Wendy’s remains on the Investment Ideas list as a long.
Wendy’s reported 4Q14 results this morning, delivering a top line miss ($502mm vs $509 est.) and in-line EPS of $0.10. Comps were a little light (1.9% vs 2.4% est.), but that’s not the story here.
In the release, management announced recapitalization plans and its intent to sell ~500 additional company restaurants to franchisees by the mid-2016, effectively bringing down the company-owned mix from 15% to 5%. This extended system optimization is expected to raise $400-475 million in cash and considerably reduce future capital expenditures, while the leveraged recapitalization (up to 5-6x net debt/2014 adj. EBITDA) will allow the company to return substantial cash to shareholders primarily through share repurchases and, to a lesser extent, dividends.
In addition to the aforementioned, the company laid out 2020 goals for the system which include:
- 1,000 new restaurants (excluding closures)
- 20% restaurant margins
- $2.0 million AUVs
- 60% of restaurants reimaged
2020 is far out, but that's not the point. The company is heading the right direction by investing in the appropriate strategic initiatives while becoming a leaner, more shareholder friendly company. Asset-light models (PLKI, KKD, DIN, DNKN, etc.) are fetching premium valuations on the public market – and for good reason.
Given the growing, steady stream of royalty income, along with lower G&A and capital expenditure requirements, Wendy’s expects to generate at least $200 million of free cash flow in 2017 and $250 million in 2015. Considering the transformation underway, we believe Wendy’s presents one of the most attractive long-term investments in the restaurant.
Financial highlights from the quarter include:
- Company-operated same-store sales growth of +1.9%
- Franchise same-store sales growth of +1.6%
- N.A. company-operated margins of 16.8% (+50 bps y/y)
- G&A expenses of $60.1 million (-22% y/y)
- Adj. EBITDA of $107.1 million (+20.3% y/y)
- Operating profit of $51.7 million (+78% y/y)
- Net Income of $23.3 million, down from $33.1 million a year ago
- EPS of $0.10, down from $0.11 a year ago
More to follow.
