Tag Archives: Wendy’s



I really like Starbucks. It’s my social life in the morning. Everyone in the store knows my name (Roger that!) and my drink (a grande’ soy latte’, no foam, costs $6.04 in Manhattan, including tax). It therefore costs me $2200 annually of after tax money, so it costs well over $3,000 per year, pretax, for my morning coffee experience.

On the other hand………..

As you may have heard, Panera is now offering a monthly coffee program, whereby I can get unlimited coffee for the month for $8.99, any size, any flavor. (no soy for that price, admittedly)

Burger King has been offering, since last March, a monthly coffee subscription for $5.00 per month.

McDonald’s has been offering any size coffee for $0.99. You can also get two breakfast sandwiches for $4.00, so two people can have a McMuffin and cup of coffee for $6.00 plus tax.

Wendy’s is aggressively rolling out a new breakfast program, starting today. They have been promoting “two for $4” sandwich deals for some time, so we can expect the breakfast offerings to be similar. They are planning to spend $40-50M on advertising of the introduction so we can assume they will be aggressively pricing the coffee.

Dunkin’ Brands, with an extensive selection of donuts and other pastries, sells their coffee at $2.00 a cup, more or less, a little less for a “regular”, a little more for “large”.

All these companies are clearly hoping that the customer will buy something else besides the coffee, as long as they are at the store. However, without question, the pricing environment for our morning cup of coffee is getting more competitive..


Away from the publicly traded companies, perhaps Panera, with their established reputation for the quality of their breakfast offerings, combined with their “community gathering place” comfort (pioneered by Starbucks) will see the largest incremental positive effect of their new breakfast program. The publicly held companies will be fighting each other for market share, since nobody has a  “moat”.

Relative to Starbucks: This can’t be a plus. Will it cripple them? Certainly not, but we suggest that the comps will slow rather than accelerate. If only one out of twenty customers makes a switch, it will be noticeable, and there is likely to be at least one of their competitors fairly nearby. They could sell more food but that’s already been the strongest part of their comp growth the last ten years. Their competitors sell food as well, and Starbucks doesn’t have a material edge in that regard. Stocks sell, by the way, based on the “second derivative”, the change of pace of the growth rate, still growing but  how fast?

If there were a Panera or McDonald’s between “my Starbucks” and my office, I would be sorely tempted to adjust, even if I have to make new friends. I could afford to spend another day or two on the golf course 😊

Roger Lipton



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.



We have written several articles regarding Papa John’s (PZZA) in the last sixty days, since John Schnatter became a persona non grata in mid July, the latest on 8/8 after he had been forced out and sales were disclosed to have been down double digits in July. You can read our commentary below:

July 17th, here:

https://www.liptonfinancialservices.com/2018/07/papa-johns-pzza-the-latest-restaurant-situation-a-buy-or-a-sell/ – PZZA closed that day at $52.09

July 23rd, here:

https://www.liptonfinancialservices.com/2018/07/papa-johns-pzza-should-you-be-long-or-short-this-one/ – we disclosed that we had bought the stock, PZZA closed that day at $46.56

and August 8th, here:

https://www.liptonfinancialservices.com/2018/08/papa-johns-pzza-reports-q2-stock-down-again-how-bad-is-it/ – we reiterated our bullish position – PZZA closed that day at $38.94

Activist investor, Trian Fund Management LP, controlled by the well known Nelson Peltz, is one of a number of potential buyers who have indicated interest in acquiring Papa John’s. The company has retained investment bankers to “shop” the company, and it is not clear whether Trian’s interest, or that of others, is a result of that process.

In any event, the due diligence process is under way, and PZZA is trading up about 10% this morning to the $54-$55 per share. “Let the games begin.” While PZZA is still statistically cheap, relative to other franchising  companies, like Dunkin’ (DNKN), Restaurant Brands (QSR), Wendy’s (WEN) and (especially) Wingstop (WING), there are some unique uncertainties here, among which are:

  • To what extent John Schnatter, who owns about 30% of the stock will muddy the waters with his ongoing desire to be involved. To date, he has indicated an unwillingness to back away, but the company has already moved ahead without him in their corporate imagery.
  • Sales were damaged materially through the summer, and we do not know whether there has been any rebound, or stability at the very least. This is a top line business, and it would make a huge difference in terms of giving hope to potential buyers if sales have at least stabilized.
  • There are lots of class action lawyers around, ready to muddy the waters should a deal be announced, claiming, among other things, that the transaction is undervaluing the company.

