The Wendy’s Company (NASDAQ:WEN) Q4 2023 Earnings Call Transcript
The Wendy's Company (NASDAQ:WEN) Q4 2023 Earnings Call Transcript February 15, 2024
The Wendy's Company misses on earnings expectations. Reported EPS is $0.21 EPS, expectations were $0.23. The Wendy's Company isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: [Call Starts Abruptly] the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Kelsey Freed, Director of Investor Relations, you may begin your conference.
Kelsey Freed: Thank you and good morning, everyone. Today’s conference call and webcast includes a PowerPoint presentation, which is available on our Investor Relations website, irwendys.com. Before we begin, please take note of the Safe Harbor statement that appears at the end of our earnings release. This disclosure reminds investors that certain information we may discuss today is forward-looking. Various factors could affect our results and cause those results to differ materially from the projections set forth in our forward-looking statements. Also some of today’s comments will reference non-GAAP financial measures. Investors should refer to our reconciliations of non-GAAP financial measures to the most directly comparable GAAP measure at the end of this presentation or in our earnings release.
On our conference call today our President and Chief Executive Officer, Kirk Tanner; and our Chief Financial Officer, Gunther Plosch, will give a business update, review our fourth quarter and full year 2023 results and share our 2024 financial outlook. From there, we will open up the line for questions. And with that, I will hand things over to Kirk.
Kirk Tanner: Thanks, Kelsey, and good morning everyone. Before we get started today, I wanted to share how fired up I am about the opportunity to join The Wendy’s team and lead this iconic brand. I’ve been a Wendy’s fan my whole life and what drove me to make this move was not just the amazing brand heritage, but the incredible potential I see in this business. I am confident that you will be just as energized about our future as I am after hearing our plans to drive profitable growth. Throughout my career, I have taken a customer centric mindset coupled with strong operational execution to guide growth and deliver on strategic objectives. I feel strongly that my experience and leadership philosophy will support our success and I am excited to bring this perspective to Wendy’s at such a pivotal time for the brand and industry.
In my first nine days, I’ve had the opportunity to meet with many members of the team and some of our passionate franchisees. I look forward to spending more time with others across The Wendy’s system and our investment community in the coming weeks. When I look at Wendy’s, I see the highest quality food in the QSR industry, which has built a very strong foundation of sales and profit alongside a very healthy balance sheet. This foundation will serve as a springboard to drive what matters most, accelerated sales and unit growth, so the brand can reach its full potential. Our commitment to growth has never been stronger and I believe that our strategic focus on driving global same restaurant sales momentum, accelerating our digital business and expanding our footprint are the keys to unlocking our next chapter and becoming an even more formidable global competitor.
Today you’ll hear our plans to invest behind these pillars to build a growth engine that drives an acceleration in sales growth, footprint expansion and margin enhancement to level up The Wendy’s brand for years to come. Before we dive into our profitable growth strategies, I’d like to take a moment to recognize the team’s accomplishments last year. We delivered strong 2023 results, driving sales and profit growth as we made continued progress on our strategic growth pillars. This marks our 13th consecutive year of global same restaurant sales growth, which highlights our consistent execution and dedication to growing The Wendy’s brand. Our international business achieved 8.1% same restaurant sales growth in 2023, laddering up to 20.5% on a two year basis and extending to eleven consecutive quarters of double-digit two year same restaurant sales growth.
This success supported a record number of international new restaurants opening in 2023 and is a key enabler of our international expansion in the coming years. Our U.S. business reached 3.7% same restaurant sales growth in 2023, resulting in 7.6% on a two year basis. This growth allowed us to maintain our dollar and traffic share within the QSR burger category each quarter of 2023. We delivered meaningful year-over-year digital sales growth every quarter, growing nearly 30% across the full year to almost $2 billion, which was well ahead of our original expectations. We reached a record high 14.5% global digital sales mix in the fourth quarter, supported by strength across all channels as we built more personalized relationships with our loyalty members and continued to provide great in-restaurant experiences.
Our sales expansion and lower commodity inflation supported 100 basis point year-over-year increase in U.S. company-operated restaurant margin to 15.3%. This return to pre-COVID margin sets the stage for even further improvement in profitability moving forward. We closed the year strong from a restaurant development perspective, bringing our full year openings to 248. On a net basis, we achieved our goal of 2% net unit growth with 75% of that growth in international markets. Finally, we remain disciplined in our capital allocation policy including 100% increase in our dividend rate and returned nearly $400 million to shareholders in 2023. All this momentum sets a strong foundation for our growth in the coming years. I will now turn it over to GP to share our fourth quarter and full year financial results.
