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| WEN > SEC Filings for WEN > Form 10-Q on 7-May-2009 | All Recent SEC Filings |
7-May-2009
Quarterly Report
This "Management's Discussion and Analysis of Financial Condition and Results of
Operations" of Wendy's/Arby's Group, Inc ("Wendy's/Arby's" or, together with its
subsidiaries, the "Company" or "we") should be read in conjunction with our
accompanying unaudited condensed consolidated financial statements included
elsewhere herein and "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" in our Annual Report on Form 10-K for the
fiscal year ended December 28, 2008 (the "Form 10-K"). There have been no
significant changes as of March 29, 2009 to the application of our critical
accounting policies, contractual obligations or guarantees and commitments as
described in Item 7 of our Form 10-K. Certain statements we make under this Item
2 constitute "forward-looking statements" under the Private Securities
Litigation Reform Act of 1995. See "Special Note Regarding Forward-Looking
Statements and Projections" in "Part II - Other Information" preceding "Item
1." You should consider our forward-looking statements in light of our unaudited
condensed consolidated financial statements, related notes, and other financial
information appearing elsewhere in this report, our Form 10-K and our other
filings with the Securities and Exchange Commission.
Introduction and Executive Overview
Merger with Wendy's International, Inc.
On September 29, 2008, we completed the merger (the "Wendy's Merger") with Wendy's International, Inc. ("Wendy's") in an all-stock transaction in which Wendy's shareholders received 4.25 shares of Wendy's/Arby's Class A Common Stock for each share of Wendy's common stock owned. Our consolidated results of operations commencing September 29, 2008 include Wendy's results of operations.
Our Business
Wendy's/Arby's is the parent company of Wendy's and Arby's Restaurant Group, Inc. ("ARG"), which are the owners and franchisors of the Wendy's® and Arby's® restaurant systems, respectively. We currently manage and internally report our operations as two business segments: the operation and franchising of Wendy's restaurants and the operation and franchising of Arby's restaurants. As of March 29, 2009, the Wendy's restaurant system was comprised of 6,623 restaurants, of which 1,399 were owned and operated by the Company. As of March 29, 2009, the Arby's restaurant system was comprised of 3,741 restaurants, of which 1,171 were owned and operated by the Company. All 2,570 Wendy's and Arby's Company-owned restaurants are located principally in the United States and to a lesser extent in Canada (the "North America Restaurants").
Restaurant business revenues for the 2009 first quarter include: (1) $745.7 million of revenues from Company-owned restaurants, (2) $27.5 million from the sale of bakery items and kid's meal promotion items to our franchisees, (3) $83.7 million from royalty income from franchisees and (4) $7.1 million of other franchise related revenue. Our revenues increased significantly in the 2009 first quarter due to the Wendy's Merger. The Wendy's royalty rate was 4.0% for the quarter ended March 29, 2009. While over 80% of our existing Arby's royalty agreements and substantially all of our new domestic royalty agreements provide for royalties of 4% of franchise revenues, our average Arby's royalty rate was 3.6% for the three months ended March 29, 2009.
Our restaurant businesses have recently experienced trends in the following areas:
Revenues
· Significant decreases in general consumer confidence in the economy as well as decreases in many consumers' discretionary income caused by factors such as continuing deterioration in the financial markets and in economic conditions, including high unemployment levels and significant displacement in the real estate market, volatility in fuel costs, and high food costs;
· Increasing price competition in the quick service restaurant ("QSR") industry,
as evidenced by (1) value menu concepts, which offer comparatively lower
prices on some menu items, (2) the use of coupons and other price discounting,
(3) many recent product promotions focused on lower prices of certain menu
items and (4) combination meal concepts ("combos"), which offer a complete
meal at an aggregate price lower than the price of individual food and
beverage items;
· Competitive pressures due to extended hours of operation by many QSR competitors, including breakfast and late night hours;
· Competitive pressures from operators outside the QSR industry, such as the deli sections and in-store cafes of major grocery and other retail store chains, convenience stores and casual dining outlets offering take-out food;
· Increased availability to consumers of product choices, including (1) healthy
products driven by a greater consumer awareness of nutritional issues, (2)
products that tend to offer a variety of portion sizes and more ingredients;
(3) beverage programs which offer a wider selection of premium non-carbonated
beverages, including coffee and tea products; and (4) sandwiches with
perceived higher levels of freshness, quality and customization; and
· Competitive pressures from an increasing number of franchise opportunities seeking to attract qualified franchisees.
