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Wendy's pushes more unit growth

The burger chain added more locations in 2017 than it had since 2004.

Wendy’s is growing again.

The Dublin, Ohio-based burger chain added 97 locations in 2017, giving the company its strongest growth rate since 2004 while propelling its system sales past $10 billion.

That growth has come as the chain has directed more of its restaurants into the hands of operators willing to build more units while it improves its focus on more international growth. The company now has more than 6,600 locations worldwide.

“We have the foundation in place to continue to grow,” CEO Todd Penegor said during the company’s fourth quarter earnings call on Thursday. “That gives us a great assurance in our ability to carry our strong momentum into the future.”

Wendy’s has engineered an overhaul of its store ownership and franchisee base in recent years, as the company has sold company-owned restaurants to operators while steering sales of franchisee-owned locations to other operators—which it now calls “franchise flips.”

By tying these transactions to development agreements, Wendy’s has been able to return to unit growth after several years of largely holding steady.

Since 2015, Penegor said, 40% of its restaurants have changed hands, including the refranchising effort. The company also engineered 540 franchise flips last year.

“We view this as healthy turnover as it allows us to strengthen our system by ensuring restaurants are in the hands of strong operators with access to capital that are committed to growth with a long-term focus,” Penegor said.

While the company has pushed unit growth, it hasn’t quite generated the growth it expected. Wendy’s had hoped to grow to 7,500 locations by 2020, but on Thursday lowered that goal to 7,250.

“We’ll still get to 7,500,” Penegor said, “There’s just been a slight delay in transitioning excitement into more restaurants in the pipeline.”

The delay is largely in North America, where that 40% of its locations have been sold to different operators. “That does slow you down in the short run on development commitments,” Penegor said.

The unit growth, sales growth and refranchisings have helped the company improve its profitability and cash flow.

Revenues last year fell 14.8% to $1.2 billion, largely because it operates fewer restaurants and franchises more of them. Franchising generates lower revenues than does restaurant operations.

But net income for the full year increased nearly 50% to $194 million, or 79 cents per share. Much of that increase was due to a lower tax rate thanks to recently passed tax reform.

But the company’s free cash flow, which was once negative, quadrupled to nearly $170 million, from $38.9 million in 2016.

Wendy’s stock rose 4% in morning trading on Thursday.

Same-store sales slow

While Wendy’s finances were improved, the company’s same-store sales in the fourth quarter increased 1.3%, a slowdown from the 2% growth for the full year.

That was lower than investors expected and was behind the performance of its biggest competitors in the quarter: McDonald’s (4.6%) and Burger King (5%).

Yet executives on the call noted that the chain’s same-store sales have increased for 20 straight quarters.

And they expect those same-store sales to improve, in large part because the company has plans both to target value customers and premium customers. The chain expanded its 4 for $4 value offer in January, for instance, and has introduced its Smoky Mushroom Bacon Cheeseburger.

And Penegor said the company has other items in its “toolbox” similar to the 50-cent Frosty it offered last year.

“We have a good pipeline of ideas, such as the 50-cent Frosty, which was more disruptive,” he said. “We have ideas like that we could get to if we needed to.”

And the chain’s average unit volumes hit $1.61 million in 2017, the highest they’ve ever been, the company said.

Technology efforts

Wendy’s also believes technology and delivery can help sales. The company has a delivery partnership with DoorDash, with delivery now available in 20% of the chain’s restaurants.

Penegor said that the company is looking at other delivery partners to further expand the service to more of its locations.

“The economics have proven to be worthwhile,” he said. “They’re highly incremental in the evening. They have higher average checks. Both are positive for our economic model.”

Meanwhile, 80% of the chain’s restaurants now accept mobile orders. The company is testing loyalty in two markets. The company did not reveal details, though a spokeswoman did say that the test involves the company’s mobile app.

“Technology can play a nice role as we connect with the consumer with mobile order and pay,” Penegor said.

Meanwhile, the chain has self-order kiosks in 150 locations and wants them in more. The kiosks improve throughput, Penegor said, the orders have higher check averages, and the devices could help operators with labor.

Cheaper remodels

Wendy’s also has hopes that remodeled units will generate sales in the coming years. The company believes that 70% of its restaurants will be remodeled by 2020—up from 43% right now.

Those remodels generate same-store sales lifts in the “high single digits.”

Wendy’s is also testing an easier, cheaper “light” remodel that could be used for restaurants with smaller unit volumes.

That could help reduce store closures, which would in turn help bolster the chain’s overall growth. Wendy’s actually added 174 new units last year, for instance, but closed 77.

“The average AUV of a closure was $1.1 million,” Penegor said, adding that a remodel could help sales at those restaurants, preventing more closures.

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