evaluation of the wendy's company
TRANSCRIPT
BUAD 285a - SEC Paper
The Wendy’s Company
T/TH 2-4 p.m. - Team 2
Oct. 28, 2015
Boyd, Michael
Chew, Daniel, Brian
Dongre, Rayhan Ranjit
Kennerson, Kaylie, Lyn
Lee, Elliot, Seung-Joon
Lee, Jung Ah
Nahin, Ryan, Alan
Wan, Yujiao
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Part I – Report
A) The Company
a. Wendy’s is a quick-serving hamburger company that offers a variety of different affordable
food options such as hamburgers, chicken sandwiches, salads, and more. Wendy’s “is the
world’s third largest quick-service hamburger company” behind McDonald’s and Burger
King. There are 6,515 locations throughout the United States and 29 other countries.
i. Major competitors
The main competitors of Wendy’s include: McDonald's and Burger King, among others.
● McDonald’s is the largest chain of fast food restaurants with 36,000 locations in over
100 countries. McDonald’s is also publicly traded on the NYSE.
● Burger King is the second largest fast food hamburger chain in the world. In 2010,
3G capital, an investment firm, purchased Burger King, making it privately held.
ii. Corporate Strategies
● Wendy’s is implementing and emulating Chipotle’s corporate strategy with great
success. Specifically, Wendy’s has started to offer premium items with high-quality
ingredients that emphasize antibiotic-free meals and locally grown ingredients. Some
examples of premium offerings include the Asian Cashew Chicken Salad and
Premium Cod Fillet Sandwich.
● Wendy’s is consistently finding ways to improve their menu and engage customers
through the use of social media platforms. This year, for example, Wendy’s is
implementing their Imagine Activation Program. This program’s goal is to remodel
the interior of their existing restaurants in order to entice more customers.
● Wendy’s is planning to cut their capital expenditures in order to cut costs by selling
480 of their privately-owned locations to franchisees. This is a part of their System
Optimization Initiative that plans to change Wendy’s to a franchise based brand.
iii. Important markets for its products
The market for Wendy’s products ranges across different generations.
● For example, their promise of higher quality fast food attracts customers who prefer to
pay extra for food with better ingredients. Their implementation of healthier options -
salads, wraps, etc. attracts health conscious customers, while the low-priced menu brings
in the market of young adults and children who look to eat quick, affordable food.
b. Competitor comparison - Wendy’s vs. McDonalds
i. Core products and /or services {Similarities on right, Differences on left}
- Both of the company's’ signature products are hamburgers.
- Focused on adding healthy items and premium items to their
menu.
- Greater drink variety with
McCafe (McDonalds)
ii. Supplier relations
- Maintain a strong and
positive relationship
with their suppliers.
- Supplier transactions are not on a contract basis but rather a “handshake” basis.
(McDonalds)
- Suppliers go under audits by the company itself. (Wendy’s)
- Source most food from American farmers and ranchers. (Wendy’s)
iii. Customer relations
Both - Have active Contact Us and Feedback pages for customer input on food and service.
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iv. Locations
Both -Many locations in North America, use franchisees, and have international franchise
locations.
v. Strategies - {Similarities on right, Differences on left}
Wendy’s and
McDonald’s
- Increasing the amount of
healthy food options provided.
- Planning on adding a delivery
service (McDonald’s)
- Image activation strategy
implemented by Wendy’s
c. Organizational structure of the company
● Headed by the Board of Directors consisting of the Chairman, Vice Chairman, CEO, and
seven other directors
● Under the CEO is the International President, CFO, COO, among other officers
● The Chief Communications Officer, Liliana Esposito, is the head of communications,
public relations, and public affairs.
● The Chief Financial Officer, Todd Penegor, is responsible for presenting and reporting
accurate financial information of the company.
● The Chief Operations Officer, Robert Wright, is responsible for the company’s day-to-day
activities and reporting information that he deems as important to the CEO.
d. Structure of the Board of Directors
● Wendy’s Board of Directors is composed of Nelson Peltz (Chairman of the Board),
Peter Way (Vice Chairman), Emil Brolick (President), the Chief Executive Officer, and
seven directors.
i. Audit committee’s responsibilities and the makeup of its membership
● The audit committee oversees the accounting and financial reporting processes of the
company and the audits of the financial statements the company provides.
● The audit committee assists the Board with holding integrity, enhancing the
performance of the internal audit, analyzing the independent audit, complying with the
legal requirements, and starting conversations about risk management.
● The members of the committee are appointed by the Board and will consist of at least
three directors. Each will have to meet financial literacy requirements and other
regulatory requirements. One director needs to have a professional background in
accounting or finance.
● The Board will also designate an Audit Committee Chairman.
ii. Is the governance structure consistent with Sarbanes-Oxley Act (SOX)
requirements?
● Yes, because the annual statement includes a certification that the statement is under the
guidelines of the Sarbanes-Oxley Act of 2002.
