Tag Archives: WEN



Wendy’s stock is under a lot of pressure today, as a result of their entry (again) into the breakfast fray. The company said that they will spend about $20M to support the breakfast initiative. Analysts are obviously reacting skeptically, since WEN has previously experimented with breakfast, in 1985, 2007 and 2012. Since $20M amounts to less than $.09/share, it seems like a reduction of $2.70/share (as this written) is a bit overdone.  This is like when your wife criticizes you for not putting the top back on the toothpaste. It’s not about the toothpaste 😊

The chart below shows the outstanding price performance of WEN over the last five years. It has recently been selling for over 30x EPS estimates for 2019, and about 20x trailing EBITDA.

The table below provides some broad financial results over the last eight years, including the Arby’s divestiture. There have been lots of “puts and takes” from the income statement, and the GAAP earnings per share have fluctuated accordingly.  We show both the GAAP results and the Adjusted Earnings Per Share from Continuing Operations.

Operating Profit, as reported, was up from 2011 to 2014, has been “flat” from 2014 through 2018. As shown on the annual cash flow statement, we view Net Cash Generated from Operating Activities  as a reasonable proxy for how a company is really progressing. Though fluctuating, up and down during the period, THIS NUMBER IS LOWER NOW THAN IT WAS IN 2011. For our purposes here, we can (charitably) call it  “flat” as well.

EPS has been up sharply from 2011 until 2018, both adjusted or by GAAP. That “progress”, however, has been, since 2014 especially, the result of borrowing $1.3 billion to buy back about 150 million shares of stock. (Ain’t low interest rates grand?? ) Setting aside the modest remaining equity, reduced from the buyback: with $2.8 billion of long term debt against calendar ’18 EBITDA of  $379M ($250M of pretax, pre-interest, continuing operating profit + $129M of Depreciation), with debt now at 7.4x TTM EBITDA, one would have to conclude that this financial lever has been pulled.


Just a week ago we wrote an article describing how the stock of lots of companies (we referenced Starbucks (SBUX) and Restaurant Brands (QSR), in the wake of the breakdown of ULTA and OLLI), are “priced for perfection”, are vulnerable to the possibility of even a small disappointment. Wendy’s now comes into play from that standpoint. Over the last five years, WEN has provided essentially flat Operating Profit and Net Cash from Operating Activities. Earnings Per Share have been increased through leveraging the balance sheet and acquiring a great deal of stock. Down over 10% as we conclude this piece, WEN still sells at 30x estimated earnings for calendar ’19 and 19x our calculation of ‘18x EBITDA from continuing operations. Setting aside the prospect of success with breakfast, which will be expensive and time consuming, and is the focus of virtually all of today’s press coverage: We are not long or short WEN common stock, because we cannot predict how long investors will embrace “asset light” and “free cash flow” companies (this one has $2.8B of debt to service), but,  by all standards we consider reasonable, WEN is more than fully valued.

Roger Lipton




As of December 31, 2017, Wendy’s operates and franchises the third largest hamburger QSR chain with systemwide sales of $10.3 billion and total locations of 6,634 (6,297 franchised and 337 Company operated). The majority of Wendy’s, 92%, are located in North America; this includes all Company owned locations. The remaining 8% are international with the majority of these locations – 83 located in Indonesia. Wendy’s international footprint is much smaller than other QSR chains.

The Company-run stores generated 6% of the total systemwide revenue with the North American franchise system accounting for 89% of total sales and international franchisees accounting for the remaining 5%.

Wendy’s NA (North America) are supplied through a cooperatively operated entity for the purpose of leveraging their purchase power and effectively managing quality distribution and inventories.


Prior to Todd Penegar being appointed CEO (May 2016), Wendy’s growth strategy was mostly stagnant. Once Mr. Penegar came into position, he began a series of growth initiatives, some new and others reutilized.

  1. The Image Activation Program, begun in 2013, includes reimaging existing restaurants and building new restaurants, and remains an integral part of Wendy’s global growth strategy. It includes exterior and interior design and upgrades. At the end of QTR-3, 2018 48% of the global system has been reimaged. This compares with 43% at the end of 2017. The Company expects approximately 50% of the global system to be reimaged by the end of 2018. Also, the addition of kiosk ordering stations has been implemented in approximately 10% of the system as of QTR-3, 2018.

