Wendy's Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 2, 2023

There are 13 speakers on the call.

Operator

Good morning. Welcome to The Wendy's Company Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer Thank you. Kelsey Fried, Director of Investor Relations, you may begin your conference.

Speaker 1

Thank you, and good morning, everyone. Today's conference call and webcast This includes a PowerPoint presentation, which is available on our Investor Relations website, irwendys.com. Before we begin, Please take note of the Safe Harbor statement that appears at the end of our earnings release. This disclosure reminds investors that certain information we may discuss today is forward looking. Various factors could affect our results and cause those results to differ materially from the projections set forth in our forward looking statements.

Speaker 1

Also, some of today's comments will reference non GAAP financial measures. Investors should refer to our reconciliations of non GAAP financial measures to the most directly comparable GAAP measure at the end of this presentation or in our earnings release. On our conference call today, our President and Chief Executive Officer, Todd Penegor, We'll give a business update and our Chief Financial Officer, Gunther Plush, will review our 2023 Q3 results and provide an update on our outlook for the year. From there, we will open up the line for questions. With that, I will hand things over to Todd.

Speaker 2

Thanks, Kelsey, and good morning, everyone. We continue to make meaningful progress across our strategic growth pillars during the Q3, which drove continued sales and profit growth. Our global same restaurant sales grew 2.8% on a 1 year basis and our 2 year result of 9.7% represents an acceleration of almost 100 basis points versus the 2nd quarter. Our international business delivered same restaurant sales growth of 7.8% and achieved an incredible 10th consecutive quarter of double digit same restaurant sales growth on a 2 year basis reaching 18.6%. We continue to see strong results across our key international growth markets with many achieving double digit 1 year same restaurant sales growth during the quarter.

Speaker 2

The ongoing success of our International segment is driven by strong execution and momentum across our global growth pillars. Our U. S. Business achieved same restaurant sales growth of 2.2% and a 2 year result of 8.5%, which represents an acceleration versus the 2nd quarter. During the quarter, we benefited from our strategic pricing actions, partially offset by an expected decline in year over year customer counts and a slight decline in mix.

Speaker 2

However, beginning in mid August, we drove year over year customer count growth through quarter end. Our digital business accelerated in the 3rd quarter With global digital sales mix reaching 13% and total digital sales growing 30% year over year as our loyalty program continued to gain momentum. These successes supported yet another quarter of profit expansion resulting in an 80 basis point year over year increase in U. S. Company operated restaurant margin to 15.6% as sales growth drove P and L leverage and commodity inflation eased further.

Speaker 2

We also continue to make progress against our development goal, opening 72 new restaurants across the globe, totaling 152 openings year to date through the Q3. We continue to expect to reach our 2023 development target as we now have 100% of our current year pipeline open or under construction. The success we've driven over the years supports our best in class franchisee satisfaction and alignment. Looking forward, we remain relentlessly focused on delivering meaningful global growth supported by compelling restaurant economic model improvement and acceleration across our strategic pillars. Our focused approach to driving same restaurant sales momentum delivered an acceleration in 2 year same restaurant sales growth and supported our strong performance in the context of the QSR burger category, within which we maintained our dollar and traffic share.

Speaker 2

Category traffic was challenged throughout the quarter and this impacted our early results. But following the mid August launch of several successful innovations and promotions, we deviated from the category trend and achieved positive customer counts in the latter half of the quarter. This led to an acceleration in 1 2 year same restaurant sales growth each month of Q3. Now let's turn to some of our specific sales drivers. We continue to make meaningful progress in our pursuit of operational excellence and posted another quarter of year over year improvements in customer satisfaction and speed of service.