B) Reporting
a. Fiscal year-end for the company and date the last annual report was issued
● Wendy’s fiscal year-end is the Sunday that is closest to December 31st each year.
● Wendy’s last annual report was issued December 28th, 2014.
i. Key financial results
● Cash and Equivalents is an important financial figure to look at. Fast food companies
are considered a cash-heavy business due to the nature of the transactions. Therefore,
the level of cash reserves is a good signal of the company’s performance. A growing
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cash reserve signals strong company performance and a decreasing cash reserve could
be a sign of trouble.
● As Wendy’s emphasizes freshness of its products, looking at the inventory on the
balance sheet is essential for inventory management. This is important in making sure
that Wendy’s is continuously holding optimal stock levels and that the products they
sell are of a premium quality. Also, looking at inventory allows its management to
forecast demand and handle costs.
● Cost of goods sold is an important financial figure because Wendy’s profitability from
its products is heavily influenced by changes and fluctuations in commodity prices.
Looking at this allows management to set realistic volumes and price expectations for
sales to become profitable.
ii. 5 most important footnotes
Liquidity and Capital Resources (a) p. 48 Although Wendy’s has sold a lot of their company-owned locations to franchisees, they are still liable for
the lease of some buildings until 2050. Wendy’s is also contingently liable for other leases that were
assigned to third parties. This footnote is important because Wendy’s is still financially attached to the
franchise after the sale.
10. Long-Term Debt (a) p. 86 Wendy’s entered a credit agreement and took out a loan of $1,125,000. They were given a small discount
on the loan, but still had to pay some interest. Entering such a large credit agreement that is nearly double
the size of the one it is replacing can create more risk and increase costs.
12. Income Taxes (b) 94 Wendy’s received dividends from Arby’s in 2013 that were 10 times larger than those of 2012.
With such an increase in dividend revenue, Wendy’s is reaping more benefit from their investment in
Arby’s and could use that money for other investments.
Transactions with Related Parties (a) p.108 Wendy’s has a purchasing co-op relationship agreement with Quality Supply Chain Co-Op Inc (QSCC).
QSCC takes care of their purchasing and distributing. QSCC has a policy in which they repay their
customers if their cost estimates are too high, so Wendy’s received patronage dividends for the
discrepancy in price. This footnote shows how Wendy’s handles their purchasing and distributing.
Transactions with Related Parties (c) p.108 Wendy’s extended their lease with TASCO, LLC on the lease of an aircraft. The first lease was for only
two years, but after a few extensions the current lease is good until the end of 2014.With Wendy’s leasing
an aircraft they have a large amount of capital on their hands that isn’t necessarily listed as capital
because they do not own it. It is Important to know that Wendy’s has an aircraft as it can become a great
cost to the company even if it is just theirs as a lease.
iii. Do any of financial data seem unusual or unique to the company or its industry?
● None of the financial data seems unusual.
b. i. Audit opinion in Appendix
● The opinion that Deloitte & Touche LLP gave on the 2014 annual report was
unqualified because at the end of the Report of Independent Registered Public
Accounting Firm Deloitte stated, “and our report dated February 26, 2015, expressed an
unqualified opinion on those financial statements and financial statement schedule.”
ii. Outside auditors and fee
● Wendy’s auditor is Deloitte & Touche LLP.
● The audit fee for the fiscal year of 2013 is $2,345,714.
c. Three key messages in the company’s MD&A & link to company’s strategy
Wendy’s strategy includes the “System Optimization Initiative” and the “Image
Activation Program,” which focus on the selling of restaurants to capable franchisees and the
remodeling of locations to improve its brand. Both will be the driving forces of Wendy’s
worldwide strategy for the next few years. Long term value for stockholders will be largely
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composed of earnings produced from international markets. In the company’s MD&A, Wendy’s
shared the results of selling company owned restaurants to franchisees, which was a move to cut
cost of sales and increase the overall net profit margin. This follows Wendy’s strategy by
allowing management more time to focus on existing markets, resulting in brand and product
building, and reducing the spending of capital.
In line with Wendy’s long term strategy, the selling of restaurants to franchisees and
remodeling initiative programs have resulted in decreased sales due to the closing and
remodeling of locations. Assuming this, the likely decrease in revenues is because Wendy’s does
not receive its former share from each restaurant. However, despite the decrease in sales, revenue
will most likely continue on an upward trend following the remodeling as rental income and
franchise fees will play a large part in raising Wendy’s overall revenue. Overall, the franchising
of restaurants will lead to a brief period of lowered sales, but the cutting of the cost of sales will
ultimately lead to higher revenues.