Cost of Sales
· Higher commodity prices which increased our food costs during 2008, with some moderation in recent months;
· The recent volatility in fuel prices which, when at much higher than current levels, contributed to an increase in utility, distribution, and freight costs;
· Federal, state and local legislative activity, such as minimum wage increases and mandated health and welfare benefits which is expected to continue to increase wages and related fringe benefits, including health care and other insurance costs; and
· Legal or regulatory activity related to nutritional content or menu labeling which results in increased operating costs.
· Dislocation and weakness in the overall credit markets and higher borrowing costs in the lending markets typically used to finance new unit development and remodels. These tightened credit conditions could negatively impact the renewal of franchisee licenses as well as the ability of a franchisee to meet their commitments under development, rental and franchise license agreements;
· A significant portion of both our Wendy's and Arby's restaurants are franchised and, as a result, we receive revenue in the form of royalties (which are generally based on a percentage of sales at franchised restaurants), rent and fees from franchisees. Franchisee related accounts receivable and estimated reserves for uncollectibility have increased, and may continue to increase, as a result of the deteriorating financial condition of some of our franchisees; and
· Continued competition for development sites among QSR competitors and other businesses.
We experience these trends directly to the extent they affect the operations of our Company-owned restaurants and indirectly to the extent they affect sales by our franchisees and, accordingly, the royalties and franchise fees we receive from them.
Business Highlights
Our primary goal is to enhance the value of our Company by:
· improving the quality and affordability of our core menu items;
· increasing same store sales in the restaurants and revitalizing the Wendy's
and Arby's brands with new marketing programs, menu development and an
improved customer experience;
· improving Company-owned restaurant margins;
· achieving significant progress on synergies and efficiencies related to the Wendy's Merger;
· expanding the breakfast daypart at many Wendy's and Arby's locations over the next several years; and
· possibily acquiring other restaurant brands.
Key Business Measures
We track our results of operations and manage our business using the following key business measures:
· Same-Store Sales
We report Arby's North America Restaurants same-store sales commencing after a store has been open for fifteen continuous months. Wendy's North America Restaurants same-store sales are reported after a store has been open for at least fifteen continuous months as of the beginning of the fiscal year. These methodologies are consistent with the metrics used by our management for internal reporting and analysis.
· Restaurant Margin
We define restaurant margin as sales from Company-owned restaurants (excluding sales from bakery items and kid's meal promotion items to franchisees) less cost of sales (excluding costs from bakery items and kid's meal promotion items), divided by sales. Restaurant margin is influenced by factors such as restaurant openings and closures, price increases, the effectiveness of our advertising and marketing initiatives, featured products, product mix, the level of our fixed and semi-variable costs, and fluctuations in food and labor costs.
Deerfield
On December 21, 2007, we completed the sale of our majority capital interest in Deerfield & Company LLC ("Deerfield"), our former subsidiary, to Deerfield Capital Corp. ("DFR") resulting in non-cash proceeds aggregating $134.6 million, consisting of 9.6 million shares of convertible preferred stock of DFR ("the DFR Preferred Stock") with a then estimated fair value of $88.4 million and $48.0 million principal amount of series A senior secured notes of DFR due in December 2012 (the "DFR Notes") with a then estimated fair value of $46.2 million. As discussed in the Form 10-K, we recorded a valuation allowance of $21.2 million during the fourth quarter of 2008 for these DFR Notes. We also owned an additional 0.2 million common shares in DFR.