Speaker 2

I am very proud that our efforts in this area have been recognized in the latest QSR Magazine drive thru report where Wendy's ranked in the top 5 brands across service time, order accuracy and satisfaction. We once again leaned into our ownable platforms, new products and partnerships during the Q3. The launch of our loaded nacho cheeseburger and fries, continued innovation on the Frosty line with strawberry and pumpkin spice flavors, Our BOGO for a dollar promotion and our ongoing partnership with college football all supported our progress. Looking ahead to the rest of the year, you can expect more craveable innovation alongside value that supports the restaurant economic model as we run our Hi Lo strategy. At the Breakfast Daypart, We continue to execute against our playbook of driving sales through innovation and promotions.

Speaker 2

We once again expanded our menu the launch of our new Frosty Creme Cold Brew and English Muffin Sandwiches. We also launched a new value offering, our 2 for 3 Biggie Bundles, which drove a meaningful sequential sales increase following its introduction and contributed to an acceleration in breakfast sales in the back half of the quarter. We know that value remains very important to the breakfast consumer and we plan to more consistently offer compelling value promotions to drive trial and repeat at this highly profitable daypart through year end and beyond. Finally, our late night efforts accelerated versus the 2nd quarter and drove a mid teens year over year sales increase for the daypart. Our sales performance at late night has far surpassed our pre pandemic average and we expect to continue benefiting from outsized growth at this daypart through the end of 2023.

Speaker 2

We continue to expect mid single digit global same restaurant sales growth for full year 2023 and now expect our 4th quarter same restaurant sales will land in the low single digit range. We are confident in our ability to break through with consumers and are committed to driving profitable sales growth. Our digital business accelerated in the Q3 with global sales mix reaching 13% and total sales growing 30% year over year. Internationally, we continue to see strong adoption of digital channels, leading to a sales mix of over 18%. We continue to significantly grow our Canadian digital business and we now hold the number 2 position in digital traffic share across the QSR Burger segment in that market.

Speaker 2

We also achieved another quarter of outstanding digital mix in the U. K, now reaching over 90%. Our U. S. Digital sales mix grew to over 12% with growth versus the prior quarter driven by a meaningful uptick in our loyalty program.

Speaker 2

Total U. S. Loyalty members reached over 35,000,000 And monthly active users grew almost 40% quarter over quarter to over 5,000,000 as we exited the 3rd quarter. This growth was driven by offers that are truly resonating with our customers like our $0.01 JVC promotion celebrating National Cheeseburger Day and allowing for in store offer redemptions, which has expanded our loyalty reach. We will continue to lean into impactful offers to drive further loyalty program growth moving forward.

Speaker 2

On a year over year basis, our almost 30% U. S. Digital sales growth was driven by strength across all digital channels, including delivery. Our strong partnerships with 3rd party delivery providers continue to benefit us as we activated compelling ads and exclusive offers that tied into our college football messaging and new product launches. I am proud of the ongoing digital growth we have achieved over the last few years.

Speaker 2

Our successes to date support an increase in our global digital sales expectation to approximately $1,800,000,000 this year, which represents over 20% growth year over year. Looking ahead, there is still significant digital growth to be captured. The large uptick in monthly active users last quarter and the increase in our digital sales expectation is just a taste of what's in front of us. I am confident that continued execution of our plans alongside our key partners will drive our digital business in the years to come. Our development pace accelerated in the Q3 as we opened 72 new restaurants and we are tracking towards our 2023 global net unit growth target of approximately 2% with 100% of our current year pipeline open or under construction.

Speaker 2

Looking towards the future, We made meaningful progress towards further solidifying our long term development pipeline by securing incremental commitments with new and existing franchisees across every region in which we operate with international markets leading the way. In the U. K, we recently added a new franchisee to the market And our 3 existing traditional franchisees have increased their development agreements, highlighting their confidence in the long term trajectory of the brand. Additionally, our existing franchisee in Japan has significantly accelerated their agreement as operations normalize following the pandemic and sales continue to improve. We also added an incremental development agreement in Mexico, a key growth market that continues to gain sales momentum and new franchisee interest.

