The Wendy’s Co. plans to open 1,000 new units by the end of 2020, the company said Wednesday, as growing sales and higher profits encourage operators to expand.
The vast majority of those new restaurants will be built by franchisees, as the system continues to shift to a more franchise-heavy model following the sale of 540 U.S. restaurants to franchisees by the middle of next year.
Wendy’s executives said during a conference call Wednesday that they expect to sell 280 units by early in the fourth quarter, and the other 260 locations by mid-2016. The sale of the restaurants is expected to generate as much as $475 million in gross proceeds, or about $900,000 per location. Ultimately, Wendy’s will operate 315 restaurants, or 5 percent of its more than 6,000 units.
Executives don’t expect to have trouble selling the restaurants. Interest in the units is “very strong,” Wendy’s CEO Emil Brolick said during the conference call.
“We’re getting a lot of interest from franchisees, as well as interest outside the community,” Brolick said. “The vast majority of the stores will be sold internally, with possibly some sold outside the community.”
The new restaurants don’t factor in unit closures, but they do signal a return to growth for a chain that has largely been stagnant for years. Wendy’s expects to add 80 new units this year, its highest count in nine years, Brolick said.
Franchisees who buy the restaurants will be required to remodel many of them under Wendy’s Image Activation design. The company aims to have 60 percent of the system remodeled by 2020.
That could be a lot to ask franchisees: Operators will have to buy existing units, remodel many of them and then build additional locations.
However, executives said they expect franchisees to be able to get funding needed to accomplish all three goals.
“The banking community knows what they’re going to have to support on the financing front,” Wendy’s chief financial officer Todd Penegor said during the call. “We’re very comfortable we are going to get the support to get financing available.”
Executives said franchisees will have plenty of incentive to add locations. Wendy’s wants to increase sales in the coming years, so that its average unit volume reaches $2 million by 2020. In addition, the company is taking costs out of the business to improve the returns generated by new units. It wants restaurant margins to grow to 20 percent by that year.
“We feel quite confident, in discussions with franchisees, that we can get to those 1,000 gross new builds,” Brolick said.
Wendy’s plan comes as the company shifts its overall business strategy from investing heavily in capital costs to returning cash to shareholders and concentrating on its more profitable franchising business.
New program to increase cash flow
The company announced a new $1.4 billion share repurchase program Wednesday. Funds from share repurchases will come from additional debt from Wendy’s recent debt refinancing, as well as the sale of company restaurants and $50 million in after-tax proceeds from the sale this week of its bakery operations. Wendy’s received $80 million from East Balt Bakeries for it bakery operation.
The $1.4 billion share repurchase program represents a third of the company’s market capitalization, meaning that Wendy’s is buying back as much as a third of its shares.
Numerous restaurant companies have been buying back shares, often funded with low-cost debt, refranchising and/or the sale of company-owned real estate. By doing so, companies spread earnings and earnings growth among fewer shares, and the value of those shares increase. Indeed, Wendy’s stock rose more than 4 percent in Wednesday morning trading on the news.
“We will continue to use our excess cash to repurchase shares,” Penegor said during a call with analysts.
By selling the restaurants, Wendy’s expects to reduce its capital expenditures considerably, from $240 million to $250 million this year to less than $70 million in 2018.
It will also generate rental income. Wendy’s is keeping ownership of the property on 674 locations. It will also hold some “sandwich leases,” in which it leases the property from one landlord and then leases it to the franchisee at a markup. By keeping control of those properties, Wendy’s expects to generate $70 million in rental income a year. Companies like Burger King and Jack in the Box have maintained control of some properties in refranchising deals to generate that rent, which is generally a high-profit business.
Franchising restaurants generates higher margins than restaurant operations do. Many legacy chains, including Applebee’s, Burger King, Jamba Juice, TGI Fridays and others have shifted or are shifting away from unit ownership. In Wendy’s case, doing so could help its cash flow margins increase from 20 percent to 22 percent this year, to 35 percent by 2018.
Wendy’s expects all of these efforts to yield 20-percent earnings per share growth by 2018.
“We are confident our strong balance sheet, financial flexibility and cash flow will enable us to comfortably fund our growth initiatives while returning significant capital to shareholders,” Penegor said in a statement.