Wendy's Co: Form 10-Q for the period ended Oct 1, 2023

Introduction

This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of The Wendy’s Company (“The Wendy’s Company” and, together with its subsidiaries, the “Company,” “we,” “us,” or “our”) should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and the related notes included elsewhere within this report and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended January 1, 2023 (the “Form 10-K”). There have been no material changes as of October 1, 2023 to the application of our critical accounting policies as described in Item 7 of the Form 10-K. Certain statements we make under this Item 2 constitute “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. See “Special Note Regarding Forward-Looking Statements and Projections” in “Part II. Other Information” of this report. You should consider our forward-looking statements in light of the risks discussed in “Item 1A. Risk Factors” in “Part II. Other Information” of this report and our unaudited condensed consolidated financial statements, related notes and other financial information appearing elsewhere in this report, the Form 10-K and our other filings with the Securities and Exchange Commission (the “SEC”).

The Wendy’s Company is the parent company of its 100% owned subsidiary holding company, Wendy’s Restaurants, LLC (“Wendy’s Restaurants”). Wendy’s Restaurants is the parent company of Wendy’s International, LLC (formerly known as Wendy’s International, Inc). Wendy’s International, LLC is the indirect parent company of (1) Quality Is Our Recipe, LLC (“Quality”), which is the owner and franchisor of the Wendy’s restaurant system in the United States (the “U.S.”) and all international jurisdictions except for Canada, and (2) Wendy’s Restaurants of Canada Inc., which is the owner and franchisor of the Wendy’s restaurant system in Canada. As used herein, unless the context requires otherwise, the term “Company” refers to The Wendy’s Company and its direct and indirect subsidiaries, and “Wendy’s” refers to Quality when the context relates to the ownership or franchising of the Wendy’s restaurant system and to Wendy’s International, LLC when the context refers to the Wendy’s brand.

Wendy’s is primarily engaged in the business of operating, developing and franchising a system of distinctive quick-service restaurants serving high quality food. Wendy’s opened its first restaurant in Columbus, Ohio in 1969. Today, Wendy’s is the second largest quick-service restaurant company in the hamburger sandwich segment in the U.S. based on traffic share, and the third largest globally with 7,166 restaurants in the U.S. and 32 foreign countries and U.S. territories as of October 1, 2023.

Each Wendy’s restaurant offers an extensive menu specializing in hamburger sandwiches and featuring filet of chicken breast sandwiches, which are prepared to order with the customer’s choice of toppings and condiments. Wendy’s menu also includes chicken nuggets, chili, french fries, baked potatoes, freshly prepared salads, soft drinks, Frosty® desserts and kids’ meals. In addition, Wendy’s restaurants sell a variety of promotional products on a limited time basis. Wendy’s also offers breakfast across the U.S. system and in Canada. Wendy’s breakfast menu features a variety of breakfast sandwiches such as the Breakfast Baconator® and sides such as seasoned potatoes.

The Company is comprised of the following segments: (1) Wendy’s U.S., (2) Wendy’s International and (3) Global Real Estate & Development. Wendy’s U.S. includes the operation and franchising of Wendy’s restaurants in the U.S. and derives its revenues from sales at Company-operated restaurants and royalties, fees and advertising fund collections from franchised restaurants. Wendy’s International includes the operation and franchising of Wendy’s restaurants in countries and territories other than the U.S. and derives its revenues from sales at Company-operated restaurants and royalties, fees and advertising fund collections from franchised restaurants. Global Real Estate & Development includes real estate activity for owned sites and sites leased from third parties, which are leased and/or subleased to franchisees, and also includes our share of the income of our TimWen real estate joint venture. In addition, Global Real Estate & Development earns fees from facilitating franchisee-to-franchisee restaurant transfers (“Franchise Flips”) and providing other development-related services to franchisees. In this “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the Company reports on the segment profit for each of the three segments described above. The Company measures segment profit using segment adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”). Segment adjusted EBITDA excludes certain unallocated general and administrative expenses and other items that vary from period to period without correlation to the Company’s core operating performance. See “Results of Operations” below and Note 17 to the Condensed Consolidated Financial Statements contained in Item 1 herein for segment financial information.

The Company’s fiscal reporting periods consist of 52 or 53 weeks ending on the Sunday closest to December 31. All three- and nine-month periods presented herein contain 13 weeks and 39 weeks, respectively. All references to years, quarters and months relate to fiscal periods rather than calendar periods.

