Wendy's Makes Breakfast Optional At U.S. Restaurants, Pegging Up To $200 Million In Restaurant EBITDA
CEO Bob Wright says dropping unprofitable breakfast could add up to $200 million, as the board rejects an unsolicited investor-group offer.
Wendy's will let franchisees at all U.S. restaurants drop breakfast, CEO Bob Wright said on the company's third-quarter earnings call Thursday, estimating the change could add up to $200 million in restaurant-level EBITDA (earnings before interest, taxes, depreciation and amortization) across franchise and company restaurants. The same morning, a committee of independent directors unanimously rejected an unsolicited offer from an investor group.
Why breakfast is being cut loose
Wendy's, which operates and franchises quick-service hamburger restaurants, is making breakfast optional after studying restaurants that already exited the day part. Wright said they stopped losing money at breakfast, widened margins across lunch, dinner and late night, and in many cases fully recaptured their breakfast sales later in the day.
"Mandating that franchisees operate during a day part where they lose money is going to do nothing but hurt their business," Wright said. He attributed the wider margins mainly to concentrating management labor into fewer hours.
A Guggenheim analyst said the $200 million, using the breakfast-sales share Wendy's gave last quarter, implied roughly a third of restaurants dropping breakfast, and asked whether that was the base case. Wright did not give a per-restaurant figure, saying labor models differ by franchisee. He said franchisees were briefed the night before and will decide restaurant by restaurant, and he expects "a fairly large portion" to conclude that many locations fail the profitability test.
The rejected offer
Wright said the independent committee, made up of directors unaffiliated with Trian Partners and its investor group, unanimously rejected a proposal received October 28 after consulting its financial and legal advisers. Management said it would not comment further, and Wright said he is confident Wendy's has the strategy and resources to restore the brand. Shares traded at $7.75 on Thursday, and the market value was about $1.5 billion.
A quarter of slow progress
U.S. same-restaurant sales fell 5.7% in the third quarter, an improvement of 130 basis points from the second quarter, with traffic down 11.9% and average check up 6.2%. Global system-wide sales declined 5.9% on a constant-currency basis. Adjusted EBITDA was $113.4 million, down $24.6 million from a year earlier, and adjusted earnings were 13 cents a share.
CFO Steve Cirulis said franchise support costs rose, including a $9.1 million increase in doubtful accounts tied to royalty deferral agreements and amounts past due from franchisees. Wendy's also signed a letter of intent to acquire up to 163 restaurants from Meritage Hospitality Group, which is in bankruptcy. Cirulis said the company ended the quarter with about $413 million in cash and a net debt leverage ratio of 5.2 times, and expects to refinance about $430 million of debt maturing in March 2028.
Wright also said more than 90% of U.S. franchise restaurants now take part in delivery promotions, nearly double the level of a few months ago.
Wright promised to report leading indicators each quarter, and Cirulis said the next earnings call may bring more detail on the business's trajectory.
Sources
- Wendy’s Rejects Trian Partners-Led Takeover Bid, Adopts Limited-Duration Rights Plan For ‘Fair And Equal Treatment’ Of Shareholders — Yahoo Finance
- Wendy's (WEN) Q3 Earnings: Taking a Look at Key Metrics Versus Estimates — Yahoo Finance
- Wendy's拒絕收購提案 快餐連鎖店啟動扭轉策略 — Yahoo Finance
- Wendy’s rejects Trian-led buyout offer, adopts ‘poison pill’ plan - The Globe and Mail — Reuters
- Wendy's rejects $1.4 billion hostile takeover bid, saying it undervalues the company - CBS News — CBS News
