Must-know: Wendy's quarterly overview for 2Q14 (Part 7 of 9)
Wendy’s system optimization’s effects on other costs
In a company-operated restaurant, there are several costs related to running the restaurant. Since Wendy’s (WEN) sold 481 restaurants, it’s important to take a look at how these costs have changed for the company.
General and administrative costs
In the above chart, we can see that both general and administrative (or G&A) expenses and cost of sales are declining. G&A costs reduced by ~$8 million, down 10.4% on a year-over-year basis. The facilities and action charges net of benefits were also lower at $0.9 million, compared to $6.6 million in 2013. In addition, the company has already achieved a $30 million reduction in G&A in the year 2013. In Chipotle Mexican Grill’s (CMG) earnings overview series, we saw how the “general and admin costs spread across all its restaurants.” Chipotle doesn’t franchise its restaurants, so it bears all G&A costs.
Moving from cost of sales to other operating expenses
Due to the shift in restaurant responsibilities from the company to the franchisee, some of the costs included as a cost of sales moved to other operating expenses. For example, the company incurred $4.4 million in its other operating expense, compared to $0.4 million a year ago in 2013. These other operating expenses were primarily due to an increase in rent expenses from properties subleased to franchisees. However, management stated that the rental income from franchise revenues mitigated this expense.
Real estate in restaurant business
Restaurants that use the franchise model often own real estate and sublease their real estate to franchisees and earn rental in return. McDonald’s (MCD) follows this model. Read “Why McDonald’s may be a REIT stock” to know more about how big a real estate portfolio can get for a restaurant chain.
An investor can get exposure to the restaurant industry through ETFs such as the Consumer Discretionary Select Sector SPDR Fund (XLY) and the PowerShares Dynamic Food and Beverage ETF (PBJ).
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