On the other hand, as we pointed out in our previous articles, it is in the interest of all the major stakeholders to get a deal done, including John Schnatter. Unfortunately, Schnatter may not realize that yet, and it could take some more time for that reality to sink in.

Putting it together, we doubt that a deal will be done at much more than $60 per share, and the process could drag on for months. Should a transaction be delayed, or not seem likely, due to continuing weak sales or Schnatter’s requirements, PZZA could fall back to the high 40s.

Longer term, six months to a year out, or beyond, we think there is a likelihood that PZZA could trade a lot higher. Chipotle (CMG), for example, hired a new CEO, and, before anything much in terms of tangible results has even occurred, CMG is up over 50%. Relative to PZZA Over the next several months, with the foreseeable uncertainties, there is not much more upside potential than downside risk. We advise long term investors to stick with at least part of their position. Shorter term traders would be well advised to take partial profits, lowering their cost basis on the remainder.

Roger Lipton


I have followed the restaurant industry for four decades; have invested hundreds of times in chain restaurant companies (public and private). Have lost more times than I normally like to admit, and fortunately have earned a lot more than I have lost. I consider it “therapeutic” to review some of the previously public companies that have disappeared. I have studied them all, invested in and/or advised some of them, and interfaced with virtually all of the management teams. Industry legends such as Norman Brinker (Brinker Int’l), Dave Thomas (Wendy’s), Jim Patterson (Long John Silver’s), Harold Butler (Denny’s), Jim Collins (Sizzler), Allan Karp (Karp & Reilly), and many others were keynote speakers at my annual Restaurant Industry Conference during the eighties and nineties.
Among the companies that appeared (in no particular order) were: Max & Erma’s, Po Folks, Rax Restaurants, Shoney’s, Sizzler, Skolniks, Uno Restaurant , Magic Restaurants, GD Ritzy’s, D’Lites, Checkers, Daka International (Fuddruckers, Champps), GB Foods (Green Burrito), TPI Restaurants, Vicorp , Ground Round, Morgan’s Foods, Bayport Restaurant (Crabhouse), Blimpie, Boston Chicken, Main Street and Main (TGIF), Wall Street Deli, American Family Restaurants, Austin’s Steaks & Saloon, Boston Restaurant Associates (Pizzeria Regina), Italian Oven, New World Coffee, Pudgie’s Chicken, Rattlesnake Holding, Shells Seafood Restaurants, Rally’s, Buffets, Ciao Cucina, Logan’s Roadhouse, Rainforest Café. Most of these companies are GONE, None are publicly held any longer.
There are many others that didn’t necessarily appear at my conference. Remember Chi Chi’s and Ryan’s Family Steakhouse, two of the most attractive concepts from the early eighties. Both had fully loaded sales/investment ratios over 2:1 at the time.
Today there are established companies such as McDonald’s, Wendy’s, Jack In The Box, Yum Brands, Chipotle, Panera and others, as well as a new crop of publicly held companies such as Papa Murphy’s, Noodle’s, Potbelly, Habit Restaurants, Wing Stop, Rave (Pizza Inn and Pie Five), Zoe’s, One Hospitality (STK), Ignite (Joe’s Crab Shack and Brick House Tavern), Del Frisco’s, Fiesta (Pollo Tropical and Taco Cabana, Del Taco and others. The obvious message for restaurant managers, investors, lenders, analysts and investment bankers: There are lessons to be learned; hopefully I’ve learned a few, how about you?

You’ve Asked Rog:

A manager of my local Chipotle tells me that his sales have firmed up again since the slowdown this summer. Maybe the decline in the stock (from 760 to 720)  has been overdone?

Rog answers:

I would canvas more than one store, in more than one region, before drawing any “anecdotal” conclusions. One of the first questions I ask employees as I canvas retail establishments, which I do, is: “How long have you been with the Company?” Sometimes an employee has been there just a couple of weeks, sounds great but has no real perspective. Meanwhile CMG is trading at one of the highest valuations in the industry so I would wait for a better buying opportunity.

You’ve Asked Rog:

I hear from a couple of McDonald’s franchisees that this new CEO, Steve Easterbrook, is making a lot of sense to most. Sales are apparently still “flattish” but he sounds good so far. Is there an opportunity here?

Rog answers:

He just became CEO earlier this year, so it will take a while because this is an awfully big ship to turn around. I think the biggest appeal of the stock here is the secure dividend, and the possibility of some sort of monetization of their royalty stream or huge real estate holdings. Upside here I don’t know, but there shouldn’t be much risk at this level.