Speaker 2

Across the U. S. And Canada, we experienced a significant uptick in agreements across our suite of development programs with new sign ups for the pacesetter and groundbreaker incentives and growing commitments through our Build the Soup Fund, which is now 70% committed. Our efforts drove a substantial increase and the share of our long term development pipeline under an agreement to approximately 70%. This is higher than historical norms and builds an additional layer of certainty into our development outlook.

Speaker 2

All of this progress is in addition to our previously announced master franchise agreement with Flynn Group to develop 200 Wendy's Restaurants in Australia, which bolsters our development plans past 2025. Finally, we remain very active on the franchise recruiting front and our team is continually adding franchise candidates to the pipeline and new franchisees to the system. We look forward to sharing more news in the coming months as we continue to progress towards our long term global net unit growth targets of 2% to 3% in 2024 and 3% to 4% in 2025. Our playbook of driving meaningful global growth behind our Three long term strategic pillars remains the same. Our ongoing success would not be possible without the partnership we have with our franchisees.

Speaker 2

We recently received the results of the 2023 Franchise Business Review Survey, reflecting another year of Wendy's far exceeding industry benchmarks. I am especially pleased with our rating on overall satisfaction, which paces more than 10 percentage points ahead of the industry in both the U. S. And internationally. We also continue to outpace the industry on financial opportunity and leadership scores, further highlighting our system alignment.

Speaker 2

We recently held our annual franchise convention and I could not be more pleased with the excitement we built across the system. We look forward to sharing more details on our plans to drive compelling restaurant economic model improvement on the back of acceleration across our growth pillars and providing our outlook when we release our Q4 earnings on February 15. Through the partnerships with our franchisees and the dedication of our restaurant crews and support center teams, We will continue our march towards achieving our vision of becoming the world's most striving and beloved restaurant brand. I will now hand it over to GP to share our Q3 financial performance.

Speaker 3

Thanks, Todd. Our 3rd quarter results continued to highlight the consistency of our financial formula as progress against our strategic growth initiatives Once again drove sales and profit growth. Our global system wide sales grew 4.8%, achieving 13.7% growth on a 2 year basis, Supported by global same restaurant sales growth across both our U. S. And international segments and continued global net unit growth.

Speaker 3

Our U. S. Company restaurant margin reached 15.6%, increasing 80 basis points year over year. This expansion was primarily due to the benefit of a higher average check, driven by cumulative pricing of 6%, partially offset by customer count declines And labor and commodity inflation of approximately 4% and 2% respectively. G and A decreased approximately 5%, primarily driven by lower professional fees resulting primarily from the completion of the company's ERP implementation.

Speaker 3

Adjusted EBITDA increased 3.5 percent to approximately $139,000,000 resulting primarily from higher franchise royalty revenue, Lower G and A expense, a decrease in the company's incremental investment in breakfast advertising and an increase in U. S. Company operated restaurant margin. These were partially offset by lower other operating income due to lapping a significant gain from insurance recoveries in the prior year, which represents a year over year EBITDA headwind of approximately 6% during the Q3. The over 12% increase in adjusted earnings per share was driven by an increase in adjusted EBITDA and higher interest income.

Speaker 3

These increases were partially offset by higher amortization of cloud computing arrangement costs. Year to date free cash flow increased over 35 percent to approximately $226,000,000 resulting primarily from higher net income Adjusted for non cash expenses and a decrease in payments for incentive compensation. These were partially offset by higher capital expenditures. Our strong results through the Q3 and the plans we have in place to end the year support our confidence in our 2023 and long term financial outlook, which we are largely reaffirming today. We are tightening our full year global system wide sales growth range to 6% We continue to expect mid single digit global same restaurant sales growth for full year 2023 And global net unit growth of approximately 2%.

Speaker 3

Our 2023 adjusted EBITDA outlook of $530,000,000 to 5 $40,000,000 remains unchanged. Our tightened global system wide sales outlook is offset by a lower G and A expectation of approximately $250,000,000 primarily driven by a lower expected incentive compensation accrual. We continue to expect U. S. Company operated restaurant margin of 15% to 16%.