Beyond remodeling and renovations, Wendy’s seeks to develop within existing markets
by distinguishing its menu from those of its competitors’. For instance, Wendy’s recently added
extra-hot Ghost Pepper Fries and the Jalapeno Fresco Spicy Chicken sandwich. Attention was
brought to Wendy’s by these new items and positively impacted revenues and sales.
d. Meaning of reports on internal controls
● The report on internal controls by the company and the auditor are similar in that they
explain what internal controls are and what the management is responsible for in relation
to these controls. They explain how they assess internal controls which is relating it to
criteria in Internal Control- Integrated Framework.
● At the end, both reports stated that after assessment, Wendy’s held effective internal
control over financial reporting for the time analyzed.
* Both reports are included because the company cannot be the only one reporting on the
effectiveness of their internal controls. Their opinion needs to be backed up by an independent
auditor for their opinion to be valid.
e. What forms does the company regularly file with the SEC?
● Wendy’s regularly files the ARS, 10-K, 10-Q, 8-K and Form 4 with the SEC.
i. When must these SEC forms be filed?
● Annual Report to Shareholders (ARS) is filed annually.
● 10-K must be submitted annually to SEC within 60 days after the end of the
company’s fiscal year
● 10-Q must be submitted annually to SEC 35 days after each of the company’s first
three fiscal quarters
● 8-K form must be filed within 4 business days of a major event
● Form 4 must be filed within 2 business days of event
ii. Generally what type of information is in these reports?
● ARS reports on the current state of a company’s financial condition after an annual
meeting of shareholders.
● 10-K contains more detail than the annual report and includes the company’s
history, structure, equity and earnings per share, etc.
● 10-Q discloses relevant information regarding the company’s financial position.
● Form 8-K is a current report that announces major events shareholders should be
aware of. For example, an 8-K could address the departure or election of a director.
● Form 4 generally includes a table showing a change in ownership of capital stock in
the company and a table of a change in derivative securities.
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f. Three examples that the company is complying with SOX
● Wendy’s has an Internal Controls Report section in their annual report to show that its
financial data is accurate and to confirm that there are controls to safeguard financial data.
This Internal Controls Report is mandated by SOX for all financial reports.
● Wendy’s has an independent auditor, Deloitte & Touche LLP, so there is a limited
amount of conflict of interest.
● Both Emil Brolick, the president, and Todd Penegor, the executive vice president,
certified the most recent annual report of Wendy’s. This certification goes along with
corporate responsibility because the executives are taking individual responsibility for the
accuracy of the financial statements submitted.
C) Subsidiaries or segments:
a. Subsidiaries: Scioto Insurance Company and TimWen
i. Business Identification
● Scioto Insurance Company provides insurance solutions, which includes liability and
property damage risks.
● TimWen is a Canadian restaurant real estate joint venture that leases real estate to
restaurants and specifically to Wendy’s/Tim Hortons combo units in Canada.
ii. Subsidiary’s information in Wendy’s financial statements.
● Scioto Insurance Company was just listed as one of the subsidiaries.
● TimWen
o TimWen paid Wendy’s a management fee under the TimWen joint venture
agreement of $0.2 million during 2014 and $0.3 million. This has been included as a
reduction to “General and administrative.”
o Under the header “TimWen lease and management fee payments” in the financial
statement, Wendy’s paid TimWen $6,313, $6,854 and $6,880 for leasing the
properties owned by TimWen.
b. Has the company had any mergers or acquisition activity in the last year or so?
● Wendy's has not undergone any recent mergers in the last year.
● The last merger transaction was with Triarc (parent company of Arby’s) which happened
on September 29, 2008.
i. Our View on Wendy’s merger activity
● While the 2008 merger was intended to create value for the newly formed company,
Wendy’s/Arby's Group, there were existing problems at Arby’s stretching further back
than the deal. Specifically, Arby’s had an unrefined and comparatively expensive menu,
poor marketing, and inconsistent store performance. These factors resulted in sales at
Arby’s to decline a drastic 5.8% after the merger as compared to Wendy’s 0.6%. This
put a financial strain for Wendy’s/Arby’s, thereby forcing the parent company, Wendy’s,
to dump control while retaining an 18% share of the Arby’s chain.
● Therefore, we think that this incident has made Wendy’s management more
conservative towards future potential merger opportunities.
ii. Our view on possible mergers that Wendy’s could benefit from
● Given the current situation of beef price hikes due to a shortage of meat, Wendy’s
revenue and overall profit was affected as beef is one of their menu’s main ingredients.
Therefore, we think that Wendy’s could benefit from a merger/vertical integration with
international beef producers, specifically in New Zealand. Entering into a merger with
such suppliers will eliminate or greatly reduce transaction costs such as freight costs of
shipping the produce over to the U.S. and help assure quality supply of critical produce
needed for operations to continue. This merger in the long run, enhances development
and creates long term value for shareholders.
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D) Corporate Governance
a. Wendy’s corporate governance policy
● Wendy’s corporate governance policy relates to its board of directors first. It explicitly
states that the board of directors are the ultimate decision making body of the company.
b. Wendy’s handling of disputes within company
● Disputes in the company are held upon accountability from not only the top down, but
also from a bottom up perspective. This works by having managers confirm that the board
of director’s actions are ethical.