Gunther Plosch: Thanks, Kirk. We are pleased to deliver another quarter of sales and adjusted EBITDA growth to close 2023. In the fourth quarter, our global system wide sales grew over 3% supported by continued global same-restaurant sales growth and the benefit our global net unit growth. Our U.S. Company-operated restaurant margin of 13.5% contracted versus the prior year, primarily due to a quarter-over-quarter acceleration in commodity inflation to mid-single digits, customer count declines and labor inflation of almost 4%. These were partially offset by the benefit of a higher average check, driven by cumulative pricing of approximately 4.5%. G&A decreased approximately 4%, primarily driven by a decrease in employee compensation and benefits.
Adjusted EBITDA increased 2.5% to approximately $127 million resulting primarily from higher franchise royalty revenue, a decrease in the company’s incremental investment in breakfast advertising and lower G&A expense. These were partially offset by a decrease in us company operated restaurant margin and higher franchise support and other cost. Adjusted EPS came in at $021, with the decrease versus prior year driven by higher monetization of cloud computing arrangement cost and a higher tax rate. These were partially offset by an increase in adjusted EBITDA. Across full year of 2023, our strategic plans and strong execution drove compelling financial performance. Our global system wide sales grew 6.1%, supported by the mid-single digit global same-restaurant sales growth alongside our 2% global net unit growth.
Our U.S. Company-operated restaurant margin of 15.3% returned to pre-COVID levels, despite ongoing inflationary pressures. Adjusted EBITDA increased over 7.5% to approximately $536 million, while adjusted EPS increased almost 13% to $.97. Finally, free cash flow increased 29% to approximately $274 million, further demonstrating the high cash flow generating abilities of our business. With that, I will now turn it back over to Kirk to talk about our plans to drive growth in 2024.
Kirk Tanner: Thanks, GP. As I said earlier, I am excited to begin this chapter for the Wendy’s brand with a focus on accelerating our global growth, delivering significant restaurant margin expansion and driving long-term shareholder value. Now let’s turn to our growth plans across each strategic pillar. The breakfast daypart is one of the most compelling levers when considering sales growth and margin acceleration opportunities. We can grow our breakfast business significantly without adding incremental labor, which drives meaningful improvement of our restaurant economic model. To fuel the acceleration of this daypart to new heights, we are planning to invest approximately $55 million of incremental company advertising in the U.S. and Canada, split evenly over the next two years.
This investment will further amplify our plans and support an always-on approach across media, partnerships and activations as we tell our breakfast story. We are on a mission to ensure everyone has tried breakfast at Wendy’s because we know from experience that once customers try our fresh cracked eggs and crispy bacon, they will be back again and again. The level of quality we provide on our breakfast menu supports our highest customer satisfaction scores and we are now driving further growth at the daypart by providing our amazing food at a great everyday price alongside craveable innovation throughout the year. I’ve had the privilege of meeting with some of our growth-minded franchisees and I can tell you they are all in on breakfast and are committed to further supporting our investments by doing everything they can to execute at the highest level in the morning.
We expect our investment and plans will drive a 50% increase in weekly U.S. breakfast sales per restaurant over the next two years as we charge forward on our journey towards earning our breakfast day part fair share of approximately $6,000 weekly per restaurant. We also have plans in place to double down on what makes Wendy’s brand iconic. First, one of our biggest competitive advantages is our fresh, never frozen beef that we use on every hamburger every day. Nobody delivers this level of quality at the scale that we do, and we will once again utilize March Madness as a high impact platform to remind fans of this key Wendy’s difference. Second, we will continue to lead the category in ownable and innovative programs that drive both traffic and check in 2024 that means new premium flavors and builds on our popular Made to Crave platform.
It means big news on Frosty, including new flavors that will drive special visits and add ons to existing orders. And it means game-changing innovation on our chicken lineup. Finally, we will continue to leverage our very own Biggie Bag platform to offer compelling everyday value. Importantly, we will always do this The Wendy’s way, which means never compromising on quality. This platform drove success in 2023 with our customer ratings on value and quality trending better than competitors positioning us to win visits in 2024. Critically important, we will execute with excellence in our more than 7000 global restaurants. In 2023 we made great progress on customer satisfaction, taste, accuracy and speed, and we will continue to elevate our in-restaurant experience to delight every customer every day.