Speaker 3

We are also reaffirming our 2023 outlook for adjusted EPS of $0.95 to $1 Our capital expenditure outlook for the year is tightening to $80,000,000 to $85,000,000 as we have better visibility as we close in on year end. Finally, we continue to expect 2023 free cash flow of $265,000,000 to $275,000,000 as our tightened capital expenditure outlook is offset by higher interest income. Turning to our long term outlook, we continue to expect mid single digit annual system wide sales growth and high single digit to low double digit annual free cash flow growth in 2024 2025. To close, I'd like to highlight our capital allocation policy, which remains unchanged. Our cash balance remained elevated at more than $600,000,000 at the end of the 3rd quarter, giving us flexibility to invest in the business to deliver meaningful global growth and return cash to shareholders.

Speaker 3

Our first priority continues to be investing in our business for growth, which we will continue to do while holding true to our asset light model. Secondly, we announced today the declaration of our 4th quarter dividend of $0.25 per share, delivering a full year dividend of $1 per share in 2023. This represents an over 100 dividend payout ratio and aligns with our commitment to sustain an attractive dividend. Lastly, Our capital allocation policy gives us the flexibility to utilize excess cash to repurchase shares and reduce debt. Year to date through October 26, we have repurchased approximately 8,000,000 shares and have approximately 332 $1,000,000 remaining on our $500,000,000 share repurchase authorization expiring in February of 2027.

Speaker 3

We expect to continue to lean in on share repurchases this year in light of our current share price and cash balance. Additionally, we repurchased approximately $70,000,000 of debt for approximately $65,000,000 including both debentures and securitized debt year to date through October 26. Our Board of Directors Recently increased our debt repurchase authorization by $10,000,000 leaving approximately $20,000,000 remaining On the authorization expiring in February of 2024. We are fully committed to continue delivering our simple Yet powerful formula, we are a predictable efficient growth company that is investing in our growth pillars and driving strong system wide sales growth on the backdrop of positive same restaurant sales and expanding our global footprint. This is translating into significant free cash flows, We support meaningful return of cash to shareholders through an attractive dividend and share repurchases.

Speaker 3

With that, I will hand things over to Kelsey

Speaker 1

Thanks, GP. To start things off, we have an NDR in New York with Barclays on November 15, After which, we'll attend the Stevens Conference in Nashville on November 16th. On November 27th, we have an investor call with KeyBanc. And finally, we have a virtual NDR with TD Cowen on December 11. If you are interested in joining us at any of these events, please contact the respective sell side analyst or equity sales Contact at the host firm.

Speaker 1

Lastly, we plan to report our Q4 and full year earnings and host a conference call that same day on February 15th. As we transition to our Q and A section, I wanted to remind everyone that due to the high number of covering analysts, we'll be limiting everyone to one question only. With that, we're ready to take your questions.

Speaker 4

Thank Our first question today comes from David Palmer of Evercore ISI. David, your line is now open. Please go ahead.

Speaker 5

Thanks. I wanted to ask you about unit growth and particularly the return on investment For franchisees, I know you've been working on new formats. And you touched on this last conference call, but I think it's worth going over because I think people are concerned about the higher building costs, the higher land costs and the margin compression that's naturally happened because of labor. So Could you just kind of go through what you see as return on investment for new units these days and where you see that pipeline developing. Thank you.

Speaker 3

Good morning, David. Yes, great question. We made great progress On new build designs, as you know with next gen, our building cost, we took about 10% cost out And we are also operating it more efficiently. As you go through this, If you were to have no incentives, the levered payback of a new next gen design is about 6 years. So that's the one bookend.

Speaker 3

If you sign up for our build to suit program, which is the most attractive program for franchisees, You get a levered return of about 3.5 years. Then obviously we have other incentive programs like the pacesetter that gets you to return of about 4 years. And if you choose to do a groundbreaker, it's about 5.5 years of levered return. So that's kind of what we have. It assumes the elevated from a leverage point of view, it assumes the elevated interest rates that we are seeing in the marketplace.

