Wendy’s reported weaker third-quarter sales and restaurant margins as it launched “Dave’s Way,” a multi-year strategy aimed at growing customer traffic and market share while improving restaurant profitability. The company is also reshaping its restaurant portfolio, including a possible purchase of as many as 163 locations from franchisee Meritage Hospitality Group.
Management says strategy work is already underway, including menu and marketing tests, faster digital initiatives and a more targeted approach to breakfast. The quarter’s results, however, showed continued pressure on sales, particularly in the U.S.
Third-quarter performance
- Global systemwide sales fell 5.9% from a year earlier to about $3.3 billion. U.S. sales declined 7.6%, while international sales grew 3.5%.
- Same-restaurant sales fell 5.2% globally: down 5.7% in the U.S. and 2.2% internationally.
- Revenue was $547.0 million, compared with $549.5 million a year earlier. Adjusted revenue was $435.6 million, down 1.6%.
- Wendy’s reported net income of $15.1 million, or 8 cents a diluted share. Adjusted EBITDA was $113.4 million, and adjusted earnings were 13 cents a share.
- U.S. company-operated restaurant margin declined to 11.7% from 13.1% a year earlier.
- For the first nine months, revenue increased 1.5% to $1.66 billion, while adjusted revenue was down 0.3%. Operating cash flow was $239.0 million and free cash flow was $174.2 million.
- Wendy’s had approximately $413 million in cash, which the CFO said gives the company financial capacity to invest in its strategy.
Strategy and portfolio changes
- Dave’s Way is intended to align the global franchise system around customer traffic, market share and restaurant profitability. The company said work is underway on menu enhancements, marketing execution and digital business.
- Wendy’s is tailoring its breakfast strategy by location, based on test results that management said produced significant profit improvement. The CFO said the approach could unlock up to $200 million in restaurant-level EBITDA across the system.
- The company has begun portfolio changes intended to improve franchisee economics. These include planned acquisitions of some company-operated restaurants and transfers of franchised locations to well-capitalized, higher-performing operators.
- Wendy’s signed a letter of intent with Meritage and its lenders to acquire as many as 163 Wendy’s restaurants. The proposal still requires a definitive agreement and court approval, and remains subject to better or higher offers. Meritage is also exploring a sale or recapitalization of its other markets.
- Wendy’s ended the quarter with 7,194 restaurants globally, including 5,711 in the U.S. and 1,483 internationally. During the quarter, the system added a net 14 locations overall: U.S. restaurant count declined by 13, while international locations increased by 27.
- Tariq Hassan was appointed chief marketing and customer growth officer.
What changes for investors
Dave’s Way combines operating initiatives with changes to who owns and operates some restaurants. The Meritage proposal is not a completed acquisition, and the restaurant-portfolio moves are described as actions underway rather than a finalized restructuring. Meanwhile, the reported sales and U.S. margin declines show the operating challenges the strategy is intended to address.