Executive Overview

Our Business

As of October 1, 2023, the Wendy’s restaurant system was comprised of 7,166 restaurants, with 6,010 Wendy’s restaurants in operation in the U.S. Of the U.S. restaurants, 403 were operated by the Company and 5,607 were operated by a total of 215 franchisees. In addition, at October 1, 2023, there were 1,156 Wendy’s restaurants in operation in 32 foreign countries and U.S. territories. Of the international restaurants, 1,144 were operated by a total of 106 franchisees and 12 were operated by the Company in the United Kingdom (the “U.K.”).

The revenues from our restaurant business are derived from two principal sources: (1) sales at Company-operated restaurants and (2) franchise-related revenues, including royalties, national advertising funds contributions, rents and franchise fees received from Wendy’s franchised restaurants. Company-operated restaurants comprised approximately 5% of the total Wendy’s system as of October 1, 2023.

Wendy’s operating results are impacted by a number of external factors, including commodity costs, labor costs, intense price competition, unemployment and consumer spending levels, general economic and market trends and weather.

Wendy’s long-term growth opportunities include delivering accelerated global growth through (1) driving strong same-restaurant sales momentum across all dayparts, (2) accelerating our implementation of consumer-facing digital platforms and technologies and (3) expanding the Company’s footprint through global restaurant expansion.

Key Business Measures

We track our results of operations and manage our business using the following key business measures, which includes a non-GAAP financial measure:

• Same-Restaurant Sales - We report same-restaurant sales commencing after new restaurants have been open for 15 continuous months and as soon as reimaged restaurants reopen. Restaurants temporarily closed for more than one week are excluded from same-restaurant sales. The table summarizing same-restaurant sales below in “Results of Operations” provides the same-restaurant sales percent changes.
• Restaurant Margin - We define restaurant margin as sales from Company-operated restaurants less cost of sales divided by sales from Company-operated restaurants. Cost of sales includes food and paper, restaurant labor and occupancy, advertising and other operating costs. Cost of sales excludes certain costs that support restaurant operations that are not allocated to individual restaurants, which are included in “General and administrative.” Cost of sales also excludes depreciation and amortization expense and impairment of long-lived assets. Therefore, as restaurant margin as presented excludes certain costs as described above, its usefulness may be limited and may not be comparable to other similarly titled measures of other companies in our industry.

Restaurant margin is influenced by factors such as price increases, the effectiveness of our advertising and marketing initiatives, featured products, product mix, fluctuations in food and labor costs, restaurant openings, remodels and closures and the level of our fixed and semi-variable costs.

• Systemwide Sales - Systemwide sales is a non-GAAP financial measure, which includes sales by both Company-operated restaurants and franchised restaurants. Franchised restaurants’ sales are reported by our franchisees and represent their revenues from sales at franchised Wendy’s restaurants. The Company’s consolidated financial statements do not include sales by franchised restaurants to their customers. The Company’s royalty and advertising funds revenues are computed as percentages of sales made by Wendy’s franchisees. As a result, sales by Wendy’s franchisees have a direct effect on the Company’s royalty and advertising funds revenues and profitability.

The Company calculates same-restaurant sales and systemwide sales growth on a constant currency basis. Constant currency results exclude the impact of foreign currency translation and are derived by translating current year results at prior year average exchange rates. The Company believes excluding the impact of foreign currency translation provides better year over year comparability.

Same-restaurant sales and systemwide sales exclude sales from Argentina due to that country’s highly inflationary economy. The Company considers economies that have had cumulative inflation in excess of 100% over a three-year period as highly inflationary.

The Company believes its presentation of same-restaurant sales, restaurant margin and systemwide sales provide a meaningful perspective of the underlying operating performance of the Company’s current business and enables investors to better understand and evaluate the Company’s historical and prospective operating performance. The Company believes that these metrics are important supplemental measures of operating performance because they highlight trends in the Company’s business that may not otherwise be apparent when relying solely on GAAP financial measures. The Company believes investors, analysts and other interested parties use these metrics in evaluating issuers and that the presentation of these measures facilitates a comparative assessment of the Company’s operating performance. With respect to same-restaurant sales and systemwide sales, the Company also believes that the data is useful in assessing consumer demand for the Company’s products and the overall success of the Wendy’s brand.

The non-GAAP financial measure discussed above does not replace the presentation of the Company’s financial results in accordance with GAAP. Because all companies do not calculate non-GAAP financial measures in the same way, this measure as used by other companies may not be consistent with the way the Company calculates such measure.

Third Quarter Financial Highlights

• Revenue increased 3.4% to $550.6 million in the third quarter of 2023 compared with $532.6 million in the third quarter of 2022;
• Global same-restaurant sales increased 2.8%, U.S. same-restaurant sales increased 2.2% and international same-restaurant sales increased 7.8% compared with the third quarter of 2022. On a two-year basis, global same-restaurant sales increased 9.7%;
• Global Company-operated restaurant margin was 15.0% in the third quarter of 2023, an increase of 70 basis points compared with the third quarter of 2022; and
• Net income increased 14.9% to $58.0 million in the third quarter of 2023 compared with $50.5 million in the third quarter of 2022.