The Image Activation Initiative met strong resistance in its early years    from franchisees. In one instance, Wendy’s Corporation had to sue one of the largest franchisees to force compliance which ultimately led to the buyout of that particular franchisee (DAVCO with 140 locations). Since that time Wendy’s launched a Franchisee Attitude & Optimism Evaluation Program (survey conducted by Franchise Business Review 2018) in the efforts of gaining more buy-in to the reimaging programs. Research shows that as of QTR-3, 2018:

  • 88% of Wendy’s franchisees would still invest in the concept.
  • 87% have a positive attitude about their affiliation with Wendy’s.
  • 84% would recommend Wendy’s to others.
  1. System Optimization Initiative – This is a program whereby: (a) Wendy’s will buy and sell restaurants in an effort to optimize the system. (b) Reduce total Company stores to 5% of total store count. As of QTR-3, 2018 the Company acquired 16 restaurants in the Columbus, Ohio market for approximately $21.4 million. Current Company owned restaurants maintain 5% of total system. (c) Franchise Flips – in QTR-3, 2018 the Company facilitated 9 franchise flips (part of the System Optimization Initiative). (d) New Restaurant Development – in QTR-3, 2018 the Company had 37 global openings; a net increase of 13 new units.
  1. Improving the Customer Experience – The Wendy’s Way is to delight every customer through:

On the technology front, Wendy’s has implemented a series of items to modernize operations. New standardized POS system, new BOH Kitchen monitors and software for scheduling and inventory management and new Mobile App (as of QTR-3, 2018 the Mobile App program has been rolled out and early response has been described as exceeding expectations.) The Rewards Program has been generous – giving away a free Dave’s Single in September as an example.

UNIT LEVEL ECONOMICS (per 2017 10-K; 2018 FDD)

Wendy’s unit level economics disclosure has been less than obvious but the 2018 FDD (Franchise Disclosure Document) provides information on AUV’s, costs and unit level EBITDA.

In 2017 AUV for Company stores was $1,881K. Franchise location AUV was $1,600K. Company store level EBITDA margin was 21.6% and at franchise locations  (EBITDAR), before rent, was 19.7%. Comparison of Cash on Cash returns at new restaurants, company and franchised, is provided below (Source: 2017 10K; 2018 FDD), royalties providing the differential:

 The acceleration in franchisee investment appears to be the result of two factors:

 1.      The performance of the new reimaged locations. The average increase in SSS in 2017 remodeled units was 11.5% up from average SSS increase in 2016 of 6.9%. See table below (Source: 2018 FDD):

Reimage Program with Indicated SSS Increase

2016      2017

Refresh                              7.8%      6.0%

Remodel                           7.5%      8.9%

Scrape & Build              19.2%   22.9%

Average                              6.9%    11.5%

2.  The Company introduced several creative incentive programs for franchisees to invest in the system. To launch the Image Incentivization Program the Company originally offered a 3-year monthly royalty abatement of 2% for new units. (Currently this royalty abatement has changed to 2% royalty abatement, 3.5% advertising abatement for year 1 and a 1% royalty abatement and a 3% advertising abatement for year 2.)

3. For the Remodel Program, franchisees are offered a 1% royalty abatement for 12 months.

The franchisees now seem convinced of the value of remodeling. Initially, there was serious pushback because of the high costs but after learning of the sales lift (see table above) and the added fact the Company adjusted their reimage requirements to 4 options ranging in costs from $300,000 to $1,200,000, now franchisees are embracing the program.



The Wendy’s Company paid quarterly cash dividends of $0.07 per share on its common stock aggregating $68.3 million in 2017. During the first quarter of 2018, The Wendy’s Company declared a dividend of $0.085 per share to be paid on March 15, 2018 to shareholders of record as of March 1, 2018.

Stock Repurchases:

The following table summarizes the Company’s repurchases of common stock for 2017, 2016 and 2015:

In February 2017, the Board of Directors authorized a repurchase program for up to $150M. An additional $120M was approved in August after the sale of the Company stake in Inspire Brands. In calendar ’18 through October, the Company repurchased 8.5M shares for $146.2M an average purchase price of $17.21. In Q3’19, an additional $120M was authorized, bringing the current outstanding authorization which expires 12/27/19 to $220M.

RECENT DEVELOPMENTS (Per Q3’18 EPS Report and Conference Call)

