Wendy's Co 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 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 December 31, 2023 (the “Form 10-K”). There have been no material changes as of September 29, 2024 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 and dollar share, and the third largest globally with 7,292 restaurants in the U.S. and 31 foreign countries and U.S. territories as of September 29, 2024. 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 25 the Company’s core operating performance. See “Results of Operations” below and Note 16 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 September 29, 2024, the Wendy’s restaurant system was comprised of 7,292 restaurants, with 6,011 Wendy’s restaurants in operation in the U.S. Of the U.S. restaurants, 398 were operated by the Company and 5,613 were operated by a total of 210 franchisees. In addition, at September 29, 2024, there were 1,281 Wendy’s restaurants in operation in 31 foreign countries and U.S. territories. Of the international restaurants, 1,268 were operated by a total of 109 franchisees and 13 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 September 29, 2024. 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 same-restaurant sales momentum across all dayparts, (2) accelerating our consumer-facing digital platforms and technologies and (3) expanding the Company’s footprint across the globe. 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. This methodology is consistent with the metric used by our management for internal reporting and analysis. The table summarizing same-restaurant sales below in “Results of Operations” provides the same-restaurant sales percent changes. • Company-Operated Restaurant Margin - We define Company-operated 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 Company-operated 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. Company-operated 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 26 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, Company-operated 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 2.9% to $566.7 million in the third quarter of 2024 compared with $550.6 million in the third quarter of 2023; • Global same-restaurant sales increased 0.2%, U.S. same-restaurant sales increased 0.2% and international same-restaurant sales increased 0.7% compared with the third quarter of 2023. On a two-year basis, global same-restaurant sales increased 3.0%; • Global Company-operated restaurant margin was 15.1% in the third quarter of 2024, an increase of 10 basis points compared with the third quarter of 2023; and • Net income decreased 13.5% to $50.2 million in the third quarter of 2024 compared with $58.0 million in the third quarter of 2023. Year-to-Date Financial Highlights • Revenue increased 1.9% to $1.67 billion in the first nine months of 2024 compared with $1.64 billion in the first nine months of 2023; • Global same-restaurant sales increased 0.7%, U.S. same-restaurant sales increased 0.5% and international same-restaurant sales increased 2.1% compared with the first nine months of 2023. On a two-year basis, global same-restaurant sales increased 5.9%; • Global Company-operated restaurant margin was 15.2% in the first nine months of 2024, an increase of 10 basis points compared with the first nine months of 2023; and • Net income decreased 6.8% to $146.9 million in the first nine months of 2024 compared with $157.5 million in the first nine months of 2023. 