The DFR Notes bear interest at the three-month LIBOR (1.22% at March 29, 2009) plus a factor, initially 5% through December 31, 2009, increasing 0.5% each quarter from January 1, 2010 through June 30, 2011 and 0.25% each quarter from July 1, 2011 through their maturity. The DFR Notes are secured by certain equity interests of DFR and certain of its subsidiaries.
On March 11, 2008, DFR stockholders approved the one-for-one conversion of all its outstanding convertible preferred stock into DFR common stock which converted the 9.6 million preferred shares we held into a like number of shares of common stock. During the first quarter of 2008, our Board of Directors approved the distribution of our 9.8 million shares of DFR common stock, which also included the 0.2 million common shares of DFR discussed above, to our stockholders. The dividend, which was valued at $14.5 million, was paid on April 4, 2008 to holders of record of our Class A common stock (the "Class A Common Stock") and our then outstanding Class B common stock (the "Class B Common Stock").
In the first quarter of 2008, in response to unanticipated credit and liquidity events in the first quarter of 2008, DFR announced changes to its business model and significant losses. Based on these events and their negative effect on the market price of DFR common stock, we concluded that the fair value and, therefore, the carrying value of our investment in the 9.8 million common shares was impaired. As a result, we recorded an other than temporary loss which is included in "Other than temporary losses on investments," of $68.1 million (without tax benefit as described below). As a result of the distribution of the DFR common stock, the income tax loss that resulted from the decline in value of our investment of $68.1 million is not deductible for income tax purposes and no income tax benefit was recorded related to this loss.
Other
We maintain an investment portfolio principally from the investment of our excess cash with the objective of generating investment income, including in an account (the "Equities Account") which is managed by a management company (the "Management Company") formed by our Chairman, who is our former Chief Executive Officer, and our Vice Chairman, who is our former President and Chief Operating Officer, (collectively, the "Former Executives") and a director, who is also our former Vice Chairman (together with the Former Executives, the "Principals"). The Equities Account is invested principally in equity securities, including derivative instruments, of a limited number of publicly-traded companies. In addition, the Equities Account sells securities short and invests in market put options in order to lessen the impact of significant market downturns. Investment income (loss) from this account includes realized investment gains (losses) from
marketable security transactions, realized and unrealized gains (losses) on derivative instruments and securities sold with an obligation to purchase, other than temporary losses, interest and dividends. The Equities Account, including restricted cash equivalents and equity derivatives, had a fair value of $33.7 million as of March 29, 2009. The fair value of the Equities Account as of March 29, 2009 excludes $47.0 million of restricted cash released from the Equities Account to Wendy's/Arby's in 2008. We obtained permission from the Management Company to release this amount from the Equities Account and we are obligated to return this amount to the Equities Account by January 29, 2010.
Presentation of Financial Information
We report on a fiscal year consisting of 52 or 53 weeks ending on the Sunday closest to December 31. All quarters presented contain 13 weeks. Because our 2009 fiscal year ending on January 3, 2010 will contain 53 weeks, our fourth quarter of 2009 will contain 14 weeks. All references to years and quarters relate to fiscal periods rather than calendar periods.
Results of Operations
Presented below is a table that summarizes our results, same-store sales and
restaurant margins for the 2009 first quarter and the 2008 first quarter. Due to
the Wendy's Merger, the percentage change between these three month periods is
not meaningful.