● Wendy’s outlines a few general guidelines for its many positions in the company such as,
“What feels right or wrong about the situation or action” and “Is your action consistent
with company policy and guidelines, applicable law and the code?” (Code of Conduct and
Business Ethics), ensuring that everyone is experiencing the most equal working
experience and goes to the length of having an ethics claim website just for reporting
claims and includes as 24/7, 365 compliance hotline.
c. Wendy’s activity with the environment, sustainability, and community
● Wendy’s is thriving in a partnership with the US Green Building Council with the
building of many new LEED certified buildings.
● Wendy’s has implemented an energy management program in all of their company-owned
restaurants which significantly reduce overall consumption. In specifics, Wendy’s has cut
all but 5% of its palm oil use in the U.S. and strongly discourages its franchises from using
it outside the U.S.
● Wendy’s focuses its charitable work on community involvement for children. Their
founder, Dave Thomas, was adopted as a child which inspired his drive to help children be
whatever they want to be in life.
● This is seen through Wendy’s incorporated philanthropic goals of “Do the right thing;
Treat people with respect; Give something back”
d. Current litigation or ethical situation facing Wendy’s
● At Wendy’s, as well as most every fast food chain and public company in the US right
now, workers are demanding higher wages.
● Wendy’s individual franchises are responsible for paying the respected wage of their state,
but with this new nation-wide strike in place, it is forcing Wendy’s management to
consider whether $15 is a financially viable wage to pay its lower-tier employees.
E) Potential Employer
Assuming we are potential employees, Wendy’s is a company we would like to work for.
First of all, Wendy’s is large so there are many available positions and opportunities for career
development and advancement, as proven by the advancement of many shift supervisors from
crew positions. Wendy’s workers are also provided with numerous health and financial work
benefits. Another reason to work for Wendy’s is that it focuses on community and has great
values. For example, they created the Wendy’s High School Heisman scholarship in 1994 for
high school seniors, and they also help with children’s adoptions through the Wonderful Kids
program.
The company promotes diversity and inclusiveness in its hiring practices. They abide by
equal employment laws and disregard “race, color, religion, gender, sexual orientation, gender
identity, national origin, age, disability or other group status protected by law” in the hiring
process. If we were to have an issue and believe that there was discrimination in the workplace,
we would be encouraged to immediately voice our concern to management. They also have
similar policies and recommendations for dealing with harassment.
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Although Wendy’s has a lot of great qualities as an employer, we would think twice
about working for the company due to concerns about the health of customers. Working for
Wendy’s may cause an ethical dilemma. People have been facing many health issues due to fast
food such as obesity, diabetes, and cardiovascular conditions. There have also been concerns
about health issues that arise from “the use of antibiotics in meat and poultry supply chains”. For
these reasons, we deduct two points and rate the company a 8/10 as a potential employer.
F) General Company/10-K information
1. Central Index Key - 0000030697
● A number given to an individual or company by the United States SEC used to identify
the filings of a company, person, or entity in online databases.
2. Standard Industrial Classification - 5810
● Four-digit numerical codes assigned by the U.S. government to business establishments to
identify the primary business of the establishment.
3. Ticker Symbol - WEN
● An arrangement of characters representing a particular security listed on an exchange or
otherwise traded publicly.
4. SEC Filing - A financial statement or other formal document submitted to the U.S. SEC.
5. Is the company an accelerated or non-accelerated filer?
● The company is a large accelerated filer.
● Accelerated filers are issuers that have “a public float of at least $75 million, but less than
$700 million”. They also must “have been subject to the Exchange Act’s reporting
requirements for at least 12 calendar months, have previously filed at least one annual
report, and …are not eligible to file their quarterly and annual reports on Forms 10-Q and
10-K using scaled disclosure requirements.”
● Large accelerated filers are “companies with a public float of $700 million or more”.
6. Location - One Day Thomas Blvd, Dublin OH 43017
7. EIN - 38-0471180
● A unique identification number that is assigned to a business entity so that they can easily
be identified by the Internal Service Restaurants.
8. Industry -Restaurants
9. Date of filings - 2015-08-03
10. List the names of the CEO and CFO - Emil Brolick (CEO) and Todd Penegor (CFO)
11. If there are any, what are the accounting challenges facing the company? Have any
accounting problems surfaced? Has the company been impacted by accounting rules?
What is the implication of IFRS if any?
● There are no accounting challenges facing the company.
