Wendy's (WEN) Q4 Earnings Beat, Revenues Miss Estimates

The Wendy's Company WEN reported mixed preliminary results for the fourth quarter of 2018, wherein revenues missed estimates while earnings surpassed the same.

Adjusted earnings of 16 cents surpassed the Zacks Consensus Estimate of 15 cents by 6.7%. The bottom line also increased a whopping 77.8% year over year, primarily favored by the positive effect of lower tax rate from Tax Cuts and Jobs Act of 2017. Increase in adjusted EBITDA and fewer outstanding shares also boosted the reported quarter’s earnings.

Quarterly revenues of $397.8 million lagged the consensus mark of $400 million by 0.6%. However, the top line improved 3.6% from the year-ago quarter, driven by increased sales at the company-operated restaurants. Revenues also gained from an increase in franchise royalty revenues and fees, which were primarily driven by new restaurant development and lower franchise incentives.

Meanwhile, comps at the North America system restaurants were up 0.2% against a decline of 0.2% in the second quarter and compared with a 1.3% increase in the year-ago quarter.

Notably, the company’s shares have gained 5.3% over the past year, underperforming the industry’s rally of 14.5%.

Let’s delve deeper into the numbers.

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System-Wide Sales Discussion

Global system-wide sales, including both company-operated and franchise restaurants, were $2.6 million in the reported quarter, up 1.1% from the prior-year quarter. North America system-wide sales were $2.5 million in the fourth quarter, reflecting a 0.9% year-over-year increase. Systemwide sales at the International segment amounted to $0.13 million in the quarter under review, up 5.6% year over year.

Operating Highlights

Company-operated restaurant margin was 16% in the reported quarter compared with 16.6% in the year-ago quarter. The 60-basis points (bps) decline was primarily caused by labor rate inflation and higher promotional activity, partially offset by pricing actions.

General and administrative expenses in the fourth quarter were $71.4 million, up 41.4% from $50.5 million recorded in the prior-year quarter. The increase reflected the $27.5-million legal reserve that was recorded in the fourth quarter of 2018.  Excluding the legal reserve, general and administrative expenses would have decreased by 13%. The decline was due to lower incentive compensation accrual, and lower employee compensation and related expenses as a result of the company's G&A savings initiative.

Fourth-quarter operating profit amounted to $45.8 million, marking a 21% decrease from the year-ago quarter’s figure of $58 million. Net income of $18.8 million declined from $142.1 million recorded in the year-ago quarter.

Adjusted EBITDA increased 9.8% from the prior-year quarter, primarily from revenue growth, and lower general and administrative expenses. Adjusted EBITDA margin also expanded 160 bps to 34%.

The Wendy's Company Price, Consensus and EPS Surprise

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The Wendy's Company Price, Consensus and EPS Surprise | The Wendy's Company Quote

Balance Sheet

Cash and cash equivalents as of Dec 30, 2018, was $431.4 million compared with nearly $171.4 million as of Dec 31, 2017. Inventories at the end of the fourth quarter amounted to $3.7 million, up from $3.2 million at the end of 2017.

Long-term debt totaled $2.30 billion as of Dec 30, 2018, compared with $2.26 billion as of Dec 31, 2017.

Wendy’s authorized an 18% increase in the quarterly cash dividend rate. The new dividend rate of 10 cents per share will be effective with the next dividend payment, which is payable on Mar 15, 2019, to shareholders of record as of Mar 1, 2019.

In 2018, management repurchased 15.8 million shares for $270.2 million and distributed $80.5 million in dividends.  At the end of 2018, the company had $147.4 million remaining under the existing share repurchase authorization.