Q3 2020 Wendys Co Earnings Call
Good morning, welcome to the Wendy's Company earnings results Conference call all lines have been placed on mute to prevent any background noise. After this.
Speakers remarks, there will be a question answer session.
The question during this time.
We are all about the number one on your telephone keypad.
And a question asked about.
Thank you, Greg let me check.
<unk> Investor Relations and corporate <unk> you may begin your conference.
Thank you and good morning, everyone.
Today's conference call and webcast include the Powerpoint presentation, which is available on our Investor Relations website.
Wendy's Dot 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.
Okay.
Various factors could affect our results and cause those results to differ materially from the projections set forth in our forward looking statement.
Also on today's comments will reference non-GAAP financial measures investors should refer to our reconciliations of non-GAAP financial measures to the most.
Most directly comparable GAAP measure at the end of this presentation or in our earnings release.
On our conference call today are president and Chief Executive Officer, Todd Penegor, and our Chief Financial Officer, Dr. block will provide a business update and share 2023rd quarter results.
From there, we'll open up the line for questions.
Oh and things over to Todd.
Thanks, Craig and good morning, everyone.
If we jump into our third quarter results I want to start off by saying that we are incredibly proud of the results we have posted against the backdrop of the global pandemic.
I want to spend a huge heartfelt. Thank you to all our employees and franchisees for the ongoing partnership as we are navigating through the challenges that we have faced and in turn delivering these very strong results building, an even stronger wendy's.
In the third quarter, we delivered our highest global same restaurant sales growth number in over 15 years on the strength of our breakfast Daypart, our growing digital business and increased mobility.
This momentum continued into October where we saw a U.S. same restaurant sales of 6.6% on a one year basis and in the low teens on a two year basis.
On top of the sales momentum we built in the third quarter. We also grew our restaurant margin.
To approximately 17% and we did this despite significant commodity headwinds.
Focus remains on ensuring that we have a strong restaurant economic model across our system and we are doing just that.
Our cash balance continues to grow coming in at over $350 million at the end of the quarter.
Up from $275 million at the end of July driven by our strong third quarter results.
We also benefited from the collection of two additional royalty payments as our franchisees feedback the amounts that had been deferred in the second quarter as part of our cobot relief package.
Testament to the health of our franchise system.
We announced this morning that our board has approved a quarterly dividend of seven cents, which is an increase of 40%.
Strengthening liquidity position along with the momentum we are seeing in our business supports this increase will still having plenty of flexibility to invest in growth, which is priority number one in our capital allocation policy.
As we look to the future we remain committed to our long term growth initiatives, which are to build our breakfast daypart grow our digital business and accelerate growth internationally.
Our goal remains the same which is to drive efficient accelerated growth and we continue to deliver on that commitment.
Moving on to provide more detail on our recent U.S. sales performance.
We have momentum and our two year same restaurant sales accelerated meaningfully in Q3.
Our same restaurant sales in the third quarter significantly improved to 7% on a one year and 11.5% on a two year basis as we saw customer counts continue to improve as mobiliti increased.
We launched two new products within the quarter and the spicy crispy chicken sandwich featured in our four for four platform as well as the Pretzel pub, cheeseburger and chicken sandwich, which we added to the made to crave lineup, both which helped US land our spicy now gets re launch from the prior year.
On a two year basis, our same restaurant sales improved each month throughout the quarter to 14.4% in September underpinning the strength, we're seeing in our business.
We have added another layer of growth in breakfast and it continues to perform well.
We have also seen our rest of day business growth, which is very promising in fact, our rest of day business was up over 5% on a two year basis, which shows the strength of our underlying business.
We continue to see very strong average checks as ordering sizes have remained elevated which is helping to drive restaurant margins across the system.
Another key indicator of success for US is how we compare against our QSR Burger peers within NPD crest and year to date. When these traffic trends have outperformed QSR Burger chain leaders versus the same period a year ago.
As we look to the fourth quarter. We are excited about the marketing and promotional plans. We have in place we will continue to drive awareness across our breakfast business as well as launch our new classic chicken sandwich that has been renovated and will allow us to compete with anyone.
Sales growth share growth and profit growth or a winning formula that we plan to continue to execute on moving forward.
We could not be more pleased with our breakfast Daypart as average weekly sales continued to grow in the third quarter and on a percentage of sales basis. They remain strong at over 7%, even as our rest of day business continued to strengthen.
We have been seeing some very positive trends on top of the fact that breakfast is providing a sales and profit layer that we did not have previously.
We have now been able to get data on customer repeat and we are seeing this to be very strong.
We're also seeing our customer satisfaction scores be our highest at the breakfast daypart as customers are loving the offering that we have.