12. List the following from the most recent financial statement published in your 10-K
(based on the company’s 2014 Annual Report.)
a) Total Assets : $4,145,842,000
b) Total Liabilities: $4,145,842,000 - $1,717,576,000 = $2,428,266,000 ≈ $2,428.3 million
(P59)
c) Equity : $1,717.6 million (P28)
d) Total Revenues : $2,061.1 million (P28)
e) Total Expenses : $1,809.6 million (P35)
f) Net income before taxes : $25.6 million (P82)
g) Tax rate: 34% (P61)
h) Net income : $121.4 million (P28)
i) Net Cash flow : $267,276,000 ≈ $267.3 million (P59)
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j) Stock Value at date of filing
● Fourth Quarter ended December 28, High=$8.99, Low=$7.61
● Average price paid per share=$8.63 (P26-27)
13. Signatories on the filings
● Emil J. Brolick - President, CEO and Director (Principal Executive Officer)
● Todd A. Penegor -Executive Vice President, CFO and International (Principal Financial Officer)
● Scott A. Kriss - Senior Vice President, Chief Accounting and Tax Officer (Principal Accounting
Officer)
● Nelson Peltz - Chairman and Director
● Peter W. May - Vice Chairman and Director
● Edward P. Garden, Janet Hill, Joseph A. Levato, J. Randolph Lewis, Peter H. Rothschild, David
E. Schwab II - Directors
14. Number and names of Board members-do any names stand out? Why?
There are 10 Board members. They are: ● Nelson Peltz, Chairman of The Board
● Peter W. May, Vice Chairman
● Emil J. Brolick, President and CEO - His name stands out because he is the former COO of Yum!
Brands, Inc. and President and Chief Concept Officer of Taco Bell Corp.
● Edward P. Garden, Director
● Janet Hill, Director
● Joseph A. Levato, Director
● J. Randolph Lewis, Director
● Michelle “Mich” J. Mathews-Spradlin, Director
● Peter H. Rothschild, Director - His name stands out because he is also the Managing Member of
Daroth Capital LLC and President and CEO of Daroth Capital Advisors LLC.
● David E. Schwab II, Director
15. Enforcement Action of Wendy’s
● No enforcement action from the last 5 years
G) Corporate Responsibility & Sustainability (CR&S)
a. Who audited this report?
No printable CR&S report is available, see appendix for a screenshot of the report.
b. Action taken to promote CR&S
Wendy’s initiatives to promote CR&S are: its involvement in the U.S. Green Building Council
where it received a LEED Silver certification for implementing environmental friendly strategies
in site development and operations; its program promoting the humane treatment of animals -
Wendy’s Animal Welfare Program; and its strategies to support the local community, especially
regarding foster care adoption.
c. Two additional CR&S initiatives Wendy’s could implement
● Recycling
Plant recycling bins with Wendy’s logo around the restaurant; create a Wendy’s sponsored
volunteer program staffed by Wendy’s employees/outside hire to staff clean-ups of restaurant
and neighborhood; reward volunteer hours or points than can be redeemed for complimentary
food/drinks (1 hr = 1 pt)
■ 2 pts = large sized soft drink OR medium sized Frosty
■ 3 pts = 1 hamburger worth up to $5
Partner up with Plant a Billion Trees - all proceeds raised from recycling on Earth Day will go to
organization
This initiative will market Wendy’s as a socially responsible brand in an obvious way by
linking Wendy’s to efforts in recycling. Creating a volunteer program will allow Wendy’s to
communicate and work directly with the community especially the youth. This is strategic for
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Wendy’s as a greater reputation among the youth can be regarded as future investment for the
company. Through this interaction with the public, Wendy’s can be perceived as a more
personable brand, something that its competitors may lack.
● Volunteering
Yearly contest among Wendy’s where winning restaurant receives makeover to building (based
on volunteer); contest measured on: creativity, collaboration, service
■ Creativity: measures creativity of volunteer work (staff can create their own
volunteer initiative), method to record hours earned (visual charts, graphs), etc.
■ Collaboration: measures participation of employees and their cohesiveness
■ Service: measures hours/impact of volunteer service
Branch with highest grade will win makeover of restaurant into an energy-conserving green one
(in concordance to U.S. Green Building Council’s LEED Certification)
This initiative will foster a sense of community within each Wendy’s. Not only will it
raise awareness to the need for eco-friendly buildings, but it will also rile up employees to give
back to their own community. The three measures were drafted to promote camaraderie and
involvement among the staff and allow them to be vocal. This contest will be a great way to find
employees with great talents.
d. Effect of existing CR&S initiatives
● Wendy’s existing CR&S initiatives do not seem to reduce its bottom line. Overall, this
company has managed to reduce its operating expenses throughout the fiscal periods.
● Even if Wendy’s experienced a negative effect on profits due to its CR&S initiatives, it
should still pursue them because it reflects well upon the public. Eventually, consumers
will look with favor upon the company because of its involvement in environmental or
human health issues. This can potentially increase profits in the long run. If Wendy’s
were to cease its CR&S initiatives, consumers who in general favor socially responsible
companies will stop consuming Wendy’s goods and services.
Part 2 - Ratio Analysis
Since McDonald’s is one of the main competitors for Wendy’s in the fast-food market,
we decided to compare their ratios. See Appendix for calculations of ratios.
