Revenues in the second quarter were $622.5 million, an increase of $15.1 million (2.49%) as compared to second quarter 2010 revenues of $607.4 million; year-to-date, total revenues (including franchise revenues) are up 1% to $1.2 billion.
Wendy’s North America system wide same-store sales increased 2.3%, due to a mix of higher average check (+1.4%, with management stating that they believe there is room to take additional pricing) and an increased number of transactions (+0.9%). This is in line with the company’s full year guidance for a 1-3% increase in same store sales, and off of a 1.7% decline in the same period last year..
In the quarter, Wendy’s Company-operated restaurant margin was 13.9%, compared to 16.4% in Q2 2010. The decrease was largely due to higher commodity costs (180 basis points), along with incremental ad spend to support the introduction of Wendy’s breakfast (60 basis points), which they expect to have in 1,000 restaurants by the end of 2011; the margin pressure from commodities is similar to what we have seen from other competitors in the U.S., despite increases in pricing.
One plan Wendy’s is working on is developing some higher margin products to complement dollar menu-type transactions, similar to what McDonald’s has successfully implemented. Here is what CEO Roland Smith had to say: “Additionally, we are expanding our beverage and snack offerings to focus on new items that can generate both incremental transactions and higher margins. We are currently offering a Caramel Apple Frosty Parfait… recently introduced Wild Berry Tea and All-Natural Lemonade, and we plan to offer a premium iced coffee as part of our updated coffee program.”
Second quarter 2011 net income from continuing operations was $11.4 million, or $0.03 per share (including after tax special items of $0.02 per share), compared to $5.4 million in Q2 2010, which was also impacted by after-tax special items ($0.04 per share). From a cash perspective, FCF was $76.6 million in the first half of 2011.
Internationally, Wendy’s expanded into Russia for the first time, with the opening of a location in Moscow on June 23rd. These openings are part of a development agreement announced in August 2010 with franchisee Wenrus Restaurant Group Limited, which includes the development of 180 restaurants over the next decade. International is looking like a significant part of Wendy’s future; they currently have 333 international locations (franchised), along with more than 700 future restaurants commitments scattered around the globe. Ultimately, management believes that there is potential for more than 8,000 international locations.
Year to date, management has repurchased 24 million shares (average price - $5.18/share), or more than 5% of total shares out at the start of the program; they are half-way through their current authorized repurchase program of $250 million. In addition, they announced a $0.02 quarterly dividend to shareholders on record as of September 1st, marking the continuation of a dividend that has been consistently paid (though drastically cut in recent years) since the mid 1980’s.
As noted above, one of the key changes from getting rid of Arby’s is management can now focus solely on Wendy’s operations. As management noted, they have seen positive developments in their operational efficiency over the past three years: “In 2008, nearly 25% of our North America company and Franchised restaurants were rated an F and only 33% were rated A or B. Today, the number of F stores is less than 1%, and the number of A and B stores have more than doubled to almost 83%. We believe this improvement in operational excellence will further help drive increases in sales and profits.” In addition, a recent study by the American Customer Satisfaction Index found Wendy's to be the highest-rated QSR hamburger chain among the Big 3 (the other two being McDonald’s and Burger King).
As management noted, they are not looking to grow outside of Wendy’s as they did in the past: “the opportunity here is to focus all of our financial resources and people resources on the Wendy's brand”. While it is still early, it appears that the new stand-alone Wendy’s Company is gradually moving in the right direction, despite a tough economic environment.
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I hope to own a collection of great businesses; to ever sell one, I demand a substantial premium to the average market valuation due to what I believe are the understated benefits to the long term investor of superior fundamentals and time on intrinsic value. I don't have a target when I purchase a stock; my goal is to replicate the underlying returns of the business in question - which if I've done my job properly, should be very attractive over many years.