27 Global Same-Restaurant Sales Wendy’s long-term growth opportunities include driving same-restaurant sales across all dayparts through quality differentiation, exciting menu innovation and compelling value offerings. Global same-restaurant sales increased 0.2% in the third quarter of 2024 and increased 3.0% on a two-year basis. Global same-restaurant sales increased 0.7% in the first nine months of 2024 and increased 5.9% on a two-year basis. To drive same-restaurant sales across the breakfast daypart, the Company plans to fund approximately $22.0 million of incremental breakfast advertising in 2024. Digital Wendy’s long-term growth opportunities include accelerating consumer-facing digital platforms and technologies to drive global systemwide sales. Over the past several years, 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 continuing to make digital investments and is partnering with key technology providers to help execute our digital, restaurant technology and enterprise technology initiatives and support our technology innovation and growth. The Company’s digital business has continued to grow and digital sales as a percent of global systemwide sales increased from approximately 12.8% during the first nine months of 2023 to approximately 17.1% during the first nine months of 2024. New Restaurant Development Wendy’s long-term growth opportunities include expanding the Company’s footprint across the globe. To promote new restaurant development, the Company has provided franchisees with certain incentive programs for qualifying new restaurants, in addition to our build to suit development fund. In July and September 2024, Wendy’s announced a new development incentive structure in the U.S. and Canada and select international markets, respectively, that provides for reductions in royalty and national advertising fees for qualifying new restaurants for two, three or four years of operation based on the number of restaurants committed to under the development agreement. 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 September 29, 2024, Wendy’s added 52 net new restaurants across the 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 held its general and administrative expense in 2023 relatively flat compared with 2022. Additionally, in January 2024, the Board of Directors announced the appointment of Kirk Tanner as the Company’s new President and Chief Executive Officer, effective February 5, 2024. Mr. Tanner succeeded Todd A. Penegor, the Company’s previous President and Chief Executive Officer, who departed from the Company in February 2024. The Company expects to incur total costs of approximately $18 million related to the Organizational Redesign Plan, including costs related to the succession of the President and Chief Executive Officer role. Of the total costs, approximately $15 million will be cash expenditures expected through 2026. Costs related to the Organizational Redesign Plan are recorded to “Reorganization and realignment costs.” During the nine months ended September 29, 2024, the Company recognized costs totaling $8.3 million, which primarily included severance and related employee costs. The Company expects to incur additional costs aggregating approximately $0.8 million, comprised primarily of share-based compensation. The Company expects costs related to the Organizational Redesign Plan to continue into 2026. 28 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 2024 and 2023. Third Quarter Nine Months 2024 2023 Change 2024 2023 Change Revenues: Sales $ 230.4 $ 234.7 $ (4.3) $ 693.1 $ 703.4 $ (10.3) Franchise royalty revenue and fees 153.9 149.4 4.5 458.0 444.0 14.0 Franchise rental income 59.3 57.6 1.7 177.9 173.4 4.5 Advertising funds revenue 123.1 108.9 14.2 343.2 320.1 23.1 566.7 550.6 16.1 1,672.2 1,640.9 31.3 Costs and expenses: Cost of sales 195.6 199.5 (3.9) 587.6 597.1 (9.5) Franchise support and other costs 16.0 14.8 1.2 47.0 41.9 5.1 Franchise rental expense 32.2 31.9 0.3 96.4 94.9 1.5 Advertising funds expense 129.7 107.9 21.8 357.9 319.2 38.7 General and administrative 62.8 59.3 3.5 188.0 184.3 3.7 Depreciation and amortization (exclusive of amortization of cloud computing arrangements shown separately below) 37.0 34.3 2.7 110.0 101.3 8.7 Amortization of cloud computing arrangements 3.6 3.8 (0.2) 10.6 7.7 2.9 System optimization gains, net (0.4) (0.1) (0.3) (0.6) (0.1) (0.5) Reorganization and realignment costs 0.4 0.6 (0.2) 8.5 8.1 0.4 Impairment of long-lived assets 0.2 0.1 0.1 2.9 0.5 2.4 Other operating income, net (5.1) (3.1) (2.0) (11.4) (9.4) (2.0) 472.0 449.0 23.0 1,396.9 1,345.5 51.4 Operating profit 94.7 101.6 (6.9) 275.3 295.4 (20.1) Interest expense, net (31.3) (31.0) (0.3) (92.8) (93.8) 1.0 Loss on early extinguishment of debt — (0.3) 0.3 — (1.6) 1.6 Investment loss, net — — — — (10.4) 10.4 Other income, net 6.3 7.7 (1.4) 19.4 22.5 (3.1) Income before income taxes 69.7 78.0 (8.3) 201.9 212.1 (10.2) Provision for income taxes (19.5) (20.0) 0.5 (55.0) (54.6) (0.4) Net income $ 50.2 $ 58.0 $ (7.8) $ 146.9 $ 157.5 $ (10.6) 29 Third Quarter Nine Months 2024 % of Total Revenues 2023 % of Total Revenues 2024 % of Total Revenues 2023 % of Total Revenues Revenues: Sales $ 230.4 40.7 % $ 234.7 42.6 % $ 693.1 41.4 % $ 703.4 42.9 % Franchise royalty revenue and fees: Franchise royalty revenue 132.6 23.4 % 130.1 23.6 % 394.6 23.6 % 384.3 23.5 % Franchise fees 21.3 3.8 % 19.3 3.5 % 63.4 3.8 % 59.7 3.6 % Total franchise royalty revenue and fees 153.9 27.2 % 149.4 27.1 % 458.0 27.4 % 444.0 27.1 % Franchise rental income 59.3 10.5 % 57.6 10.5 % 177.9 10.6 % 173.4 10.6 % Advertising funds revenue 123.1 21.7 % 108.9 19.8 % 343.2 20.5 % 320.1 19.5 % Total revenues $ 566.7 100.0 % $ 550.6 100.0 % $ 1,672.2 100.0 % $ 1,640.9 100.0 % Third Quarter Nine Months 2024 % of Sales 2023 % of Sales 2024 % of Sales 2023 % of Sales Cost of sales: Food and paper $ 71.7 31.1 % $ 74.5 31.7 % $ 214.4 30.9 % $ 224.1 31.9 % Restaurant labor 73.9 32.1 % 74.9 31.9 % 223.5 32.2 % 223.8 31.8 % Occupancy, advertising and other operating costs 50.0 21.7 % 50.1 21.4 % 149.7 21.6 % 149.2 21.2 % Total cost of sales $ 195.6 84.9 % $ 199.5 85.0 % $ 587.6 84.8 % $ 597.1 84.9 % Third Quarter Nine Months 2024 % of Sales 2023 % of Sales 2024 % of Sales 2023 % of Sales Company-operated restaurant margin: U.S. $ 34.8 15.6 % $ 35.5 15.6 % $ 106.4 15.8 % $ 108.8 15.9 % Global 34.8 15.1 % 35.2 15.0 % 105.5 15.2 % 106.3 15.1 % 30 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. Third Quarter Nine Months 2024 2023 2024 2023 Key business measures: U.S. same-restaurant sales: Company-operated (1.5) % 0.7 % (1.1) % 3.6 % Franchised 0.3 % 2.3 % 0.6 % 4.8 % Systemwide 0.2 % 2.2 % 0.5 % 4.7 % International same-restaurant sales (a) 0.7 % 7.8 % 2.1 % 9.4 % Global same-restaurant sales: Company-operated (1.6) % 1.0 % (1.3) % 3.8 % Franchised (a) 0.4 % 3.0 % 0.8 % 5.4 % Systemwide (a) 0.2 % 2.8 % 0.7 % 5.2 % Systemwide sales (b): U.S. Company-operated $ 222.7 $ 227.7 $ 673.4 $ 685.2 U.S. franchised 2,918.3 2,885.3 8,701.3 8,557.2 U.S. systemwide 3,141.0 3,113.0 9,374.7 9,242.4 International Company-operated 7.7 7.1 19.7 18.2 International franchised (a) 487.5 460.3 1,418.9 1,328.6 International systemwide (a) 495.2 467.4 1,438.6 1,346.8 Global systemwide (a) $ 3,636.2 $ 3,580.4 $ 10,813.3 $ 10,589.2 _______________ (a) Excludes Argentina due to the impact of that country’s highly inflationary economy. (b) During the third quarter of 2024 and 2023, global systemwide sales increased 1.8% and 4.8%, respectively, U.S. systemwide sales increased 0.9% and 3.6%, respectively, and international systemwide sales increased 7.7% and 13.6%, respectively, on a constant currency basis. During the first nine months of 2024 and 2023, global systemwide sales increased 2.3% and 7.2% respectively, U.S. systemwide sales increased 1.4% and 6.0%, respectively, and international systemwide sales increased 8.3% and 15.6%, respectively, on a constant currency basis. 31 Third Quarter U.S. Company-operated U.S. Franchised International Company-operated International Franchised Systemwide Restaurant count: Restaurant count at June 30, 2024 399 5,614 12 1,236 7,261 Opened — 22 1 41 64 Closed — (24) — (9) (33) Net (sold to) purchased by franchisees (1) 1 — — — Restaurant count at September 29, 2024 398 5,613 13 1,268 7,292 Nine Months U.S. Company-operated U.S. Franchised International Company-operated International Franchised Systemwide Restaurant count at December 31, 2023 403 5,627 12 1,198 7,240 Opened 2 63 1 97 163 Closed (6) (78) — (27) (111) Net (sold to) purchased by franchisees (1) 1 — — — Restaurant count at September 29, 2024 398 5,613 13 1,268 7,292 Sales Third Quarter Nine Months 2024 2023 Change 2024 2023 Change Sales $ 230.4 $ 234.7 $ (4.3) $ 693.1 $ 703.4 $ (10.3) The decrease in sales during the third quarter and the first nine months of 2024 was primarily due to (1) a 1.6% and 1.3% decrease in global Company-operated same-restaurant sales of $4.1 million and $9.4 million, respectively, and (2) net closures of Company-operated restaurants of $0.3 million and $2.2 million, respectively. Company-operated same-restaurant sales decreased due to a decrease in customer count, partially offset by higher average check. Franchise Royalty Revenue and Fees Third Quarter Nine Months 2024 2023 Change 2024 2023 Change Franchise royalty revenue $ 132.6 $ 130.1 $ 2.5 $ 394.6 $ 384.3 $ 10.3 Franchise fees 21.3 19.3 2.0 63.4 59.7 3.7 $ 153.9 $ 149.4 $ 4.5 $ 458.0 $ 444.0 $ 14.0 Franchise royalty revenue during the third quarter of 2024 increased $2.5 million, of which (1) $2.1 million was due to net new restaurant development and (2) $0.7 million was due to a 0.4% increase in global franchise same-restaurant sales. Franchise royalty revenue during the first nine months of 2024 increased $10.3 million, of which (1) $6.1 million was due to net new restaurant development and (2) $3.9 million was due to a 0.8% increase in global franchise same-restaurant sales. Franchise same-restaurant sales during the third quarter and first nine months of 2024 increased due to higher average check, partially offset by a decrease in customer count. The increase in franchise fees during the third quarter and the first nine months of 2024 was primarily due to (1) higher fees for providing information technology services to franchisees of $0.5 million and $1.3 million, respectively, and (2) an increase in other miscellaneous franchise fees of $1.5 million and $2.4 million, respectively. 32 Franchise Rental Income Third Quarter Nine Months 2024 2023 Change 2024 2023 Change Franchise rental income $ 59.3 $ 57.6 $ 1.7 $ 177.9 $ 173.4 $ 4.5 The increase in franchise rental income during the third quarter and the first nine months of 2024 was primarily due to (1) the impact of amending certain existing leases of $1.3 million and $2.8 million, respectively, (2) the impact of entering into new leases of $0.6 million and $1.6 million, respectively, and (3) an increase in executory costs of $0.3 million and $0.7 million, respectively. See Note 11 to the Condensed Consolidated Financial Statements contained in Item 1 herein for further information. Advertising Funds Revenue Third Quarter Nine Months 2024 2023 Change 2024 2023 Change Advertising funds revenue $ 123.1 $ 108.9 $ 14.2 $ 343.2 $ 320.1 $ 23.1 The increase in advertising funds revenue during the third quarter of 2024 was primarily due to promotional activity of $12.0 million. During the first nine months of 2024, advertising funds revenue also increased due to (1) net new restaurant development of $4.5 million and (2) an increase in franchise same-restaurant sales in the U.S. and Canada of $2.3 million. Cost of Sales, as a Percent of Sales Third Quarter Nine Months 2024 2023 Change 2024 2023 Change Food and paper 31.1 % 31.7 % (0.6) % 30.9 % 31.9 % (1.0) % Restaurant labor 32.1 % 31.9 % 0.2 % 32.2 % 31.8 % 0.4 % Occupancy, advertising and other operating costs 21.7 % 21.4 % 0.3 % 21.6 % 21.2 % 0.4 % 84.9 % 85.0 % (0.1) % 84.8 % 84.9 % (0.1) % The decrease in cost of sales, as a percent of sales, during the third quarter and the first nine months of 2024 was primarily due to (1) higher average check and (2) labor efficiencies. These impacts were partially offset by (1) an increase in restaurant labor rates and (2) a decrease in customer count. Franchise Support and Other Costs Third Quarter Nine Months 2024 2023 Change 2024 2023 Change Franchise support and other costs $ 16.0 $ 14.8 $ 1.2 $ 47.0 $ 41.9 $ 5.1 The increase in franchise support and other costs during the third quarter and the first nine months of 2024 was primarily due to an increase in costs incurred to provide information technology and other services to franchisees. Franchise Rental Expense Third Quarter Nine Months 2024 2023 Change 2024 2023 Change Franchise rental expense $ 32.2 $ 31.9 $ 0.3 $ 96.4 $ 94.9 $ 1.5 The increase in franchise rental expense during the first nine months of 2024 was primarily due to an increase in executory costs. See Note 11 to the Condensed Consolidated Financial Statements contained in Item 1 herein for further information. 