The reported numbers are heavily focused on “Adjusted” results. By far the largest adjustment was the Investment Income from the sale of their interest in Inspire Brands, for $450M, $353M net of tax. Adjusted earnings per share ($0.17 vs. $0.09), as described by the Company, “resulted primarily from the positive impact of a lower tax rate…..as well as an increase in adjusted EBITDA.” Adjusted EBITDA was $107.2M vs. $97.6M, the largest operating improvement being a $5.2M reduction in G&A expense. The most important operating variables in Q3 was a decrease in North American Same Restaurant sales (on a constant currency basis) of 0.2%, traffic also down,  (vs. 2.0% increase in ’17), global systemwide sales growth of 1.7% (on top of 3.4% in ’17), a decrease in company operated restaurant EBITDA margin of 20 bp to 15.7% (labor rate inflation and higher insurance costs, partially offset by pricing actions and lower commodity costs). There were 37 new openings globally and 24 closings, moving toward 1.5 percent for all of ’18 (1.0% in N.A. and 10% internationally).  At the end of Q3, 48% of the global system was image activated vs 43% a year earlier. 16 restaurants were bought back from franchisees, in Columbus, Ohio, which is historically interesting as that is where Dave Thomas started Wendy’s 49 years ago. Also in Q3, there were 9 “Franchisee Flips”, as part of the system optimization program, with 130 FFs to be completed in ’18.

For all of ’18, the Company now expects N.A. comps of about 1%, Company operated restaurant margin of 16-16.5% (15.8% for nine months, 17.6% in calendar ‘17), G&A expense of $190-195M ($46.5M and 146.1M for 3 mos. and 9 mos.), Adjusted EBITDA  up 6-8% to $415-420M ($107.2M and $291.7M for 3 mos. and 9 mos., $406.2M in calendar ’17, don’t know how ’18 becomes 6-8% growth), Adjusted EBITDA margin of approximately 33% (33.6% and 32.5% for 3 mos. and 9 mos.), Cash Flow from Operations of $295-$310M (was 229.7M for 9 mos.), Free Cash Flow of $225-235M ( $181.1M for 9 mos.). Commodity inflation is expected to be 1-2%, labor inflation of 3-4%, interest expense of $120M ($29.6M and $89.9M for 3 mos.and 9 mos.). In essence, the Q4 results are implied to approximately mirror Q3, with a slight increase in restaurant operating margin.

The Company points out, relative to projected ’18 results, and “certain non-GAAP financial measures”, including “adjustments”: “Due to the uncertainty and variability of the nature and amount of those expense and benefits, the Company is unable without unreasonable effort to provide projections of net income, earnings per share, free cash flow or reported tax rate or a reconciliation of those projected measures.”

The Company refrained from reaffirming previous goals for 2020, since international plans are being updated under new leadership in this area.

The Company stressed on the conference call the ongoing reimaging program, the delivery program now covering 50% of the North American system,  free cash flow generation of $181M for 9 mos. (a 50% increase) and FCF for all of ’18 of $225-235M (vs. 169.9M in calendar ’17, a result of slightly lower capex and a favorable change in working capital, i.e.accrued expenses), further development of the mobile app, the excellent franchisee relationships (strongly evidenced by recent survey results), the ongoing capital allocation process that includes substantial share repurchase.

There was quite a bit of conference call conversation about marketing initiatives and balancing the low priced offerings with premium products in a still fiercely competitive environment. An incentive program was launched to provide franchisees 11.5% of royalty and advertising relief for two years if they sign an incremental development. This is a step up from the previous 6% cumulative abatement over a three year period, with one point of the increased relief in each of the first two years on the royalty side. The Company initiative to reduce costs on reimaging has helped as well to stimulate new unit growth. International unit growth is still strong, on a small base, at 10% after 15% in ’17.

Overall, Wendy’s management continues to do a credible job of “blocking & tackling”, renovating and optimizing the system, encouraging international development and allocating capital to reward shareholders. They are here to stay, but are basically a mature chain operating in a challenging  environment.




The long term investment appeal of well established franchising companies is accepted by the investment community. Most of the prominent franchisors’ equities sell at price to trailing twelve month EBITDA multiples in the mid to high teens (Denny’s (DENN), Dine Brands (DIN), Dunkin’ Brands (DNKN), Pollo Loco (LOCO), McDonald’s (MCD), Restaurant Brands (QSR), Wendy’s (WEN), even higher in a couple of instances Domino’s (DPZ), Shake Shack (SHAK), Wingstop (WING), lower in a number of “challenged” situations like Jack in the Box (JACK), Red Robin (RRGB), Brinker (EAT), Fiesta Rest. (FRGI).

The attraction of asset light franchisors revolves around the presumably free cash flow for franchisors, a steady stream of royalty income unburdened by capital expenditures to build stores. The operating leverage is at the store level.  Franchisees are responsible for building the stores, then controlling food costs, labor, rent and all the other operating line items. Franchisors receive the royalty stream and have the obligation of supporting the system with brand development, site selection advice, marketing support, and operating supervision. These supporting functions, it should be noted, are optional to a degree, and we have written extensively about system support sometimes being short changed by corporate priorities such as major stock buybacks.