Three Months Ended
March 29, March 30, Change
2009 2008 Amount
(In Millions Except Restaurant Count and
Percents)
Revenues:
Sales $ 773.2 $ 281.6 $ 491.6
Franchise revenues 90.8 21.3 69.5
864.0 302.9 561.1
Costs and expenses:
Cost of sales 676.0 233.5 442.5
General and administrative 109.8 44.9 64.9
Depreciation and amortization 51.7 15.9 35.8
Impairment of long-lived assets 6.9 0.1 6.8
Facilities relocation and corporate restructuring 4.2 0.9 3.3
Other operating expense (income), net 1.5 (0.5 ) 2.0
850.1 294.8 555.3
Operating profit 13.9 8.1 5.8
Interest expense (22.1 ) (13.5 ) (8.6 )
Investment (expense) income, net (1.8 ) 2.2 (4.0 )
Other than temporary losses on investments (3.1 ) (68.1 ) 65.0
Other expense, net (2.6 ) (4.6 ) 2.0
Loss before income taxes benefit (15.7 ) (75.9 ) 60.2
Benefit from income taxes 4.8 8.4 (3.6 )
Net loss $ (10.9 ) $ (67.5 ) $ 56.6
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Restaurant statistics:
Wendy's same-store sales: First Quarter 2009
North America Company-owned
restaurants 0.3%
North America Franchised
restaurants 1.2%
North America Systemwide 1.0%
Arby's same-store sales: First
First Quarter Quarter
2009 2008
North America Company-owned
restaurants (8.0)% (1.6)%
North America Franchised
restaurants (9.1)% 1.0%
North America Systemwide (8.7)% 0.0%
Restaurant margin:
First Quarter 2009
Wendy's 11.1%
First Quarter 2009 First Quarter 2008
Arby's 14.2% 17.1%
Restaurant count: Company-owned Franchised Systemwide
Wendy's restaurant count:
Restaurant count at December 1,406 5,224 6,630
28, 2008
Opened 5 11 16
Closed (2) (21) (23)
Sold to franchisees (10) 10 -
Restaurant count at March 29, 1,399 5,224 6,623
2009
Arby's restaurant count:
Restaurant count at December 28
2008 1,176 2,580 3,756
Opened 1 17 18
Closed (6) (27) (33)
Restaurant count at March 29,
2009 1,171 2,570 3,741
Total Wendy's/Arby's restaurant
count at March 29, 2009 2,570 7,794 10,364
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Three Months Ended March 29, 2009 Compared with Three Months Ended March 30, 2008
Sales
Our sales, which were generated primarily from our Company-owned restaurants, increased $491.6 million to $773.2 million for the three months ended March 29, 2009 from $281.6 million for three months ended March 30, 2008. The increase in sales was due to the Wendy's Merger which added 1,399 net Company-owned restaurants as of March 29, 2009 and generated $507.0 million in sales during the 2009 first quarter. Wendy's same-store sales, excluding the impact of fewer restaurants serving breakfast in the first quarter of 2009, would have increased approximately 1.6%. Excluding Wendy's, sales decreased $15.4 million, which is attributable to the 8.0% decrease in same store sales of our Arby's Company-owned restaurants stemming from lower customer traffic primarily impacted by the previously described negative economic trends and competitive pressures in "Introduction and Executive Overview - Our Business." The decrease in sales was mitigated by the effect of our new Roastburger™ product launch and related advertising campaign in March 2009, which improved sales to a decrease of 2.5% in that month, and partially offset by the net increase in sales from the 15 net Arby's Company-owned restaurants added since March 30, 2008.
Franchise Revenues
Total franchise revenues, which were generated entirely from franchised restaurants, increased $69.5 million to $90.8 million for the three months ended March 29, 2009 from $21.3 million for the three months ended March 30, 2008. The increase in franchise revenue was due to the Wendy's Merger which added 5,224 franchised restaurants as of March 29, 2009 to the Wendy's/Arby's restaurant system and generated $71.2 million in franchise revenue during the 2009 first quarter. Wendy's franchise store-sales were not significantly impacted by fewer restaurants serving breakfast in the first quarter of 2009. Excluding Wendy's, franchise revenues decreased $1.7 million, which is attributable to the 9.1% decrease in same-store sales for Arby's franchised restaurants. Same-store sales of our Arby's franchise restaurants decreased primarily due to the same factors discussed above under "Sales."