Our breakfast Daypart has proven to be easy to staff operationally simple and profit accretive to our restaurant economic model and we will continue to build on this success.
Our breakfast awareness levels have remained consistent at approximately 50%.
We plan to continue to support breakfast with our incremental company advertising spending to drive trial and frequency as we ingrain wendy's into consumers' morning routines.
We are confident that we can continue to grow this business into the future as more and more people fall back into their daily routines.
The great news is the messaging around the quality food, we deliver at breakfast halos back to support our rest of day business.
We said that we're going to bring America the breakfast it deserved and we're delivering on that promise the key unlock for this business moving forward will be mobility as this improves coupled with our incremental investment in marketing. We believe that this business has a ton of upside.
Now jumping into digital.
Our digital business continued to grow each month in the third quarter coming in at 5.5% of sales in the US which is more than double the amount we had in 2019 we.
We exited the quarter in September with digital sales and over 6% and we are outpacing our peers in digital traffic share growth.
We're very pleased with the launch of our new Wendy's rewards program and the early results are in line with our expectations.
We have seen a significant jump in app downloads as those have increased over 15% since we launched rewards.
I've also seen higher average checks and higher frequency.
Both of which were expected benefits of the program.
We are excited about this program and we will continue to drive awareness through compelling offers and within our marketing messaging to grow this program in the coming months.
Digital is one of our key growth pillars, and we continue to pace ahead of our expectations. We expect this business to build even more as we continue to make significant investments in this area.
Our restaurants are essential to feeding our communities and we could not do this without great leadership and support from our dedicated restaurant teams who are on the front lines every day.
We have now opened dining rooms in many of our restaurants and as of the end of September approximately 75% of the dining rooms were open for carry out and in some cases dine in services.
As we have opened dining rooms, we have seen about 10% to 15% of our sales coming through either carry out for dine in we will continue to reopen in a thoughtful phased approach to ensure the safety of our crews and customers as well as making sure that it makes sense economically our staffing levels remained strong in our company restaurants with the lowest turnover rates that we've seen.
Over a decade.
We know that when staffing levels are good and turnover is low that we can drive an exceptional customer experience and we are doing just that.
Customers are noticing these operational improvements as overall satisfaction scores, including speed.
Based in order accuracy have seen significant improvements.
Outcome of all of these things has been an accelerating restaurant margin in our company restaurants, which increased 70 basis points from the prior year, despite a challenging commodity environment.
We believe that we have found operating model efficiencies, which should result in strong restaurant margins on a go forward basis.
Our international business also improved significantly in the third quarter.
We now have approximately 95% of our restaurant operating and saw our sales turn positive in Canada, and Puerto Rico, which comprised about 75% of our international sales in.
In Canada, our digital sales penetration has doubled from last year, reaching almost 10% and we continue to outperform our QSR Burger competitors in both dollar and traffic share gains.
In Puerto Rico, our same restaurant sales grew to almost 20% as we lean in on our local fresh beef differentiation.
On the other hand, we have some high potential emerging markets, where the recovery period is taking a bit longer but they are showing improvement and our franchise partners remain excited about the future.
We also continue to make progress towards our plan to expand into Europe and remain on track to open restaurants in the UK in the first half of 2021.
We have been building a top talent team on the ground have a strong pipeline of locations, including some with drive throughs and are engaging with potential franchise candidates to build out the market with us.
International expansion remains one of our three growth pillars, and we are excited to continue to grow our wendy's footprint around the world.
I wanted to provide an update on some enhancements that we have made as an organization to continue to drive growth.
As we previously announced we are very excited to welcome Kevin Dscone to the Wendy's family is our Chief Information Officer Technology is a critical growth driver for our brand and Kevin is the ideal leader to join a talented team and help take us to the next level.
We are confident that is industry, leading experience will help us to accelerate the growth we've already seen across our technology channels in 2020.
We have recently taken the opportunity to look at the way we work and we believe there is a better way to utilize our resources to drive the business we.
We have made the decision to reorganize our operations team in the US under one leader responsible for company and franchise restaurants, and deep pocketed money has assumed this position.
He has over 30 years of Wendys experience and we are confident he will help us create even better and more consistent experiences across all our restaurants.
We're also optimizing our field structure to ensure that our restaurants are set up for success moving forward.
Lastly, we also expect to incur contract termination charges, including the planned closure of certain field offices as we have found that people can be just as effective working remotely.
As a result of these changes we implemented a restructuring plan with expected total cost of approximately $7 million to $9 million.
Investing in growth is our top priority and we will be taking the savings from these changes and putting them right back into the business to fuel growth.
We have made the decision to create a diversity equity in inclusion office and are currently in the process of hiring someone to lead that team.
We're also reinvesting back into our technology organization to continue to drive that business. Lastly, we are adding resources to our international franchise recruiting team to support our international expansion plans.