We acknowledge that in every franchise system there will be some operators less satisfied than others. In the same way, customer reviews on Yelp or Facebook are more frequently written by critics. Bad news is more noteworthy and more customers are inclined to criticize than applaud, so we have to listen to the complaints but dig further for the reality. With that in mind, we hear the following from franchisees of various restaurant systems:

“I’ve been in this business for thirty years, and I’ve never seen it this bad. Everyone is making money but me; the landlords, the franchisor, the banks. My margins have been killed, and I’m up against my lending convenants”.

“All the franchisors want to do is build sales to build their royalties. The dollar deals are trading people down. My franchisor doesn’t care about my margins. I can’t maintain my margins, especially with the increasing cost of labor, let alone build it”.

“The franchisor is putting pressure on me to sell, even though I’ve always been considered a good operator, with high performance scores. I’m up to date on my development agreement, but they want somebody else to take me out, and the new buyer will agree to what I consider to be a ridiculously aggressive development contract”.

“The franchisor has replaced experienced long term field support with lower priced (and inexperienced) younger people. They’re cutting corporate overhead, but these kids, who never ran a store, are telling me to how to control costs.””

“I’m doing my best with the development objectives, but it is almost impossible to build stores with today’s economics. Rents are too high, labor costs are killing me, and I can’t raise prices in this promotional environment”.

“As if things aren’t tough enough, I’m being nickeled and dimed with demand for higher advertising contributions and fees on services (including software) that I thought would be provided”.

The valuations provided to the publicly held companies do not reflect the situation as described by the admittedly anonymous franchisees. The commentators quoted above don’t want to aggravate their franchisor, and we don’t want to be unfair or misleading to particular companies by relying on just a few conversations, though they do support one another. For the most part, franchisees are strongly discouraged from talking to the press or investment community. The companies will say that “competitive” issues require some secrecy, but there are few secrets in this industry.

The optimistic view, as represented by the valuations in the marketplace, is that the comments above are not typical or representative of the health of the subject franchise systems. Allow me to provide a short story which leads to a suggestion.


Twenty six years ago, in 1992, IHOP had just come public. I was a sell side analyst, thought the numbers were interesting and the stock was reasonably priced. The company, led by the now deceased CEO Kim Herzer, invited me to attend their franchisee convention, which I did. I obviously had the opportunity to interface with many franchisees and it was clear that, while all was not perfect, the franchisor was providing a great deal of support that was embraced by an enthusiastic franchise community. IHOP stock tripled over several years for me and my clients who owned millions of shares. I attended several more of their annual conventions and maintain some of those relationships to this day. Obviously, the conviction I gained from their open attitude was critical to the success of the investment. I should add, that many of those buyers in 1992 owned the stock for many years, not living and dying on quarterly reports.


As you are no doubt by now anticipating, my suggestion to publicly held franchising companies: open up your franchisee conventions to the investment community. The companies may quickly respond that lenders are already invited to franchise conventions, but franchisees are unlikely to express their system oriented concerns when they are making a pitch to a potential lender. Companies may also respond that their lawyers think it would be a bad idea, not consistent with full disclosure and analysts would be getting “inside information”. Let’s not allow the lawyers to provide “cover”. A good lawyer will provide a solution to the problem, not just provide the pitfalls. Analysts attending a franchise convention are not being told what sales or profits are going to be. Attending a franchise convention is  a “channel check”, no more than talking to a supplier or customer of a manufacturing company, which any decent analyst will do.

The anecdotal critical comments, as described above, have likely been heard by others, but may be atypical of most restaurant franchising companies. There are no secrets in this business. One of the investment appeals of this industry is its transparency. Notable news is going to leak out anyway. The objective of any publicly held company is to build stock ownership by well informed investors. Investment analysts pride themselves on their ability to “build a mosaic”, enhance the information provided in quarterly reports, SEC filings, and conference calls, with “channel checks”. What channel check would be more pertinent than meeting the franchisees of a company that is dependent on franchisee success? Putting it another way, and taking the highest valuation relative to EBITDA as an example: Wingstop (WING) is a company I have the highest regard for. However, you could call it irresponsible to pay almost fifty times trailing EBITDA for Wingstop stock (and I haven’t) if I couldn’t talk to franchisees of my own choosing?

There’s no particular need to invite this writer if I’m not considered influential enough. I have not spoken to these analysts on this subject, but qualified industry followers such as David Palmer, Nicole Reagan, Matt DiFrisco, David Tarantino, Jeff Bernstein, Andy Barish, Bob Derrington, Mark Kalinowski, Michal Halen, Gary Occhiogrosso, Howard Penney, Jonathan Maze, Nicholas Upton, John Hamburger and John Gordon provide the beginning of an invitation list.  I rest my case.

Roger Lipton


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