33 Advertising Funds Expense Third Quarter Nine Months 2024 2023 Change 2024 2023 Change Advertising funds expense $ 129.7 $ 107.9 $ 21.8 $ 357.9 $ 319.2 $ 38.7 On an interim basis, advertising funds expense is recognized in proportion to advertising funds revenue. The Company expects advertising funds expense to be higher than advertising funds revenue by approximately $22.0 million for 2024, which represents the Company’s plan to fund incremental breakfast advertising. The increase in advertising funds expense during the third quarter and the first nine months of 2024 was primarily due to (1) the same factors as described above for “Advertising Funds Revenue” and (2) the recognition of the expected Company breakfast advertising spend in excess of advertising funds revenue of $6.6 million and $14.8 million, respectively. General and Administrative Third Quarter Nine Months 2024 2023 Change 2024 2023 Change Employee compensation and benefits $ 35.2 $ 31.1 $ 4.1 $ 103.4 $ 96.1 $ 7.3 Share-based compensation 6.7 6.4 0.3 17.8 15.7 2.1 Incentive compensation 2.5 5.4 (2.9) 15.0 20.4 (5.4) Professional fees 14.9 13.2 1.7 42.2 42.8 (0.6) Other, net 3.5 3.2 0.3 9.6 9.3 0.3 $ 62.8 $ 59.3 $ 3.5 $ 188.0 $ 184.3 $ 3.7 The increase in general and administrative expenses during the third quarter of 2024 was primarily due to (1) higher employee compensation and benefits and (2) an increase in professional fees. These increases were partially offset by a decrease in incentive compensation accruals, reflecting lower operating performance as compared to plan in 2024 versus 2023. The increase in general and administrative expenses during the first nine months of 2024 was primarily due to (1) higher employee compensation and benefits and (2) higher share-based compensation. These increases were partially offset by a decrease in incentive compensation accruals, reflecting lower operating performance as compared to plan in 2024 versus 2023. Depreciation and Amortization (exclusive of amortization of cloud computing arrangements shown separately below) Third Quarter Nine Months 2024 2023 Change 2024 2023 Change Restaurants $ 23.3 $ 21.9 $ 1.4 $ 68.8 $ 63.9 $ 4.9 Technology support, corporate and other 13.7 12.4 1.3 41.2 37.4 3.8 $ 37.0 $ 34.3 $ 2.7 $ 110.0 $ 101.3 $ 8.7 The increase in depreciation and amortization during the third quarter and the first nine months of 2024 was primarily due to (1) asset additions for new and remodeled restaurants and (2) depreciation and amortization for technology investments. Amortization of Cloud Computing Arrangements Third Quarter Nine Months 2024 2023 Change 2024 2023 Change Amortization of cloud computing arrangements $ 3.6 $ 3.8 $ (0.2) $ 10.6 $ 7.7 $ 2.9 The increase in amortization of cloud computing arrangements during the first nine months of 2024 was primarily due to amortization of assets associated with the Company’s human capital management (“HCM”) system implementation completed in the third quarter of 2023. 34 System Optimization Gains, Net Third Quarter Nine Months 2024 2023 Change 2024 2023 Change System optimization gains, net $ (0.4) $ (0.1) $ (0.3) $ (0.6) $ (0.1) $ (0.5) System optimization gains, net for the third quarter and the first nine months of 2024 were primarily comprised of post-closing adjustments on sales of restaurants. See Note 3 to the Condensed Consolidated Financial Statements contained in Item 1 herein for further information. Reorganization and Realignment Costs Third Quarter Nine Months 2024 2023 Change 2024 2023 Change Organizational redesign $ 0.3 $ 0.6 $ (0.3) $ 8.3 $ 8.0 $ 0.3 Other reorganization and realignment plans 0.1 — 0.1 0.2 0.1 0.1 $ 0.4 $ 0.6 $ (0.2) $ 8.5 $ 8.1 $ 0.4 During the first nine months of 2024 and 2023, the Company recognized costs under the Organizational Redesign Plan of $8.3 million and $8.0 