Our company wide response to the pandemic reinforces the values that Dave Thomas instilled over 50 years ago. When he founded this great brand the values that continue to guide us today.
The health safety and well being of our teams and customers has always been and will continue to be our top priority.
Our system, we will remain focused on continuing to provide essential access to high quality affordable food.
All our communities around the world.
A differentiator for US continues to be the relationship that we have with our franchisees the partnership across our system. This year as we've navigated. These unprecedented times has been nothing short of incredible.
We recently hosted our annual convention virtually and it was great to get our system together to highlight all our accomplishments over the last year, while aligning everyone behind the plans to finish the year strong and continue the momentum into 2021.
We have successfully partnered with our franchisees to navigate through a global pandemic and launched our breakfast Daypart and.
And along the way to build an even stronger culture in support of the special brand ever.
Everything we do at Wendy's is focused on bringing our vision to life, which is to become the world's most thriving nimble loved restaurant brand.
The momentum that we have in our business on the top and bottom line and as we continue to execute against our strategic growth initiatives, we are well on our way.
I will now hand things over to GP to talk through our third quarter results. Thanks talked very proud of our third quarter results in the current environment would showcase to very strong same restaurant sales and core earnings growth.
Global same restaurant sales accelerated in quarter three on the strength of our breakfast day, part, which contributed approximately 6.5% to a U.S. same restaurant sales growing digital business and increased mobility.
The momentum that we're able to building our business helped us to successfully led to strong spicy chicken Nuggets results from the prior year and on top of debt.
Our highest global SMS in over 15 years.
Year over year company restaurant margin increased by 70 basis points to approximately 17%, primarily driven by higher average check and lower than expected local advertising spend these benefits were partially offset the customer count declines as a result of the pandemic higher commodity cost of approximately five.
Percent and labor rate increases.
The increase in teenage was primarily driven by lapping a reduction in the legal reserve related to the financial institution case in the prior year. Excluding these key in a would have decreased by approximately 3%. This was due to lower incentive compensation accrual and reduced travel partially offset.
An increase in professional fees, which was mainly driven by higher IP related cost.
Adjusted EBITDA increased by about 8% to $119 million.
It was primarily driven by higher franchise royalty revenues and fees lower franchise support and other cost as we left part of the company's investments in digital scanners and an increase in company operated restaurant margin.
These benefits were partially offset our investment incremental breakfast advertising of $6.2 million in the quarter.
Adjusted earnings per share was flat to prior year at 19 cents. The increase in adjusted EBITDA benefited from most offset by higher year over year tax rate, primarily due to a tax reserve release the company recognized in quarter three of 2019.
Free cash flow into third quarter increased significantly to approximately $120 million as we benefited from two additional royalty payments.
Additional payments due to repayments timing posted the photos that we allowed on though of Cobiz relief package to franchisees, we did not experience any material collection issues related to these repayments, which demonstrates the financial strength of our franchise system.
To date, excluding the $24.7 million payment related to the settlement of the financial institution case, our cash flow was approximately $58 million.
We are confident in the momentum we have no business on the top and bottom line as we head into the fourth quarter and as we look ahead to 2021.
Given the continued volatility and uncertainty surrounding the future impact of COVID-19 on the global economy and its impact. So a company. We are still unable to provide a 2020 and long term outlook.
Planning to reintroduce guidance as part of a fourth quarter earnings release in early March we.
We did however want to provide an update on the few underlying aspects of our financial outlook.
We are now estimating commodity inflation for 2020 to be approximately 2%, which is locked in for the remainder of the year. This is a decrease from our prior expectation of 3% driven primarily by lower than projected beef prices in quarter four.
We are now expecting cimini of approximately $205 million.
We continue to manage our achieving a spending tightly.
Our annual tax rate is expected to be approximately 25%, which is at the low end of our previously provided range. Finally, we expect capital expenditures to be approximately $70 million, which is an increase of about $15 million versus what we had previously communicated.
As our business has improved over the last few months, we made the decision to ramp up capital spending in development and technology to set us up to drive growth in the future Lastly, let's talk about our capital allocation policy, which remains unchanged.
Our number one priority remains investing in profitable growth with this.
Glenn No investment choices and focused on ensuring a strong financial return for our franchisees and for us as the franchise.
We have done so with a $15 million incremental advertising investment for breakfast in 2020, and we plan to continue our incremental spending in 2021.
As previously disclosed our largest franchisee MPC filed for chapter 11 bankruptcy any seeking to sell its wendy's restaurants through a court approved auction process.
We are actively participating in the proceedings and continue to evaluate our strategic alternatives. This includes assuming our content rights of franchise war as well as the possibility of acquiring one or two markets as part of a consortium bid with a group of pre qualified franchisees.