Speaker 6

And I

Speaker 2

think, David, the confidence in the future is really in the proof that we talked about on the call, right? We've got 2% net unit growth approximately that will hit this year with all of those open or under construction. We've now got 70% of our restaurants Under a development agreement through 2025. So we are building confidence and we know we need to continue to work to take a little bit of cost out of the building and To drive our margins up and we've been seeing nice healthy margins on company new restaurant openings, which have been opening north of $2,000,000 With margins above the average margins that you see for the company. So those are encouraging signs too.

Speaker 4

Our next question comes from Tyler Prowse from Stephens Inc. Tyler, your line is now open. Please go ahead.

Speaker 6

Sorry, I was muted. Thanks for taking the question here. Can you talk a little more about the consumer and what you're seeing as far as trade down or check management? Additionally, what are you seeing in the competitive environment as far as discounting among peers?

Speaker 2

Yes. If you look at the consumer, it's really the tale of 2 sides, right? The over 75,000 consumer continues to be healthy. We continue to see Traffic growth in that segment, we're holding our share in that segment. Under 75,000 consumers are little more stressed, Especially as you go down the income core, I would say it gets even more stressed.

Speaker 2

But again, we've lost a little bit of traffic there, but still holding our share with that consumer. From a trade down perspective, we are seeing some trade down from mid scale casual and sit down into QSR, but we're also seeing some trade out Of the category from the lower income consumer out of QSR and into food at home. So it was kind of wash each other out along the way. We do feel like we've got a calendar that's very balanced with high and low to support both income cohorts. And our job is to continue to make sure that we create great experiences as we have those folks trade into our brand and have compelling offers to make sure was Folks get a little healthier from an economic standpoint, they continue to come back into the Wendy's brand with our great promotions moving forward.

Speaker 4

Our next question comes from Jeffrey Bernstein of Barclays. Jeffrey, your line is now open. Please go ahead.

Speaker 7

Great. Thank you very much. Just wondering if you could talk a little bit about, I think you mentioned the comps start to improve in mid August, Back traffic was positive. I'm just wondering if you could talk a little bit about what you think was the driver of the uptick. I know of the big Burger players, it seems like optically you're perhaps lagging your 2 biggest burger players.

Speaker 7

I know you mentioned holding your dollar and percent market share. So I'm just wondering if you Connect the dots with a little bit more detail in terms of the competitive marketplace and your positioning relative to those largest peers. And again, That you saw in mid August, what you think the drivers of that were?

Speaker 2

Thanks for the question, Jeffrey. As you think about the start to the quarter, we were up Again, some really strong comps from a year ago with the success of Strawberry Frost, Steve. We thought we had a strong promotion with the BOGO for a dollar. It didn't bring in as many add ons early in the quarter as we had anticipated, but we also didn't have any media support or promotional Breakfast business to start the quarter. We are rolling off of the $3 croissant deal and really did set ourselves up with a lot of Support or news to compete in the first half of the quarter, but as the quarter evolved, we made some several challenges.

Speaker 2

We launched on the premium side in the middle of the quarter with the loaded nacho cheeseburger and queso fries. We brought news to breakfast with the English muffin. We started our NCAA Cup promotion and we launched a very compelling 2 for 3 breakfast Biggie Bag Bundles. We started to see our business immediately shift and bring more customers in as we put those news and promotions out. And then soon after that, the Pumpkin Spice Frosty launched, which created some additional support.

Speaker 2

And with all of that, we saw our 1 and 2 year same restaurant sales each month within the quarter, and importantly, we started to deviate from category trends with us starting to grow customer counts as we exited the quarter versus the category QSR burger category being a little more challenged.

Speaker 4

And our next question comes from Danilo Gaglioglu from Bernstein. Danilo, your line is now open. Please go ahead.