1. EPS (Earnings Per Share) = 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝒐𝒖𝒕𝒔𝒕𝒂𝒏𝒅𝒊𝒏𝒈 𝑺𝒉𝒂𝒓𝒆𝒔
The EPS is a variable that measures how profitable a company is. It specifically measures
the amount of the company’s net income that is available to holders of its common stock. In
comparing Wendy’s to McDonald’s as seen in the table below:
EPS 2014 EPS 2013 EPS 2012
Wendy’s 0.33 0.12 0.02
% Change of EPS 175% 500% N/A
McDonald’s 4.85 5.59 5.41
% Change of EPS -13.2% 3.3% N/A
Looking at the table above, it becomes apparent that the EPS has shown an increasing
trend from 2012 to 2014. More specifically, EPS has increased by 500% from 2012-2013 and
another 175% from 2013-2014. This change indicates that Wendy’s is generating an increasing
amount of earnings through its “system optimization initiative and image activation strategy. In
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McDonald’s case, their EPS has only increased by 3.3% from 2012-2013 and dropped by 13.2%
from 2013 to 2014. Although McDonald’s EPS across three years are much higher than Wendy’s,
we have to take into account the fact that larger companies have to split its earnings amongst
many more shares when comparing companies of different sizes.
2. Current Ratio = 𝒄𝒖𝒓𝒓𝒆𝒏𝒕 𝒂𝒔𝒔𝒆𝒕𝒔
𝒄𝒖𝒓𝒓𝒆𝒏𝒕 𝒍𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔
Current Ratio 2014 Current Ratio 2013 Current Ratio 2012
Wendy’s 1.65 2.64 2.47
% Change of Current Ratio -37.5% 6.9% N/A
McDonald’s 1.52 1.59 1.45
% Change of Current Ratio -4.4% 9.7% N/A
The current ratio measures the company’s current assets for every dollar of its current
liabilities. Wendy’s current ratio for the year 2014 states that for every dollar of current liabilities,
it has $1.65 of current assets. This means that Wendy’s can pay off its maturing obligations as
well as meet unexpected needs for cash in the short run. Although Wendy’s current ratio has
surpassed 1, we must take into account that it had a significant decline compared to 2012 and
2013, which was 2.47 and 2.64 respectively.
Also, current assets has significantly decreased by $360.3 million from 2013 to 2014 due
to a dramatic decline of $314.7 million in cash and cash equivalents. Therefore as Wendy’s cash
decreases, the ability of the company to pay back liabilities is highly reduced. The main reason
for the cash decrease is that the cost of production has increased due to the increase of beef costs.
The company also reinvested cash towards remodeling in order to follow the Image Activation
strategy, which also led to temporary cuts in sales.
When we compare Wendy’s with competitors such as McDonald’s, we found that the
current ratios of Wendy’s over the 3-year period were much higher than that of McDonald’s,
meaning that Wendy’s were able to better cover it liabilities given their assets.
3. Net Margin = 𝑵𝒆𝒕 𝑷𝒓𝒐𝒇𝒊𝒕
𝑵𝒆𝒕 𝑹𝒆𝒗𝒆𝒏𝒖𝒆𝒔
Net Margin 2014 Net Margin 2013 Net Margin 2012
Wendy’s 0.059 0.018 0.0028
% Change of Net Margin 228% 543% N/A
McDonald’s 0.17 0.20 0.20
% Change of Net Margin -15% 0% N/A
Net margin is heavily scrutinized by shareholders because it puts on display how
effective the company is at turning revenue into profits. It is the percentage by which a
company’s total sales exceeds its total expenses. With continuous positive net margins, it means
that Wendy’s is able to cover its operating expenses based on the revenue it generates. For
example, Wendy’s makes 5.9 cents of profit for each dollar of sales in year 2104.
Team 2 11
Given the fact that fast food restaurants typically have a low net profit margin at about
three percent (The Heritage Foundation), Wendy’s net profit margin of 5.9% for the year of 2014
is above the industry average. In addition, Wendy’s has continuously increased their net margin
over the three year period, whereas McDonald’s experienced a decline from 2013 to 2014. The
difference between the performances of the two companies is that Wendy’s was able to
significantly increase their profit through their cost cutting strategy of “System optimization
strategy”. Through this strategy, it explains Wendy’s decrease in revenues and thereby net
revenue following the sale of company operated restaurants to franchisees.
4. Return on Equity = 𝑵𝒆𝒕 𝑰𝒏𝒄𝒐𝒎𝒆
𝑺𝒉𝒂𝒓𝒆𝒉𝒐𝒍𝒅𝒆𝒓′𝒔 𝑬𝒒𝒖𝒊𝒕𝒚
ROE 2014 ROE 2013 ROE 2012
Wendy’s 0.071 0.024 0.0036
% Change of ROE 196% 567% N/A
McDonald’s 0.37 0.35 0.36
% Change of ROE 5.7% -2.8% N/A
Return on equity is a profitability ratio that measures how profitable a company is by
measuring how much the shareholders earn from their investments in the company. From the
figures, we can tell that Wendy’s has increased their ROE over the three years by 6.71% whereas
its competitor McDonald’s only increased theirs by 1.29%.