Year-to-Date Financial Highlights

• Revenue increased 5.3% to $1.64 billion in the first nine months of 2023 compared with $1.56 billion in the first nine months of 2022;
• Global same-restaurant sales increased 5.2%, U.S. same-restaurant sales increased 4.7% and international same-restaurant sales increased 9.4% compared with the first nine months of 2022. On a two-year basis, global same-restaurant sales increased 9.6%;
• Global Company-operated restaurant margin was 15.1% in the first nine months of 2023, an increase of 160 basis points compared with the first nine months of 2022; and
• Net income increased 15.7% to $157.5 million in the first nine months of 2023 compared with $136.1 million in the first nine months of 2022.

Global Same-Restaurant Sales

Wendy’s long-term growth opportunities include driving strong same-restaurant sales momentum across all dayparts through our ownable core products, exciting menu innovation, compelling value offerings and improvements in speed, consistency and accuracy in our restaurants. Global same-restaurant sales increased 2.8% in the third quarter of 2023 and increased 9.7% on a two-year basis. Global same-restaurant sales increased 5.2% in the first nine months of 2023 and increased 9.6% on a two-year basis.

Digital

Wendy’s long-term growth opportunities include accelerated implementation of consumer-facing digital platforms and technologies. The Company has invested significant resources to focus on consumer-facing technology, including activating mobile ordering via Wendy’s mobile app, launching the Wendy’s Rewards loyalty program in the U.S. and Canada and establishing delivery agreements with third-party vendors. The Company is also partnering with key technology providers to help execute our digital, restaurant technology and enterprise technology initiatives and support our technology innovation and growth. During the second quarter of 2023, the Company revised its definition of digital sales to reflect our full digital portfolio by including in-restaurant mobile scans, in addition to our previously included delivery, mobile order and kiosk digital channels. Under the revised definition, the Company’s digital business represented approximately 12.8% and 10.7% of global systemwide sales during the nine months ended October 1, 2023 and October 2, 2022, respectively.

New Restaurant Development

Wendy’s long-term growth opportunities include expanding the Company’s footprint through global restaurant expansion. To promote new restaurant development, the Company has provided franchisees with certain incentive programs for qualifying new restaurants, in addition to our $100.0 million build to suit development fund. In February 2023, the Company announced a new restaurant development incentive program in the U.S. and Canada that provides for waivers of royalty, national advertising and technical assistance fees for up to the first three years of operation for qualifying new restaurants. In addition, the Company has development agreements in place with a number of franchisees that contractually obligate such franchisees to open additional Wendy’s restaurants over a specified timeframe. During the nine months ended October 1, 2023, the Company and its franchisees added 71 net new restaurants across the Wendy’s system.

Organizational Redesign

In February 2023, the Board of Directors approved a plan to redesign the Company’s organizational structure to better support the execution of the Company’s long-term growth strategy by maximizing organizational efficiency and streamlining decision making (the “Organizational Redesign Plan”). As a result of the Organizational Redesign Plan, the Company expects to hold its general and administrative expense in 2023 and 2024 relatively flat compared with 2022. The Company expects to incur total costs of approximately $11 million to $13 million related to the Organizational Redesign Plan, of which approximately $9 million to $11 million will be cash expenditures. The cash expenditures are expected to continue into 2025, with approximately two-thirds of the total cash expenditures occurring in 2023. Costs related to the Organizational Redesign Plan are recorded to “Reorganization and realignment costs.” During the nine months ended October 1, 2023, the Company recognized costs totaling $8.0 million, which primarily included severance and related employee costs and share-based compensation. The Company expects to incur additional costs aggregating approximately $3 million to $5 million, comprised of (1) severance and related employee costs of approximately $1.5 million, (2) recruitment and relocation costs of approximately $0.5 million, (3) third-party and other costs of approximately $0.5 million and (4) share-based compensation of approximately $1.5 million. The Company expects costs related to the Organizational Redesign Plan to continue into 2026, with approximately three-fourths of the total costs to be recognized during 2023.

Results of Operations

The tables included throughout this Results of Operations set forth in millions the Company’s condensed consolidated results of operations for the third quarter and the first nine months of 2023 and 2022.

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The table below presents certain of the Company’s key business measures, which are defined and further discussed in the “Executive Overview” section included herein.

(a) Excludes Argentina due to the impact of that country’s highly inflationary economy.