In total, we now expect our plans and investments will drive global same-restaurant sales growth of 3% to 4% in 2024, an increase versus our previous long-term expectation of low single-digits, and we expect to build on this momentum moving forward. Now, let’s turn to our plans to accelerate our digital business. We’ve made a ton of progress on our digital journey as we’ve grown digital sales from under $250 million in 2019 to almost $2 billion in 2023. We are clearly seeing the benefits of the higher frequency and checks that digital drives. We also know there’s a massive opportunity to further unlock digital sales growth and benefit even more from the margin expansion these channels can generate. To drive digital’s new phase of growth, we are planning to invest approximately $15 million, primarily in 2024, to further enhance our mobile app experience and step change our loyalty capabilities.
The enhancement to our mobile app will allow us to consistently deliver a seamless experience for our customers, enabling them to access Wendy’s anytime, anywhere. We also implemented a new customer data platform in Q4 and are evolving our loyalty platform alongside best-in-class third-party partners. These initiatives will unlock our ability to act on customer data through segmentation and machine learning, driving a meaningful increase in personalization for our loyalty members. I’m excited about our new capabilities in our digital toolbox, but what really drives our confidence in accelerating digital is the way we’re bringing the entire experience together in a uniquely Wendy’s way. We started our journey by forging a data-centric infrastructure and building out a top talent team.
That foundation allows us to gain the maximum benefit from these new platforms, including increased digital engagement, frequency and lifetime spend. We have the right people, systems and plans in place to fuel the next phase of digital growth and now expect global digital sales will reach over $2 billion in 2024, a full year earlier than planned. We are always focused on improving the customer and crew experience, and in that spirit, we are leveraging technology in our restaurants even more. We are planning to invest approximately $20 million to roll out digital menu boards to all U.S. company operated restaurants by the end of 2025 and approximately $10 million over the next two years to support digital menu board enhancements for the global system.
We expect our digital menu boards will drive immediate benefits to order accuracy, improve crew experience and sales growth from upselling and consistent merchandising execution. Beginning as early as 2025, we will begin testing more enhanced features like dynamic pricing and day part offerings along with AI-enabled menu changes and suggestive selling. As we continue to show the benefit of this technology in our company-operated restaurants, franchisee interest in digital menu boards should increase further supporting sales and profit growth across the system. We will continue setting the pace in generative AI and now have rolled out Wendy’s fresh AI in several restaurants where we see ongoing improvement in speed and accuracy. This technology also plays a key role on our restaurant team, enabling the crew to focus on what matters, preparing fresh, high quality Wendy’s favorites and building customer relationships to bring them back time and again.
We will do everything we can to ensure this new technology is delighting our customers and crew while enhancing our restaurant economic model along the way. The incremental sales growth we expect to deliver behind our investment in breakfast, digital and technology will drive meaningful sales leverage in our restaurants. These initiatives are highly incremental and margin accretive to the overall business, driving further benefit to restaurant margin. These growth drivers, alongside our continued focus on supporting the restaurant economic model through cost management and strategic pricing are driving acceleration in our U.S. company-operated restaurant margin outlook to 16% to 17% in 2024. And our plans perfectly position us to continue driving meaningful margin expansion into the future.
The top 25% of our company-operated footprint already achieved over 20% restaurant margin, so we know significant growth is achievable. We are now creating the foundation for all restaurants to reach towards the top performance tier. We are committed to working with our franchisees to support margin expansion across our system. This drives both incremental profit for our current footprint and improvement in new unit economics which further supports our global footprint expansion. Our expected restaurant margin expansion will improve new build paybacks and drive increased financial health across our system, increasing development appetite from new and existing franchisees over time. But we aren’t waiting to accelerate our unit growth. We are fueling growth now with continue to support of our global expansion plans.
Our popular build a suit funds continue to drive unit growth and we expect to add incremental funding to the program over time to drive even more new restaurants. Additionally, as our restaurant economic model becomes even more compelling, we will lead by example and continue to expand our company operated footprint in the U.S. and UK. These initiatives build on our groundbreaker and pace setter development incentive programs and our increased franchise recruiting efforts, which have resulted in hundreds of new restaurant commitments and 70 approved new franchisees across the last two years. These plans support our goal of driving global net unit growth of north of 2% in 2024 and further acceleration to 3% to 4% in 2025. As of today, we have over 90% of our new restaurant pipeline through 2025 committed under a development agreement.
This represents a 20% increase versus our position in the previous quarter, further solidifying our confidence in achieving our development goals. Now I’ll turn it back to GP to walk through our financial outlook.
Gunther Plosch: Thanks, Kirk. Our 2024 financial outlook, which replaces our previous long-term outlook, reflects the strong foundation we are building as we enter our next chapter. We expect to deliver significant sales growth of 5% to 6% this year, driven by global same restaurant sales growth of 3% to 4% and global net unit growth north of 2%. This sales growth flows through the P&L, benefiting royalties and our company operated restaurant EBITDA and driving our 2020 forecasted EBITDA outlook of approximately $535 million to $545 million, flat to slightly up versus the prior year, as we are making significant incremental investments across the business. We are expecting us company operated restaurant margin expansion of approximately 100 basis points to 16% to 17%.