million, respectively, which primarily included severance and related employee costs. See Note 4 to the Condensed Consolidated Financial Statements contained in Item 1 herein for further information on the Organizational Redesign Plan. Costs incurred under the Company’s other reorganization and realignment plans were not material during the three and nine months ended September 29, 2024 and October 1, 2023. The Company does not expect to incur any material additional costs under these plans. Impairment of Long-Lived Assets Third Quarter Nine Months 2024 2023 Change 2024 2023 Change Impairment of long-lived assets $ 0.2 $ 0.1 $ 0.1 $ 2.9 $ 0.5 $ 2.4 The increase in impairment of long-lived assets during the first nine months of 2024 was primarily due to higher impairment charges as a result of the deterioration in operating performance of certain Company-operated restaurants. Other Operating Income, Net Third Quarter Nine Months 2024 2023 Change 2024 2023 Change Lease buyout $ 1.7 $ (0.2) $ 1.9 $ 2.2 $ (0.2) $ 2.4 Equity in earnings in joint venture, net 3.1 3.0 0.1 8.6 8.0 0.6 Other, net 0.3 0.3 — 0.6 1.6 (1.0) $ 5.1 $ 3.1 $ 2.0 $ 11.4 $ 9.4 $ 2.0 The increase in other operating income during the third quarter and the first nine months of 2024 was primarily due to an increase in lease buyout activity. Interest Expense, Net Third Quarter Nine Months 2024 2023 Change 2024 2023 Change Interest expense, net $ 31.3 $ 31.0 $ 0.3 $ 92.8 $ 93.8 $ (1.0) The decrease in interest expense, net during the first nine months of 2024 was primarily due to lower outstanding long-term debt. 35 Loss on Early Extinguishment of Debt Third Quarter Nine Months 2024 2023 Change 2024 2023 Change Loss on early extinguishment of debt $ — $ 0.3 $ (0.3) $ — $ 1.6 $ (1.6) During the first nine months of 2023, the Company incurred a loss on early extinguishment of debt of $1.6 million related to the repurchase of $39.3 million in principal of the Company’s 7% debentures. Investment Loss, Net Third Quarter Nine Months 2024 2023 Change 2024 2023 Change Investment loss, net $ — $ — $ — $ — $ 10.4 $ (10.4) 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. Other Income, Net Third Quarter Nine Months 2024 2023 Change 2024 2023 Change Other income, net $ 6.3 $ 7.7 $ (1.4) $ 19.4 $ 22.5 $ (3.1) The decrease in other income, net during the third quarter and the first nine months of 2024 was primarily due to a decrease in interest income, reflecting lower balances of cash equivalents. Provision for Income Taxes Third Quarter Nine Months 2024 2023 Change 2024 2023 Change Income before income taxes $ 69.7 $ 78.0 $ (8.3) $ 201.9 $ 212.1 $ (10.2) Provision for income taxes (19.5) (20.0) 0.5 (55.0) (54.6) (0.4) Effective tax rate on income 27.9 % 25.5 % 2.4 % 27.3 % 25.8 % 1.5 % The effective tax rates for the third quarter and the first nine months of 2024 and 2023 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 increase in the effective tax rate for the third quarter of 2024 was primarily due to (1) an increase in the tax effects of our foreign operations, (2) a decrease in the benefit from share-based compensation and (3) an increase in state income taxes, including discrete changes to state deferred income taxes. The increase in the effective tax rate for the first nine months of 2024 was primarily due to (1) an increase in the tax effects of our foreign operations and (2) a decrease in the benefit from share-based compensation. These changes were partially offset by a one-time adjustment to our foreign deferred income taxes related to prior periods. Numerous countries have enacted the Organization of Economic Corporation and Development’s framework on a global minimum tax (referred to as “Pillar 2”), with the earliest effective date for taxable years beginning after December 31, 2023. While the Company does not expect this enactment will have a material impact on the condensed consolidated financial statements, we will continue to evaluate and monitor as additional guidance and clarification becomes available. 