(b) During the third quarter of 2023 and 2022, global systemwide sales increased 4.8% and 8.9%, respectively, U.S. systemwide sales increased 3.6% and 7.7%, respectively, and international systemwide sales increased 13.6% and 18.3%, respectively, on a constant currency basis. During the first nine months of 2023 and 2022, global systemwide sales increased 7.2% and 6.3%, respectively, U.S. systemwide sales increased 6.0% and 4.6%, respectively, and international systemwide sales increased 15.6% and 20.1%, respectively, on a constant currency basis.

The increase in sales during the third quarter and the first nine months of 2023 was primarily due to (1) a 1.0% and 3.8% increase in global Company-operated same-restaurant sales of $3.5 million and $25.4 million, respectively, and (2) net new restaurant development of $2.5 million and $10.2 million, respectively. Company-operated same-restaurant sales increased due to higher average check, partially offset by a decrease in customer count.

Franchise royalty revenue during the third quarter of 2023 increased $5.6 million, of which (1) $3.2 million was due to net new restaurant development and (2) $2.4 million was due to a 3.0% increase in global franchise same-restaurant sales. Franchise royalty revenue during the first nine months of 2023 increased $22.9 million, of which (1) $14.8 million was due to a 5.4% increase in global franchise same-restaurant sales and (2) $9.4 million was due to net new restaurant development. Franchise same-restaurant sales during the third quarter and the first nine months of 2023 increased due to higher average check, partially offset by a decrease in customer count.

The increase in franchise fees during the third quarter of 2023 was primarily due to higher fees for providing information technology services to franchisees of $1.9 million. The increase in franchise fees during the first nine months of 2023 was primarily due to (1) higher fees for providing information technology services to franchisees of $3.8 million and (2) an increase in fees as a result of Franchise Flips and other miscellaneous fees of $3.0 million.

The decrease in franchise rental income during the third quarter and the first nine months of 2023 was primarily due to the impact of assigning certain leases to franchisees, partially offset by an increase in executory costs. See Note 12 to the Condensed Consolidated Financial Statements contained in Item 1 herein for further information.

The increase in advertising funds revenue during the third quarter and the first nine months of 2023 was primarily due to an increase in franchise same-restaurant sales in the U.S. and Canada.

The decrease in cost of sales, as a percent of sales, during the third quarter and the first nine months of 2023 was primarily due to higher average check. This impact was partially offset by (1) an increase in restaurant labor rates, (2) a decrease in customer count, (3) higher commodity costs and (4) the impact of the Company’s investments to support the entry into the U.K. market and additional inflationary pressures in the U.K.

The increase in franchise support and other costs during the third quarter and the first nine months of 2023 was primarily due to an increase in costs incurred to provide information technology and other services to franchisees.

The increase in franchise rental expense during the third quarter and the first nine months of 2023 was primarily due to an increase in executory costs. See Note 12 to the Condensed Consolidated Financial Statements contained in Item 1 herein for further information.

On an interim basis, advertising funds expense is recognized in proportion to advertising funds revenue. The Company expects advertising funds expense to be lower than advertising funds revenue by approximately $3.0 million for 2023, which includes the amount by which advertising funds expense exceeded advertising funds revenue in prior years (excluding the Company’s funding of incremental advertising) of approximately $5.0 million, partially offset by the Company’s incremental funding of advertising in Canada of approximately $2.0 million.

The decrease in advertising funds expense during the third quarter of 2023 was due to a decrease in the Company’s funding of incremental advertising, partially offset by an increase in franchise same-restaurant sales in the U.S. and Canada. The increase in advertising funds expense during the first nine months of 2023 was due to an increase in franchise same-restaurant sales in the U.S. and Canada, partially offset by a decrease in the Company’s funding of incremental advertising.

(a) Certain reclassifications have been made to the prior year presentation to conform to the current year presentation.

The decrease in general and administrative expenses during the third quarter of 2023 was primarily due to a decrease in professional fees, primarily as a result of costs associated with the Company’s enterprise resource planning (“ERP”) system implementation during the third quarter of 2022.

The decrease in general and administrative expenses during the first nine months of 2023 was primarily due to (1) a decrease in share-based compensation and (2) lower professional fees, primarily as a result of costs associated with the Company’s ERP system implementation during the first nine months of 2022. These decreases were partially offset by an increase in incentive compensation accruals, reflecting higher operating performance as compared to plan in 2023 versus 2022.

The increase in depreciation and amortization during the first nine months of 2023 was primarily due to depreciation and amortization for technology investments and new restaurant assets, partially offset by assets becoming fully depreciated.

Amortization of cloud computing arrangements primarily represents amortization of assets associated with the Company’s ERP system implementation completed in the third quarter of 2022.