From comparing the percentages of the return on equity for Wendy’s and McDonald’s,
the higher increase experienced by Wendy’s signals that The Wendy's’ Company is getting better
at generating cash internally through food sales as well as revenues earned by the increasing
franchising opportunities to franchisees.
5. Inventory Turnover = 𝑆𝑎𝑙𝑒𝑠
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
IT 2014 IT 2013 IT 2012
Wendy’s 234.02 243.24 181.47
% Change of IT -3.8% 34% N/A
McDonald’s 249.46 227.2 226.52
% Change of IT 9.8% 0.3% N/A
This ratio describes how often a company’s inventory is sold and replaced over a period
of a year. When comparing the 2 companies, we found that Wendy’s showed larger increases in
inventory turnover during 2012-2013. We can infer that Wendy’s is more successful in selling
inventory, especially when inventory turnover increased by 34%. This increase was due to the
successfulness of Wendy’s strategy of “Image activation” to improve its brand, helping to turn
over inventory and generating sales at a faster than average pace.
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6. Cash Debt Coverage Ratio = 𝒄𝒂𝒔𝒉 𝒑𝒓𝒐𝒗𝒊𝒅𝒆𝒅 𝒃𝒚 𝒐𝒑𝒆𝒓𝒂𝒕𝒊𝒐𝒏𝒔
𝒂𝒗𝒆𝒓𝒂𝒈𝒆 𝒕𝒐𝒕𝒂𝒍 𝒍𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔
CDC 2014 CDC 2013 CDC 2012
Wendy’s 0.05 0.0188 0.0041
% Change of CDC 166% 3.59% N/A
McDonald’s 0.32 0.35 0.36
% Change of CDC -8.57% - 2.78% N/A
The cash debt ratio of a company indicates the ability of the business to pay its current
liabilities from its operations. This result of Wendy’s cash debt coverage ratio can be
summarized by the fact that Wendy’s corporate strategy is to create a stronger franchise base.
Wendy’s has relinquished company operated restaurants to franchise operated businesses.
However, a relatively low current cash debt coverage indicates a relatively poor liquidity and
therefore considered highly leveraged as the business is not able to pay all of it liabilities.
Summary:
We think Wendy’s is doing very well in the current market especially in comparison to
their top competitor, McDonald's. Wendy’s recently implemented corporate strategies including
the “System Optimization Initiative” and the “Image Activation Program.” Looking at different
ratios for the company, we can see that these strategies are leading to improvements. For
example, Wendy’s saw a large percentage increase in EPS, which indicates that the newly
implemented corporate strategy has allowed for increased profitability per unit of equity. In the
same manner, the fact that Wendy’s greatly improved inventory turnover from 2012 to 2014 is a
testament to greater sales at its branches. However, as Wendy’s has exposure to commodities
such as dairy and beef, we have to be wary of how the increasing trends in prices of beef will
affect its financials. As seen by the current ratio, Wendy’s and the fast food industry in general
were heavily affected by commodity price fluctuations. In closing, Wendy’s has made great steps
in the right directions to improve its brand presence in the fast food industry through changing its
corporate strategy and making the company a formidable competitor in the market.
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Appendix
1. The Auditor’s Opinion
To the Board of Directors and Stockholders of Wendy’s Dublin, Ohio We have audited the
internal control over financial reporting of Wendy’s and subsidiaries (the “Company”) as of
December 28, 2014, based on criteria established in Internal Control – Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The
Company’s management is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management’s Report on Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on the Company’s internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the
supervision of, the company’s principal executive and principal financial officers, or persons
performing similar functions, and effected by the company’s board of directors, management,
and other personnel to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of
the company; (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance
with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the
possibility of collusion or improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any
evaluation of the effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the company maintained, in all material respects, effective internal control
over financial reporting as of December 28, 2014, based on the criteria established in Internal
Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of
the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company’s consolidated financial statements and financial
Team 2 14
statement schedule as of and for the year ended December 28, 2014 and our report dated
February 26, 2015, expressed an unqualified opinion on those financial statements and financial
statement schedule.