36 Segment Information See Note 16 to the Condensed Consolidated Financial Statements contained in Item 1 herein for further information regarding the Company’s segments. Wendy’s U.S. Third Quarter Nine Months 2024 2023 Change 2024 2023 Change Sales $ 222.7 $ 227.7 $ (5.0) $ 673.4 $ 685.2 $ (11.8) Franchise royalty revenue 114.4 112.7 1.7 341.2 334.0 7.2 Franchise fees 17.9 17.0 0.9 53.5 51.8 1.7 Advertising fund revenue 113.7 99.8 13.9 316.1 296.0 20.1 Total revenues $ 468.7 $ 457.2 $ 11.5 $ 1,384.2 $ 1,367.0 $ 17.2 Segment profit $ 129.8 $ 134.9 $ (5.1) $ 392.3 $ 403.1 $ (10.8) The increase in Wendy’s U.S. revenues during the third quarter and the first nine months of 2024 was primarily due to (1) higher advertising fund revenue and (2) net new franchise restaurant development. During the first nine months of 2024, revenues also increased due to higher franchise same-restaurant sales. Franchise same-restaurant sales increased during the first nine months of 2024 primarily due to higher average check, partially offset by a decrease in customer count. These increases were partially offset by a decrease in Company-operated sales driven by the same factors as described above for “Sales.” The decrease in Wendy’s U.S. segment profit during the third quarter and the first nine months of 2024 was primarily due to (1) an increase in the Company’s funding of incremental advertising and (2) a decrease in Company-operated sales. During the first nine months of 2024, segment profit also decreased due to higher franchise support and other costs. These changes were partially offset by an increase in franchise royalty revenue and fees. Wendy’s International Third Quarter Nine Months 2024 2023 Change 2024 2023 Change Sales $ 7.7 $ 7.1 $ 0.6 $ 19.7 $ 18.2 $ 1.5 Franchise royalty revenue 18.2 17.4 0.8 53.4 50.4 3.0 Franchise fees 2.3 1.6 0.7 6.6 4.5 2.1 Advertising fund revenue 9.4 9.1 0.3 27.1 24.1 3.0 Total revenues $ 37.6 $ 35.2 $ 2.4 $ 106.8 $ 97.2 $ 9.6 Segment profit $ 11.0 $ 10.8 $ 0.2 $ 32.4 $ 26.8 $ 5.6 The increase in Wendy’s International revenues during the third quarter and the first nine months of 2024 was primarily due to (1) net new restaurant development and (2) an increase in franchise same-restaurant sales. Franchise same-restaurant sales increased during the third quarter and the first nine months of 2024 due to higher average check, partially offset by a decrease in customer count. The increase in Wendy’s International segment profit during the third quarter and the first nine months of 2024 was primarily due to higher revenues. This increase was partially offset by higher advertising fund expenses. 37 Global Real Estate & Development Third Quarter Nine Months 2024 2023 Change 2024 2023 Change Franchise fees $ 1.1 $ 0.6 $ 0.5 $ 3.3 $ 3.4 $ (0.1) Franchise rental income 59.3 57.5 1.8 178.0 173.4 4.6 Total revenues $ 60.4 $ 58.1 $ 2.3 $ 181.3 $ 176.8 $ 4.5 Segment profit $ 27.2 $ 24.4 $ 2.8 $ 79.5 $ 76.0 $ 3.5 The increase in Global Real Estate & Development revenues during the third quarter and the first nine months of 2024 was primarily due to higher franchise rental income as a result of (1) amending certain existing leases, (2) entering into new leases and (3) an increase executory costs. The increase in Global Real Estate & Development segment profit during the third quarter and the first nine months of 2024 was primarily due to (1) higher revenues and (2) an increase in lease buyout activity. These increases were partially offset by higher franchise rental expense driven by the same factors as described above for “Franchise Rental Expense.” 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 and dividends to stockholders. Our anticipated cash requirements for the remainder of 2024, exclusive of operating cash flow requirements, consist principally of: • capital expenditures of approximately $38.0 million to $48.0 million, resulting in total anticipated cash capital expenditures for the year of approximately $90.0 million to $100.0 million; • cash dividends aggregating approximately $51.0 million as discussed below in “Dividends;” and • stock repurchases under the Company’s January 2023 Authorization as discussed below in “Stock Repurchases.” 