System optimization gains, net for the first nine months of 2022 were primarily comprised of post-closing adjustments on previous sales of restaurants. See Note 3 to the Condensed Consolidated Financial Statements contained in Item 1 herein for further information.

During the first nine months of 2023, the Company recognized costs totaling $8.0 million under the Organizational Redesign Plan, which primarily included severance and related employee costs of $5.7 million and share-based compensation of $1.1 million. See Note 4 to the Condensed Consolidated Financial Statements contained in Item 1 herein for further information.

Costs incurred under the Company’s other reorganization and realignment plans were not material during the three and nine months ended October 1, 2023 and October 2, 2022. The Company does not expect to incur any material additional costs under these plans.

The decrease in impairment of long-lived assets during the first nine months of 2023 was primarily due to higher impairment charges in the prior year as a result of the deterioration in operating performance of certain Company-operated restaurants.

The decrease in other operating income, net during the third quarter and the first nine months of 2023 was primarily due to a gain from insurance recoveries during the third quarter of 2022. Other operating income, net during the first nine months of 2023 also decreased due to prior year lease buyout activity.

The decrease in interest expense, net during the third quarter of 2023 was primarily due to the impact of repurchasing $39.3 million in principal of the Company’s 7% debentures during the first nine months of 2023. The increase in interest expense, net during the first nine months of 2023 was primarily due to the impact of completing a debt financing transaction under the Company’s securitized financing facility in the first quarter of 2022, partially offset by the impact of repurchasing $39.3 million in principal of the Company’s 7% debentures during the first nine months of 2023.

During the first nine months of 2023, the Company incurred a loss on early extinguishment of debt of $1.6 million due to the repurchase of $39.3 million in principal of the Company’s 7% debentures.

During the first nine months of 2023, the Company recorded a loss of $10.4 million due to impairment charges for the difference between the estimated fair value and the carrying value of an investment in equity securities. During the first nine months of 2022, the Company recognized a gain of $2.1 million on an investment in equity securities as a result of an observable price change.

The increase in other income, net during the third quarter and the first nine months of 2023 was primarily due to interest income earned on our cash equivalents, which increased as a result of cash received from our debt financing transaction under the Company’s securitized financing facility in the first quarter of 2022.

Our effective tax rates for the third quarter and the first nine months of 2023 and 2022 were impacted by variations in income before income taxes, adjusted for recurring items such as non-deductible expenses and state income taxes, as well as non-recurring discrete items. The decrease in the effective tax rate for the third quarter of 2023 compared with the third quarter of 2022 was primarily due to (1) a decrease in the tax effects of our foreign operations and (2) additional net income from our national advertising funds, which are not subject to tax. These decreases were partially offset by an increase in state income taxes, including discrete changes to state deferred income taxes. The decrease in the effective tax rate for the first nine months of 2023 compared with the first nine months of 2022 was primarily due to additional net income from our advertising funds, which are not subject to tax, partially offset by an increase in the tax effects of our foreign operations.

Segment Information

See Note 17 to the Condensed Consolidated Financial Statements contained in Item 1 herein for further information regarding the Company’s segments.

Wendy’s U.S.

The increase in Wendy’s U.S. revenues during the third quarter and the first nine months of 2023 was primarily due to an increase in same-restaurant sales. Same-restaurant sales increased during the third quarter and the first nine months of 2023 primarily due to higher average check, partially offset by a decrease in customer count.

The increase in Wendy’s U.S. segment profit during the third quarter and the first nine months of 2023 was primarily due to (1) higher revenues, (2) lower cost of sales, as a percent of sales for Company-operated restaurants driven by the same factors as described above for “Cost of Sales, as a Percent of Sales” (excluding the impact of the U.K. market) and (3) a decrease in the recognition of the Company’s funding of incremental advertising.

Wendy’s International

The increase in Wendy’s International revenues during the third quarter and the first nine months of 2023 was primarily due to (1) net new restaurant development in the U.K. and (2) an increase in same-restaurant sales. Same-restaurant sales increased during the third quarter and the first nine months of 2023 due to (1) higher average check and (2) an increase in customer count.

The increase in Wendy’s International segment profit during the third quarter and the first nine months of 2023 was primarily due to higher revenues. This increase was partially offset by (1) higher franchise support and other costs, (2) the Company’s investments to support the entry into the U.K. market and inflationary pressures in the U.K and (3) other international advertising expenses.

Global Real Estate & Development

The decrease in Global Real Estate & Development revenues during the third quarter and the first nine months of 2023 was primarily due to the impact of assigning certain leases to franchisees, partially offset by an increase in executory costs.