/s/ Deloitte & Touche LLP
Columbus, Ohio
February 26, 2015
2. Ratio Calculations
2014 EPS 2013 EPS 2012 EPS
Wendy’s $121.43 mil / $370.16
mil
= 0.33
$45.75 mil / $392.58
mil = 0.12
$5.57 mil / $390.27
mil
= 0.02
% Change of EPS (0.33 - 0.12) / 0.12
= 175%
(0.12 - 0.02)/0.02
= 500%
N/A
McDonald’s $4757.8 mil/ $980.5
mil
= 4.85
$5585.9 mil / $998.4
mil
= 5.59
$5464.8 mil /
$1010.1mil
= 5.41
% Change of EPS (4.85 - 5.59)/5.59 = -
13.2%
(5.59 - 5.41) / 5.41 =
3.3%
N/A
Current Ratio for Year
2014
Current Ratio for Year
2013
Current Ratio for Year
2012
Wendy’s $562.1 mil / $340.2 mil
= 1.65
$922.4 mil / $349.5 mil
= 2.64
$709.8 mil / $286.9 mil
= 2.47
% Change of
Current Ratio
= (1.65 - 2.64) / 2.64
= -37.5%
= (2.64 - 2.47) / 2.47
= 6.9%
N/A
McDonald’s = $4,185.5 mil / $2,747.9
mil
= 1.52
= $5,050.1 mil / $3,170.0
mil
= 1.59
= $4,922.1 mil / $3,403.1
mil
= 1.45
% Change of
Current Ratio
= (1.52 - 1.59) / 1.59
= -4.4%
= (1.59 - 1.45) / 1.45
= 9.7%
N/A
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2014 Net Margin 2013 Net Margin 2012 Net Margin
Wendy’s $121.4 mil /
$2,061.1mil = 0.059
$45.5 mil / $2,487.4
mil = 0.018
$7.1 mil / $2,505.2 mil
= 0.0028
% Change of Net
Margin
(0.059 - 0.018) / 0.018
= 228%
(0.018 - 0.0028) /
0.0028 = 543%
N/A
McDonald’s $4,757.8 mil /
$27,441.3 mil
= 0.17
$5,585.9 mil/
$28,105.7 mil
= 0.20
$5,464.8 mil/
$27,567 mil
= 0.20
% Change of Net
Margin
(0.17 - 0.20) / 0.20 = -
15%
(0.20 - 0.20) / 0.20 =
0%
N/A
2014 Return on Equity
2013 Return on Equity 2012 Return on Equity
Wendy’s $121.4 mil / $1,717.6
mil = 0.071
$45.5 mil / $1,929.5 mil
= 0.024
$7.1 mil / $1,985.9 mil =
0.0036
% Change of
ROE
(0.071 - 0.024) / 0.024 =
196%
(0.024 - 0.0036) / 0.0036
= 567%
N/A
McDonald’s $4,757.8 mil / $12,853.4
mil = 0.37
$5,585.9 mil / $16,009.7
mil = 0.35
$5,464.8 mil/ $15,293.6
mil = 0.36
% Change of
ROE
(0.37 - 0.35) / 0.35 =
5.7%
(0.35 - 0.36) / 0.36 = -
2.8%
N/A
Inventory turnover 2014 Inventory turnover 2013 Inventory Turnover 2012
Wendy’s $2061.06 mil / $8.807 mil
= 234.02
$2487.41 mil / $10.226
mil
= 243.24
$2505.24 mil / $13.805 mil =
181.47
% Change of
Inventory
Turnover
(234.02-243.24) / 243.24 =
-3.8%
(243.24-181.47) l /
181.47 = 34%
N/A
McDonald’s $27,441.30 mil / $110 mil
= 249.46
$28,105.70 mil / $123.7
mil = 227.2
$27,567.00 mil / $121.7 mil
= 226.52
% Change of
Inventory
Turnover
(249.46-227.2) / 227.2 =
9.8%
(227.2-226.52) / 226.52 =
0.3%
N/A
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2014 Cash-Debt
Coverage Ratio
2013 Cash-Debt
Coverage Ratio
2012 Cash-Debt
Coverage Ratio
Wendy’s $121.43 mil / ($2,428.27
mil + $2,433.55 mil) / 2
= 0.05
$44.63 mil / ($2,433.55
mil + $2,317.34 mil) / 2
= 0.0188
$9.47 mil / ($2,317.34
mil + $2,300 mil) / 2
= 0.0041
% Change of
Cash Debt
Coverage Ratio
(0.05 - 0.0188) / 0.0188
= 166%
(0.0188-0.0041) / 0.0041
= 3.59%
N/A
McDonald’s $6730.3 mil / ($21428
mil + $20616.6 mil) / 2
= 0.32
$7120.7 mil / ($20616.6
mil + $20092.9 mil) / 2
= 0.35
$6966.1 mil / ($20092.9
mil + $18599.7 mil) / 2
= 0.36
% Change of
Cash Debt
Coverage Ratio
= (0.32-0.35) / 0.35
= -8.57%
(0.35-0.36) / 0.36
= - 2.78%
N/A
3. CR&S Report
Attached below is the corporate responsibility and sustainability report from Wendy’s. We were
not able to find a printable version of the report, so we print screened the report that is available
online. See the works cited page for a link to the report.
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4. Relevant 10-K Financial Reports
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Team 2 23
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