximately 60 restaurants," Penegor says. "In addition, the North America system opened 28 new restaurants during the third quarter and we expect to deliver the first year of net new restaurant openings since 2010. With more than 28 percent of the North America system now featuring our new image, we are on track to achieve our goal of image activating at least 60 percent of our North America restaurants by the end of 2020."
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