This is supported by our sales growth, including cumulative pricing in the low-single digits and flat commodity inflation. We expect labor inflation will hold relatively steady versus the prior year at 3% to 5%. Please note that we expect our startup investments and ongoing inflationary pressures in the UK market will represent a headwind of approximately 50 basis points to global company operated restaurant margin. We anticipate that the increases in royalty and restaurant EBITDA will be partially offset by our investment in U.S. and Canadian breakfast advertising, an increase in G&A to $265 million to $275 million and a decrease in net franchise fees to $15 million to $20 million. The expected G&A increase is driven by investments to hire and support top talent to drive our growth plans.
These increases are partially offset by lower expected professional fees. We expect free cash flow to grow to approximately $280 million to $290 million this year. We expect this will be driven by lower cloud computing arrangement cash outlays of approximately $25 million as both phases of our EAP implementation have now been completed, an increase in our core earnings and cash received for development activities and services provided to franchisees. We anticipate these benefits will be partially offset by an increase in CapEx to $90 million to $100 million, driven by the rollout of digital menu boards to our U.S. company operated restaurants, investments in our mobile app, and an increase in company new builds. To close our 2024 outlook discussion, we expect an increase in our adjusted EPS in 2024 to $0.98 to $1.02, primarily driven by an increase in adjusted EBITDA and lapping a decrease in investment income in the prior year.
These are partially offset by lower interest income, driven by an expected decrease in our cash balance as we invest in the business for growth and an increase in amortization of cloud computing arrangements. We’re building a profitable growth engine behind our investments to drive continued sales and margin expansion, supporting earnings and cash flow growth for years to come. Finally, I’d like to highlight our capital allocation policy, which remains unchanged. Investing in growth remains our number one priority and that is clear through the investments we are making to fuel our strategic growth pillars. Secondly, we are committed to sustaining an attractive dividend. We announced today the declaration of our first quarter dividend of $0.25 per share and expect a full year dividend of a $1 per share in 2024.
As we turn our focus to growth investments and maintaining an industry-leading dividend yield, we plan to allocate less cash over the next year to share and debt repurchases. We have approximately $310 million remaining on our $500 million share repurchase authorization expiring in February of 2027 and approximately $20 million remaining on our debt repurchase authorization expiring this month. We remain fully committed to delivering a simple yet powerful formula. We are predictable, efficient growth company that is driving strong system by sales growth on the backdrop of positive same-restaurant sales and expanding our global footprint. This is translating into significant free cash flows, which supports meaningful return of cash to shareholders through an attractive dividend and share repurchases.
With that, I will hand things over to Kirk.
Kirk Tanner: Thanks, GP. I couldn’t be more excited for what’s ahead of us at Wendy’s as the investments and plans we announced today position us to drive growth across our strategic pillars. These plans are specifically designed to complement each other in ways that build Wendy’s fandom and bring more customers into our restaurants more often. Our plans and investment enable us to delight our customers with high quality menu items, exciting innovation and compelling value across our day parts, fueling an increase in our 2024 global same restaurant sales expectations to 3% to 4%. They allow us to build personalized relationships with our fans and make it easier for them to access the brand anytime, anywhere, enabling us to reach our global digital sales goal of over $2 billion a year earlier than planned.
And they drive our global footprint expansion, bringing more Wendy’s restaurants to the world and empowering our net unit growth acceleration to 3% to 4% in 2025. Wendy’s already has a strong track record of growth and now we are solidifying that foundation with the right investments at the right time to drive us to the next level. In the coming months, I am committed to working alongside the Wendy’s system to build a robust profitable growth plan that will unlock the full potential of this iconic brand. With that, I will hand things over to Kelsey to share our upcoming IR calendar.
Kelsey Freed: Thanks, Kirk. We’re excited to get on the road and introduce many of you to Kirk, who will be attending all our investor events this quarter. To start things off, we have an NDR in Boston with Piper Sandler on March 7. We’ll then attend the UBS Conference in New York on March 13, followed by the Citi Conference in Orlando on March 21. Lastly, we plan to report our first quarter earnings and host a conference call that same day on May 2. As we transition into our Q&A section, I wanted to remind everyone that due to the high number of covering analysts, we will be limiting everyone to one question only. With that, we are ready to take your questions.
Operator: [Operator Instructions] We do have our first question comes from Danilo Gargiulo from Bernstein. Danilo, your line’s now open.
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