Speaker 8

Thank you. In your opening remarks, you mentioned offering more consistent value promotion. So can you elaborate on that point? And What are you planning to maintain strong restaurant level margins for the next few quarters as a result of your strategy?

Speaker 3

Good morning, Danilo. Yes, I mean, value is important for our consumers, as Todd answered the previous question, right? The income cohort that is earning less than $75,000 a year, they are having less frequency and opting out of the category. So as a result of it, value bundles are important. I would say we've done a great job to move away from 444 and really Upgrade the consumer to 4, 5 and 6 biggie bags.

Speaker 3

We have done a similar thing now. Instead of doing Like a dollar cross sell promotion, we are moving to $243,000,000 which again is creating overall Better economics. When you see it in our company restaurant P and L, our margin in the quarter was up 80 basis points Despite still 2% commodity inflation and 4% labor inflation, if you take the whole year, run the whole year, Our company restaurant margin sits at 15.9%. It's actually above COVID levels and we expanded profitability By about 190 basis points. So it's a good balancing act that is driving good consumer engagement Without actually giving up on Western Economic Model and other way around, we're actually expanding profitability.

Speaker 2

GP said it well, it's a nice Balance calendar, we've talked about that historically and we continue to make sure that we're there for the consumer, but also make sure that we're working a strong restaurant economic model and you see that In the construct of our everyday Biggie Bag Bundles at breakfast, good margin construct on that. You see that on the evolution of our Biggie Bag Rest of day as we've evolved from $4 for $4 to $5 $6 and you'll see a nice balance between digital offers, New news like Peppermint Frosty coming back into the Q4, and we'll continue to make sure we bring some exciting innovations as we close out the year on the premium

Speaker 4

Our next question comes from Andrew Charles from TD Cowen. Andrew, your line is now open. Please go ahead.

Speaker 5

Great. Thanks. Todd, 2 part question on breakfast. First, just curious if you look back over the last year or so post COVID, how would you describe the progress of driving breakfast trial into habit? And separately, you talked about the success of the 2 for $3 breakfast promo in the quarter.

Speaker 5

How do you plan to improve breakfast Profitability is value activity for the category is likely to persist and likely put pressure on continued promotions during the daypart.

Speaker 2

Yes, we're still on a journey. Trying to engrain the breakfast day part in the habit takes some time. We've been doing a nice We've got good awareness. We have been driving trial. We continue to have an opportunity to bring our rest of the day customer in and get them into our breakfast day part.

Speaker 2

But we're still what I would characterize in the early innings of breakfast, and you see that where we need to continue to make sure that we've got news. We did that in this quarter with Frosty Cream Cold Brew with English Muffin. We do know we need to have compelling value, 2 for 3 is Compelling value, but it's constructed very nicely to make sure that it works for the restaurant economic model as well as the consumer. And we just need to be consistent, be consistent on with compelling value. Biggie bundles gives us that platform to do that.

Speaker 2

And we continue to be consistent out there with messaging, letting the consumer know that Wendy's is open for breakfast. So it is a journey. It's been progressing well. We've continued to establish the daypart for us, and we know we got a lot of opportunity for growth still ahead of us.

Speaker 3

And Andrew, as you know, right, the breakfast business is above average profitability. Even when we promote, We still basically maintain above average profitability. That's the reason why we keep leaning in, keep innovating, keep price promoting, Continue to drive the break in habit and building our business because long term it's a sustained tailwind to our margin progression.

Speaker 4

And our next question comes from Gregory Francfort from Guggenheim. Gregory, your line is now open. Please go ahead.

Speaker 9

Hey, thanks for the question. GP, I just had a question on balance sheet and cash usages. And it sounded like on the Prepared remarks, you were talking about maybe no change to the capital structure, but I think you've been buying back a little bit of debt here. And I'm wondering, As you look forward the next 2 or 3 years, what's your thoughts are on leverage and what's your thoughts are on potentially the pushes and pulls between share repurchase and debt repurchase? Thanks.