Restaurant Margin
Our restaurant margin decreased to a consolidated 12.6% for the three months ended March 29, 2009 from the Arby's 17.1% for the three months ended March 30, 2008. The 2009 first quarter restaurant margin reflects the Wendy's restaurant margin of 11.1% and the Arby's restaurant margin of 14.2%. Wendy's restaurant margin for the first quarter of 2008 was 10.1%. The increase in the Wendy's margin is attributable to decreases in labor and certain controllable costs partially offset by increases in commodity costs in the first quarter of 2009. The decrease in the Arby's margin was primarily attributable to the effect of the decrease in Arby's same store sales without comparable reductions in fixed and semi-variable costs. The decrease in Arby's margin was partially offset by price increases.
General and Administrative
Our general and administrative expenses increased $64.9 million to $109.8
million for the three months ended March 29, 2009 from $44.9 million for the
three months ended March 30, 2008 principally due to the Wendy's Merger which
added $61.7 million of general and administrative expenses in the 2009 first
quarter. Excluding Wendy's, general and administrative expenses increased $3.2
million principally due to integration costs related to the Wendy's Merger.
Depreciation and Amortization
Three Months Ended
March 29, 2009 March 30, 2008
(In Millions)
Arby's restaurants, primarily properties $ 13.8 $ 14.8
Wendy's restaurants, primarily properties 35.8 -
Other 2.1 1.1
$ 51.7 $ 15.9
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As a result of 2009 refinements to the Wendy's purchase price allocation (including long-lived assets), the Company recorded an additional one time charge for related depreciation and amortization of $6.5 million in the first quarter of 2009.
Impairment of Long Lived Assets
Three Months Ended
March 29, 2009 March 30, 2008
(In Millions)
Arby's restaurants, primarily properties at underperforming
locations $ 6.5 $ 0.1
Wendy's restaurants 0.4 -
$ 6.9 $ 0.1
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Facilities Relocation and Corporate Restructuring
Three Months Ended
March 29, 2009 March 30, 2008
(In Millions)
Wendy's severance costs in the 2009 first quarter $ 4.2 $ -
Other - 0.9
$ 4.2 $ 0.9
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Interest Expense
Three Months Ended
March 29, 2009 March 30, 2008
(In Millions)
Wendy's debt $ 11.5 $ -
Arby's debt:
Term Loan 4.3 8.9
Other 5.9 5.4
Corporate debt 0.4 (0.8 )
$ 22.1 $ 13.5
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Interest expense increased $8.6 million principally reflecting $11.5 million of interest on Wendy's debt. This increase was partially offset by a decrease in Arby's Term Loan (the "Term Loan") interest expense due to a decrease in outstanding Term Loan debt resulting from the $143.2 million voluntary net prepayments since the end of the first quarter of 2008.
Investment Income, Net
Three Months Ended
March 29, 2009 March 30, 2008
(In Millions)
Recognized net (losses) gains $ (1.6 ) $ 1.7
Interest income 0.2 0.5
Other (0.4 ) -
$ (1.8 ) $ 2.2
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Our net gains (losses) include realized gains (losses) on available-for-sale securities and cost method investments and unrealized and realized gains (losses) on derivative instruments. Our recognized net gains decreased $3.3 million to a loss of $1.6 million and is primarily attributable to (1) $1.8 million of lower unrealized gains on derivatives in the 2009 first quarter as compared to the 2008 first quarter and (2) $2.7 million of unrealized losses on securities sold short with an obligation to purchase in the 2009 first quarter as compared to nominal gains in the prior year quarter. These decreases were partially offset by a $2.2 million increase in realized gains on securities sold short with an obligation to purchase in the 2009 first quarter as compared to the 2008 first quarter.
As of March 29, 2009, we had unrealized holding gains and (losses) on available-for-sale securities before income taxes of $0.2 million and ($1.2) . . .
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