The decrease in Global Real Estate & Development segment profit during the third quarter and the first nine months of 2023 was primarily due to (1) a decrease in franchise rental income, reflecting the impact of assigning certain leases to franchisees, and (2) lower gains on sales-type leases.

Liquidity and Capital Resources

Cash Flows

Our primary sources of liquidity and capital resources are cash flows from operations and borrowings under our securitized financing facility. Our principal uses of cash are operating expenses, capital expenditures, repurchases of common stock, dividends to stockholders and repurchases of debt.

Our anticipated cash requirements for the remainder of 2023, exclusive of operating cash flow requirements, consist principally of:

• capital expenditures of approximately $25.0 million to $30.0 million, resulting in total anticipated cash capital expenditures for the year of approximately $80.0 million to $85.0 million;
• cash dividends aggregating approximately $51.6 million as discussed below in “Dividends;”
• stock repurchases under the Company’s January 2023 Authorization as discussed below in “Stock Repurchases;” and
• debt repurchases under the Company’s February 2023 Authorization as discussed below in “Long-Term Debt, Including Current Portion.”

Based on current levels of operations, the Company expects that available cash and cash flows from operations will provide sufficient liquidity to meet operating cash requirements for the next 12 months.

We currently believe we have the ability to pursue additional sources of liquidity if needed or desired to fund operating cash requirements or for other purposes. However, there can be no assurance that additional liquidity will be readily available or available on terms acceptable to us.

The table below summarizes our cash flows from operating, investing and financing activities for the first nine months of 2023 and 2022:

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Operating Activities

Cash provided by operating activities consists primarily of net income, adjusted for non-cash expenses such as depreciation and amortization, deferred income tax and share-based compensation, and the net change in operating assets and liabilities. Cash provided by operating activities was $269.5 million and $182.6 million in the first nine months of 2023 and 2022, respectively. The change was primarily due to (1) higher net income, adjusted for non-cash expenses, and (2) a decrease in payments for incentive compensation.

Investing Activities

Cash used in investing activities was $55.5 million and $46.1 million in the first nine months of 2023 and 2022, respectively. The change was primarily due to (1) an increase in capital expenditures of $5.7 million and (2) a decrease in proceeds from dispositions of $3.5 million.

Financing Activities

Cash (used in) provided by financing activities was $(373.2) million and $324.5 million in the first nine months of 2023 and 2022, respectively. The first nine months of 2023 was primarily comprised of (1) dividends of $157.9 million, (2) repurchases of common stock of $142.4 million and (3) long-term debt activities of $61.3 million, including the impact of repurchases of the Company’s 7% debentures during the first nine months of 2023. The first nine months of 2022 was primarily comprised of long-term debt activities of $470.3 million, reflecting the impact of the completion of the Company’s debt financing transaction during the first quarter of 2022, partially offset by (1) dividends of $80.2 million and (2) repurchases of common stock of $52.0 million.

Long-Term Debt, Including Current Portion

During the nine months ended October 1, 2023, Wendy’s repurchased $39.3 million in principal of its 7% debentures for $39.3 million.

We may from time to time seek to repurchase additional portions of our outstanding long-term debt, including our 7% debentures and/or our senior secured notes, through open market purchases, privately negotiated transactions or otherwise. In December 2022, our Board of Directors authorized debt repurchases of up to $25.0 million and, in February 2023, our Board of Directors authorized additional debt repurchases of up to $50.0 million through February 2024 (the “February 2023 Authorization”), resulting in total debt repurchase authorizations of up to $75.0 million. As of October 1, 2023, the Company had completed the December 2022 debt repurchase authorization and had $35.7 million remaining under the February 2023 Authorization. Subsequent to October 1, 2023 through October 26, 2023, the Company repurchased $29.2 million and $1.2 million in principal of its Class A-2 senior secured notes and 7% debentures, respectively, for a total of $26.1 million. In addition, in October 2023, our Board of Directors approved an increase of $10.0 million to the February 2023 Authorization, which continues to expire in February 2024. Further repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. Whether or not to repurchase any additional debt and the size and timing of any such repurchases will be determined at our discretion.

Except as described above, there were no material changes to the Company’s debt obligations since January 1, 2023. The Company was in compliance with its debt covenants as of October 1, 2023. See Note 6 to the Condensed Consolidated Financial Statements contained in Item 1 herein for further information related to our long-term debt obligations.

Dividends

On March 15, 2023, June 15, 2023 and September 15, 2023, the Company paid quarterly cash dividends per share of $.25, aggregating $157.9 million. On November 2, 2023, the Company announced a dividend of $.25 per share to be paid on December 15, 2023 to stockholders of record as of December 1, 2023. As a result, the Company expects that its total cash requirement for the fourth quarter of 2023 will be approximately $51.6 million based on the number of shares of its common stock outstanding at October 26, 2023. The Company currently intends to continue to declare and pay quarterly cash dividends; however, there can be no assurance that any additional quarterly dividends will be declared or paid or of the amount or timing of such dividends, if any.