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 2024 and 2023: Nine Months 2024 2023 Change Net cash provided by (used in): Operating activities $ 286.7 $ 269.5 $ 17.2 Investing activities (68.8) (55.5) (13.3) Financing activities (250.6) (373.2) 122.6 Effect of exchange rate changes on cash (1.6) 0.3 (1.9) Net decrease in cash, cash equivalents and restricted cash $ (34.3) $ (158.9) $ 124.6 38 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 $286.7 million and $269.5 million in the first nine months of 2024 and 2023, respectively. The change was primarily due to (1) a decrease in cash paid for cloud computing arrangements and (2) the timing of payments for marketing expenses of the national advertising funds. These changes were partially offset by lower net income, adjusted for non-cash expenses. Investing Activities Cash used in investing activities was $68.8 million and $55.5 million in the first nine months of 2024 and 2023, respectively. The change was primarily due to an increase in expenditures associated with the Company’s franchise development fund of $19.1 million, partially offset by (1) a decrease in capital expenditures of $3.3 million and (2) an increase in proceeds from dispositions of $2.9 million. Financing Activities Cash used in financing activities was $250.6 million and $373.2 million in the first nine months of 2024 and 2023, respectively. The change was primarily due to (1) a decrease in repurchases of the Company’s common stock of $82.4 million and (2) a decrease in repayments of long-term debt of $39.3 million, reflecting the impact of repurchases of the Company’s 7% debentures during the first nine months of 2023. Long-Term Debt, Including Current Portion We may from time to time seek to repurchase 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. No debt repurchases were made during the nine months ended September 29, 2024. Future repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. Whether or not to repurchase any debt and the size and timing of any such repurchases will be determined at our discretion. There were no material changes to the Company’s debt obligations since December 31, 2023. The Company was in compliance with its debt covenants as of September 29, 2024. Dividends On March 15, 2024, June 17, 2024, and September 17, 2024, the Company paid quarterly cash dividends per share of $.25, aggregating $153.4 million. On October 31, 2024, the Company announced a dividend of $.25 per share to be paid on December 16, 2024 to stockholders of record as of December 2, 2024. As a result, the Company expects that its total cash requirement for the fourth quarter of 2024 will be approximately $51.0 million based on the number of shares of its common stock outstanding at October 24, 2024. 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”). During the nine months ended September 29, 2024, the Company repurchased 3.4 million shares under the January 2023 Authorization with an aggregate purchase price of $59.6 million, of which $0.2 million was accrued as of September 29, 2024, and excluding excise tax and commissions. As of September 29, 2024, the Company had $250.4 million of availability remaining under the January 2023 Authorization. Subsequent to September 29, 2024 through October 24, 2024, the Company repurchased 0.2 million shares under the January 2023 Authorization with an aggregate purchase price of $2.7 million, excluding applicable excise tax and commissions. 39 General Inflation, Commodities and Changing Prices Inflationary pressures on labor directly impacted our consolidated results of operations during the nine months ended September 29, 2024, and we expect this to continue throughout the remainder of 2024. 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. Item 3. Quantitative and Qualitative Disclosures about Market Risk. As of September 29, 2024 there were no material changes from the information contained in the Company’s Form 10-K for the fiscal year ended December 31, 2023.