Speaker 3

Good morning, Greg. Yes, we are sitting in a great position, right? Our cash balance is a little bit more than $600,000,000 As you know, We have securitized debt structure that's very well lettered. So when is our next debt action? It's Clearly, end of 2025 when we have to buyback our payback our debentures is about $50,000,000 outstanding.

Speaker 3

And then the first WBS debt that's going to be refinanced is in 2026. So we have time To weight what the financial markets are going to do, we are sitting currently at about a 5.2 times Sorry, in the 4.7 times leverage ratio. So it's well below the 5 to 6 times I started on 7 years ago. I would expect with that trajectory That leverage we will naturally delever and you will also see us definitely continuing to Look at our debt and maybe buy back more. You've seen the sign.

Speaker 3

The Board has increased our debt authorization. So if we get all of that done, We will have bought back $85,000,000 of debt on top of the mandatory authorization. So The balancing act, we're obviously trying to protect a very, very attractive dividend, so that you can continue to see from us. And you can also expect obviously share repurchases is continuing to be part of our choices. As you know, we have leaned in on a year to date basis.

Speaker 3

We have bought back $168,000,000 on a prorated basis really that would be $125,000,000 on the year. So we are leaning in. So clearly, if we change if we leave the authorization unchanged for the next 3 years, share repurchases will step down a little bit.

Speaker 2

The great news is we've got a lot of flexibility to GP's point on the balance sheet with a lot of cash today, and a lot of free cash flow generation that we've got built into The outlook and we know we can continue to drive that, which gives us the opportunity to invest in growth 1st and foremost and return a lot of cash to the shareholders in various forms over time.

Speaker 4

And our next question comes from Dennis Geiger from UBS. Dennis, your line is now open. Please go ahead.

Speaker 10

Great. Thanks very much. I wanted to ask a little bit more about late night and maybe even the snacking daypart opportunities. It seems like you're making good gains in late night this year. Is this still a notable opportunity into 2024?

Speaker 10

And then I assume staffing and operations are some of the key drivers to help unlock that opportunity. But how much maybe does the digital and loyalty help as you guys look to maybe continue to push on those dayparts? Thank you.

Speaker 2

Yes, late night continues to be a fast growing segment of the QSR business, and we're outperforming the category at late night, and we continue to have A lot of opportunity to continue momentum. We've led the way on late night with company. We've extended hours of operation now across the system. We've made a lot of progress and there's still a lot of opportunity across various regions of the country where we know we can do even more at late night. It's a great business, a lot of incremental volume without adding any labor.

Speaker 2

We do see a big delivery business at late night with that nice average check. We have seen staffing improve across all day parts and turnover improve, which has certainly helped us staff the restaurant all the way from breakfast through the late night day part. But we do think that there's still a lot of leg room and opportunity to grow that business. And we know we can create and deliver some of the best food in the business when we're

Speaker 4

And our next question comes from Jon Tower of Citi. Jon, your line is now open. Please go ahead.

Speaker 11

Great. Thanks for taking the question. Just curious, maybe you guys can expand upon your expectations for balancing pricing next year with new product news. I know, obviously, Can't dictate where franchisees are going with price and there will continue to be some inflationary pressures in the business. And obviously, there's Some stresses happening at the lower income levels of the consumer, maybe even spreads beyond that.

Speaker 11

So just curious how you're thinking about Pricing actions next year and maybe a follow-up to that.

Speaker 3

Good morning, John. Yes, it's all tied to our long term guidance, right? We have said that we're mid single digit overall sales growth with low single digit same restaurant sales growth. And the same restaurant sales growth It's really driven by flattish traffic, slightly positive mix and the rest is all price, right? So it's Very low pricing versus what we have done in the past.