Stock Repurchases

In January 2023, our Board of Directors authorized a repurchase program for up to $500.0 million of our common stock through February 28, 2027, when and if market conditions warrant and to the extent legally permissible (the “January 2023 Authorization”). In connection with the January 2023 Authorization, the remaining portion of the previous February 2022 authorization for $250.0 million was canceled. During the nine months ended October 1, 2023, the Company repurchased 6.7 million shares under the January 2023 Authorization with an aggregate purchase price of $144.3 million, of which $2.0 million was accrued as of October 1, 2023, and excluding excise tax of $1.3 million and commissions of $0.1 million. As of October 1, 2023, the Company had $355.7 million of availability remaining under the January 2023 Authorization. Subsequent to October 1, 2023 through October 26, 2023, the Company repurchased 1.2 million shares under the January 2023 Authorization with an aggregate purchase price of $23.6 million, excluding applicable excise tax and commissions.

Cloud Computing Arrangements

In addition to the anticipated cash requirements for capital expenditures noted above in “Cash Flows,” the Company expects to spend approximately $30.0 million during 2023 on cloud computing arrangements (“CCA”), primarily related to the Company’s human capital management system implementation. The Company’s cash expenditures related to CCA amounted to $25.2 million during the nine months ended October 1, 2023.

General Inflation, Commodities and Changing Prices

Inflationary pressures on labor and commodity price increases directly impacted our consolidated results of operations during the nine months ended October 1, 2023, and we expect this to continue throughout the remainder of 2023. We attempt to manage any inflationary costs and commodity price increases through selective menu price increases and product mix. Delays in implementing such menu price increases and competitive pressures may limit our ability to recover such cost increases in the future. Inherent volatility experienced in certain commodity markets, such as those for beef, chicken, pork, cheese and grains, could have a significant effect on our results of operations and may have an adverse effect on us in the future. The extent of any impact will depend on our ability to manage such volatility through product mix and selective menu price increases.

Seasonality

Wendy’s restaurant operations are moderately seasonal. Wendy’s average restaurant sales are normally higher during the summer months than during the winter months. Because our business is moderately seasonal, results for a particular quarter are not necessarily indicative of the results that may be achieved for any other quarter or for the full fiscal year.

During the nine months ended October 1, 2023, certain of the Company’s subsidiaries executed amendments to the 2021-1 Variable Funding Senior Secured Notes, Class A-1 (the “Class A-1 Notes”) and the U.S. advertising fund revolving line of credit to transition from the London Interbank Offered Rate (“LIBOR”) to the Secured Overnight Financing Rate (“SOFR”), plus any applicable margin. The Company continues to be exposed to interest rate increases under its Class A-1 Notes, its U.S. advertising fund revolving line of credit and certain other lines of credit; however, the Company had no outstanding borrowings under such lines of credit as of October 1, 2023.

Except as described above, there were no significant changes from the information contained in the Company’s Form 10-K for the fiscal year ended January 1, 2023.

Evaluation of Disclosure Controls and Procedures

The management of the Company, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of October 1, 2023. Based on such evaluations, the Chief Executive Officer and Chief Financial Officer concluded that as of October 1, 2023, the disclosure controls and procedures of the Company were effective at a reasonable assurance level in (1) recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act and (2) ensuring that information required to be disclosed by the Company in such reports is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There were no changes in the internal control over financial reporting of the Company during the third quarter of 2023 that materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

There are inherent limitations in the effectiveness of any control system, including the potential for human error and the possible circumvention or overriding of controls and procedures. Additionally, judgments in decision-making can be faulty and breakdowns can occur because of a simple error or mistake. An effective control system can provide only reasonable, not absolute, assurance that the control objectives of the system are adequately met. Accordingly, the management of the Company, including its Chief Executive Officer and Chief Financial Officer, does not expect that the control system can prevent or detect all error or fraud. Finally, projections of any evaluation or assessment of effectiveness of a control system to future periods are subject to the risks that, over time, controls may become inadequate because of changes in an entity’s operating environment or deterioration in the degree of compliance with policies or procedures.

