In this file:
· Wendy's is Fully Committed to Breakfast This Time Around
· Wendy's (WEN) Q3 2019 Earnings Call Transcript
Wendy's is Fully Committed to Breakfast This Time Around
The three-year plan will kick into gear in early 2020.
By Danny Klein, QSR Magazine
Wendy’s doesn’t want breakfast to be a Hail Mary. And that’s where one major change from past year’s efforts comes into focus.
Chief executive officer Todd Penegor told investors Wednesday that Wendy’s believes breakfast can become “an additional layer to growth in our business.” One that rises to 10 percent of total sales, or roughly $1 billion if you consider Wendy’s generated $9,993.70 (in millions) last year.
But unlike former, rocky attempts, the brand is bringing new advertising dollars to life to support the daypart expansion. It’s not going to sacrifice support against lunch and dinner, Penegor said.
“We know what we need to do. We’ve got the hearts and the minds of the system to go execute. Now, we've got to go execute,” Penegor said.
Wendy’s turned in a strong third quarter, fueled by spicy chicken nuggets, with North America same-store sales rising 4.4 percent, year-over-year. They declined 0.2 percent in the comparable period. Adjusted revenues rose 10 percent to $351.1 million, and Wendy’s raised its full-year outlook for global systemwide sales to 3.5–4 percent from 3–4 percent.
But breakfast dominated the discussion throughout Wednesday’s call. Wendy’s plans to launch the offering sytemwide in the first quarter of 2020, and has invested $20 million upfront to do so.
Whether or not it’s going to be a seamless process, though, is a fair question to ask.
In 2010, with Roland Smith at the helm, Wendy’s tried its fourth go at breakfast when it rolled tests across six markets (Kansas City; Shreveport, Louisiana; San Antonio; Phoenix; Louisville; and Pittsburgh). The goal was to hit 1,000 units (15–16 percent of the U.S. system) by the end of 2011. Wendy’s aim was to generate an incremental $150,000–$160,000 in sales in the first year, or roughly $3,000 per week, and hit $200,000 by year five. Like the current breakfast target, it implied sales could mix 10 percent within year one and expand to 12.5 percent within five. While below McDonald’s touted 25 percent brekfast figure, a sizable contribution nonetheless.
The reality, however, was that some franchisees brought in average weekly sales of $2,700, below breakeven, and with uncertain levels of cannibalization on lunch and dinner sales. Additionally, food costs for breakfast, which included items like an artisan egg sandwich and Mornin’ Melt Panini, ran higher and pressed pilot stores 150–200 basis points above non-breakfast units.
The result: Breakfast stalled somewhere in the 600–700 restaurant range.
One interesting learning from the trial...
The other levers ...
Wendy's (WEN) Q3 2019 Earnings Call Transcript
WEN earnings call for the period ending September 30, 2019.
Motley Fool Transcribing
Nov 6, 2019
Q3 2019 Earnings Call
Nov 06, 2019, 8:30 a.m. ET
Questions and Answers
Good morning. Welcome to The Wendy's Company earnings results conference call. [Operator instructions] Greg Lemenchick, senior director, investor relations, and corporate FP&A, you may begin your conference.
Greg Lemenchick -- Senior Director, Investor Relations, and Corporate FP&A
Thank you, and good morning, everyone. Today's conference call and webcast 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. 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, will provide an update on key initiatives, and our chief financial officer, Dr. Plosch will review our third-quarter results and full-year outlook. After that, we will open up the line for questions. With that, I'll hand things over to Todd.
Todd Penegor -- President and Chief Executive Officer
Thanks, Greg, and good morning, everyone. Before I get into our third-quarter results, I want to take a moment to thank all of you who attended or tuned in to the investor day a few weeks ago. As we shared, we are striving to become an accelerated, efficient growth company by playing a different game to unlock growth. Let's dive into our third-quarter results, which highlights the strong momentum we have in our business.
As previously announced, we showcased our ability to be an accelerated, efficient growth company through our robust systemwide sales increase of 5.7%, on the backdrop of strong North America same-restaurant sales of 4.4% and continued global restaurant expansion, which translated into strong earnings growth. We opened 40 new restaurants across the globe in the third quarter and have opened 111 year to date. This is pacing slightly ahead of the openings we had this time last year, and we remain on track to deliver our goal of 1.5% net new unit growth in 2019. We also continue to reimage our restaurants and now have 56% of the global system on the new image.