Speaker 3

Just as a recap, this year, we're expecting effective Price increase in the company restaurant is about 7%. 5% of that was carryover, 2% was new. Just to foreshadow a little bit, we did our last price increase in May of this year. We are going to do a small price increase at the end of this Here to set us up for next year. So we're definitely expecting a moderating pricing environment And therefore, that's the posture that we are taking.

Speaker 2

And I think from a calendar perspective, I think you'll see a continued balance Across our calendar, how do we continue to focus on the core to have the best hamburgers chicken sandwiches in the business? What New news do we bring to keep Made to Crave fresh and ownable to the Wendy's brand? And how do we continue to lead into some of our ownable platforms Like Biggie Bags and Biggie Bundles at lunch, dinner and then now into breakfast. I think we'll find that right balance that works for the consumer And continues to work for the restaurant economic model for our franchise community.

Speaker 4

And our next question comes from Rahul Crow from JPMorgan. Rahul, please go ahead.

Speaker 3

Good morning, guys. Thanks for taking my question. I have a question about the company stores performance versus the franchise stores in the U. S. Can you Break out the dynamics here.

Speaker 3

Where is the drag coming from? Is it Florida stores? And can you also remind us if there are any remodels for the company

Speaker 2

Quite honestly, when you think of where the company is located, we got restaurants up in the Northeast with Boston market. We're in the Cargo market, we're in the Denver market, we're here in Columbus and then down in Florida. We started with much higher AUVs than the franchisees in many of those markets. And we've had a lot of growth if you go back and look at it For a 4 year perspective in the company market. So if you look at where we are performing relative to the franchise community in those markets, we're largely Forming in line with them.

Speaker 2

Anything else to add, GP, on that?

Speaker 3

Yes. I think a lot of it also has to do with the comps, right? On a 1 year basis, there is a gap of about Two points. If you just go back only on a 2 year basis, you will find that the company has grown 7.6% and The U. S.

Speaker 3

System has grown 8.5 percent, so the gap is narrowing very, very quickly. So it's a function of comps. Again, we are benefiting from much higher AUVs in the company restaurants. We like that because obviously our cash profit per restaurant is pretty high.

Speaker 4

And our final question today comes from Sara Senatore from Bank of America. Sara, your line is now open. Please go ahead.

Speaker 12

Thank you. Just quickly on the loyalty, you mentioned that active users grew to 5,000,000. And I guess I have 2 questions. Yes, you mentioned that there are compelling offers. How profitable are these offers?

Speaker 12

Are you thinking about them more as acquisition costs, Transactions still sort of margin neutral or accretive. And then maybe Following on to that, what kind of list do you see when you convert members to being active users? If you have any measures on like frequency or spend over time, just to get a sense of sort of the trade offs of customer acquisition versus the lifetime value. Thanks.

Speaker 2

Thanks for the question, sir. I'll start and GP can add on wherever he thinks he needs to add on. The great news is We did make a nice 5% increase in our total loyalty members hitting 35,000,000, so we're proud of that. But more importantly, That 40% increase in the monthly active users, we've got folks to get into the app with some compelling values. The penny JBC on National Cheeseburger Day Clearly drove folks in, and we want to get folks into the app, because what we do see is more frequency and higher checks Over time for those consumers.

Speaker 2

So we're seeing all of that data happen. Early on, you've got maybe On par check, maybe slightly lower check with the offers that you see, but that's more than made up by the lifetime value with the frequency that you get And we can then really leverage all the data to really connect and have more personalized rather than blanket offers out To the consumer environment, and we're in the early, early innings of really ramping up our one to one marketing ability. The platforms in the base is built, but we're looking forward to that being a nice generator to help our margins over time. Anything else, GP?

Speaker 3

No, I think you said it all.

Speaker 1

All right. Thank you, Sarah. That was our last question of the call. Thanks, Todd and GP, and thank you, everyone, for participating this morning. We look forward to speaking with you again on our Q4 call in February.

Speaker 1

Have a great day. You may now disconnect.

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Earnings Conference Call
Wendy's Q3 2023
00:00 / 00:00
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