PART II. OTHER INFORMATION

Special Note Regarding Forward-Looking Statements and Projections

This Quarterly Report on Form 10-Q and oral statements made from time to time by representatives of the Company may contain or incorporate by reference certain statements that are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Reform Act”). Generally, forward-looking statements include the words “may,” “believes,” “plans,” “expects,” “anticipates,” “intends,” “estimate,” “goal,” “upcoming,” “outlook,” “guidance” or the negation thereof, or similar expressions. In addition, all statements that address future operating, financial or business performance, strategies or initiatives, future efficiencies or savings, anticipated costs or charges, future capitalization, anticipated impacts of recent or pending investments or transactions and statements expressing general views about future results or brand health are forward-looking statements within the meaning of the Reform Act. Forward-looking statements are based on our expectations at the time such statements are made, speak only as of the dates they are made and are susceptible to a number of risks, uncertainties and other factors. For all of our forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Reform Act. Our actual results, performance and achievements may differ materially from any future results, performance or achievements expressed or implied by our forward-looking statements. Many important factors could affect our future results and cause those results to differ materially from those expressed in or implied by our forward-looking statements. Such factors include, but are not limited to, the following:

• the impact of competition or poor customer experiences at Wendy’s restaurants;
• adverse economic conditions or disruptions, including in regions with a high concentration of Wendy’s restaurants;
• changes in discretionary consumer spending and consumer tastes and preferences;
• the disruption to our business from the COVID-19 pandemic and the impact of the pandemic on our results of operations, financial condition and prospects;
• impacts to our corporate reputation or the value and perception of our brand;
• the effectiveness of our marketing and advertising programs and new product development;
• our ability to manage the accelerated impact of social media;
• our ability to protect our intellectual property;
• food safety events or health concerns involving our products;
• our ability to deliver accelerated global sales growth and achieve or maintain market share across our dayparts;
• our ability to achieve our growth strategy through new restaurant development and our Image Activation program;
• our ability to effectively manage the acquisition and disposition of restaurants or successfully implement other strategic initiatives;
• risks associated with leasing and owning significant amounts of real estate, including environmental matters;
• risks associated with our international operations, including our ability to execute our international growth strategy;
• changes in commodity and other operating costs;
• shortages or interruptions in the supply or distribution of our products and other risks associated with our independent supply chain purchasing co-op;
• the impact of increased labor costs or labor shortages;
• the continued succession and retention of key personnel and the effectiveness of our leadership and organizational structure;
• risks associated with our digital commerce strategy, platforms and technologies, including our ability to adapt to changes in industry trends and consumer preferences;
• our dependence on computer systems and information technology, including risks associated with the failure or interruption of our systems or technology or the occurrence of cyber incidents or deficiencies;
• risks associated with our securitized financing facility and other debt agreements, including compliance with operational and financial covenants, restrictions on our ability to raise additional capital, the impact of our overall debt levels and our ability to generate sufficient cash flow to meet our debt service obligations and operate our business;
• risks associated with our capital allocation policy, including the amount and timing of equity and debt repurchases and dividend payments;
• risks associated with complaints and litigation, compliance with legal and regulatory requirements and an increased focus on environmental, social and governance issues;
• risks associated with the availability and cost of insurance, changes in accounting standards, the recognition of impairment or other charges, changes in tax rates or tax laws and fluctuations in foreign currency exchange rates;
• conditions beyond our control, such as adverse weather conditions, natural disasters, hostilities, social unrest, health epidemics or pandemics or other catastrophic events;
• risks associated with our organizational redesign; and
• other risks and uncertainties affecting us and our subsidiaries referred to in our Annual Report on Form 10-K filed with the SEC on March 1, 2023 (see especially “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”) and in our other current and periodic filings with the SEC.

In addition to the factors described above, there are risks associated with our predominantly franchised business model that could impact our results, performance and achievements. Such risks include our ability to identify, attract and retain experienced and qualified franchisees, our ability to effectively manage the transfer of restaurants between and among franchisees, the business and financial health of franchisees, the ability of franchisees to meet their royalty, advertising, development, reimaging and other commitments, participation by franchisees in brand strategies and the fact that franchisees are independent third parties that own, operate and are responsible for overseeing the operations of their restaurants. Our predominantly franchised business model may also impact the ability of the Wendy’s system to effectively respond and adapt to market changes.

All future written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to above. New risks and uncertainties arise from time to time, and factors that we currently deem immaterial may become material, and it is impossible for us to predict these events or how they may affect us. We assume no obligation to update any forward-looking statements after the date of this Quarterly Report on Form 10-Q as a result of new information, future events or developments, except as required by federal securities laws, although we may do so from time to time. We do not endorse any projections regarding future performance that may be made by third parties.

In addition to the information contained in this report, you should carefully consider the risk factors disclosed in our Form 10-K, which could materially affect our business, financial condition or future results. Except as described elsewhere in this report, there have been no material changes from the risk factors previously disclosed in our Form 10-K.