Company restaurant margin came in at 16.2% for the quarter, growing 50 basis points from the prior year as we leverage our same-restaurant sales growth. Our Q3 results exceeded our expectations as we achieved approximately 3% adjusted EBITDA growth, 12% adjusted EPS growth and a 6% increase in our year-to-date free cash flow. This strong result will flow through to our updated outlook for the year, which GP will talk about in a moment. Our balanced marketing strategy contributed to accelerated North America same-restaurant sales growth of 4.4% in Q3.
We began the quarter with our Baconfest promotion, highlighting the newest addition to our Made to Crave Hamburger lineup, the Bacon Jalapeño Cheeseburger. We then turned up the heat with the relaunch of Spicy Nuggets, and the customer response exceeded our expectations, thanks to our powerful social media voice that had customers craving for this product. This promotion increased our average check and significantly changed our incoming customer count trends when we began this promotion. Supporting the launch of Spicy Nuggets for promotions through our mobile app, this led to an increased awareness of our digital platforms as we doubled our number of mobile ordering transactions during the promotion.
The addition of the Bacon Jalapeño Chicken Sandwich to our Made to Crave Chicken lineup, as well as the Buffalo Chicken Salad, added to the excitement around spicy during the quarter. We continue to build on the equity we established in the first half of the year around driving flavor and innovation with our menu. We have momentum. We shared at our investor day, our formula is simple, yet powerful: accelerate same-restaurant sales and drive global restaurant expansion, with a strong restaurant economic model to fuel this growth.
With organic same-restaurant sales at the forefront to drive a healthy restaurant economic model, which is at No. 1, we continue to focus on our one more visit, one more dollar strategy to drive mix. This is working as evidenced by our strong third-quarter results. As Kurt discussed at our investor day, we continue to make progress on improving our operations and have a comprehensive plan in place to ensure we succeed.
We are also enhancing our digital capabilities as we continue to provide more access to the brand through expanded delivery partners and launching a loyalty program. We believe our strengthening business will set us up for a successful breakfast launch in the first quarter of 2020. Our franchise system is fully aligned to this launch, on the backdrop of strong customer demand for breakfast at Wendy's, and since we have designed a program that we expect to benefit the overall restaurant economic model. These initiatives, working in tandem, give us confidence in our ability to accelerate same-restaurant sales growth into the future.
Accelerating the pace at which we open restaurants around the globe to give customers more access to our brand is vital to our growth story, and we are on track to deliver our commitments in 2019. As Abigail discussed at our investor day, we will begin pursuing accelerated international development on the backdrop of strong growth in our existing markets. We also announced that we'll be entering Europe by opening company restaurants in the U.K. within the next 12 to 18 months.
Our growth plans culminated with the announcement of our new compelling long-term guidance at investor day, which I'd like to take a moment to highlight. Our new long-term growth algorithms call for us to accelerate our systemwide sales growth to 4% to 5% and grow adjusted EBITDA and free cash flow high single digits. There are three pillars that we expect to be the primary drivers of this acceleration of growth. The first is breakfast.
We believe that we can grow this daypart to at least 10% of our U.S. sales based on strong customer demand and on the strong program that we plan to execute. The second is digital. And we believe that digital sales could contribute approximately 10% of total U.S.
sales by 2024 versus the approximately 2% we sit at today as we plan to provide more access to our brand through our digital platforms. Lastly, we believe that internationally, we can grow to 1,500 restaurants and double our sales to approximately $2 billion by 2024, driven by growth in our existing markets, as well as expansion into Europe. We are excited about the growth plans that we have as we are investing in accelerated growth and playing a different game to achieve our goals. In closing, it is important to remember that our system is one family, and we won't be able to do any of this without the support, dedication and partnership of our franchisees.
We are totally aligned with our franchisees on the plans we have in place to grow. The system is all in to execute with excellence and has the passion and commitment to ensure we achieve our vision of becoming the world's most thriving and beloved restaurant brand. With that, I'll turn things over to GP.
GP Plosch -- Chief Financial Officer ...