Who would purchase the auto markets.
As we have said previously.
They buy and sell company operated restaurants to enhance our restaurant footprint. It is our intention to maintain approximately 5% ownership.
We announced today the declaration of our quarterly cash dividend and via increasing it by 40% to seven cents per share payable in December.
Our strengthening liquidity position along with the momentum we are seeing in our business support this increase while still allowing us to invest in growth.
Lastly, we plan to utilize excess cash to reduce debt and repurchase shares we began repurchasing shares again in the third quarter and instead, we assumption has bought back about $4 million worth.
We currently have $81.7 million remaining.
Existing hundred million dollar share repurchase authorization.
Well no way to tuning to our powerful financial formula.
The accelerated efficient growth company.
Okay seeing strong system wide sales growth on the backdrop of positive same restaurant sales and Cobra with some expansion, which is translating into significant free cash flows I will now end things over to Greg to closes out.
Thanks TV.
As a reminder, due to the ongoing travel restrictions all our investor meetings for the remainder of 2020 will be virtual event.
First off we will be doing in NDR in Boston next Wednesday on November 11th with Wells Fargo.
We will be attending two conferences, which will be the Deutsche Bank Conference on November 19th and the Morgan Stanley Conference on December 2nd.
Lastly, we will be hosting two investor calls one with Cowen ASCII research on November 16th and one with MKM partners on November 18.
If you're interested in joining us at any of these events. Please contact the respective sell side analyst or equity sales contact at the host from.
As we transition into our Q in a section we will be doing this slightly different this quarter due to the high number of covering analysts will be limiting everyone to one question only.
With that we're ready to take your questions.
Thank you. Your first question comes from David Palmer of Evercore ISI.
Your line is open.
Thank you.
Gosh, one questionnaire.
I guess the question would have to be about breakfast and if you could just make a statement I think people can see that the breakfast mix has been strong around 7% that looks to be more or less what your comps are how are you thinking about the breakfast learnings from this year, what's gone better or worse than expectation.
And then how should we be thinking about the potential for weddings, making an extra marketing contribution for breakfast in 21 banks.
As David Great question, I mean in the face of the pandemic with mobility being down morning routines completely disrupted we're very happy with how our breakfast business has been performing we still have a lot opportunity to continue to drive awareness, whereas the 50% level a lot opportunity to continue to drive trial.
We're seeing great repeat with with some of our heavier users. So we know there is a great opportunity to get our breakfast offerings into into more consumers and in fact, a high percentage of our existing wendy's customers Havent, even tried our breakfast.
Offering as of yet so we're feeling very bullish about the future on where breakfast can go as as routines come back as mobility continues to increase.
We will continue to provide appropriate support on our breakfast daypart.
But it is a nice mix between what we do rest today, what we do at breakfast as it all halos back to both Dayparts really separating ourselves on quality.
Your next question comes from John Ivankoe of JP Morgan Your line.
Hi, great. Thank you the question is on.
The high profile hiring of Kevin Thats gone he as your Chief Technology Officer, obviously coming from Dominoes, Great Technology company, great user of data what have you.
Yes, I want you to necessarily.
Comment on what Domino's has done that work.
What parts of their strategy had been successful, but I would like to know what kind of core attributes or change that you think Kevin could bring to the organization as it relates to things like loyalty you sub.
Specific customized consumer data.
Potentially delivery if that was something that you know that you've talked to him about or maybe.
Maybe using technology and data for store location, so am I kind of thinking about that higher in the right way of kind of driving this functionality is or what specifically do you think.
You can see we're functional attributes that you think that Kevin can add to wendy's and that I guess, Rob short to a longer term. Thanks.
Thanks, John I know I'm very pleased to have Kevin joined our organization not to not only does he brings a great track record to the table to help Wendy's take our technology journey to the next level, it's a great cultural fit for our organization and as you think about the progress we've made.
Digital mix being at 5.5% actually exiting the third quarter at over 6%. We do have a strong foundation and and we're pleased to have Kevin here working with a really strong technology team underneath him to continue to raise the bar and in grain more of this into our restaurant operating model, we've seen a lot of app downloads.
With loyalty and we're seeing increased frequency, we're seeing a nice average check how do we continue to drive that even further how do we led technology around mobile ordering get really complemented with mobile grab and go and and curbside delivery into our restaurants to create an even more seamless experience and ultimately how do we capture and leverage all of this data.
It's really a more personalized communication one to one communication and those are all things that Kevin has had an asset that weve been working on that with his leadership. We are confident that can continue to accelerate into the future.
Your next question comes from Andrew Charles with Cowen Your line is open.
Great. Thank you given the sales trends the domestic system is seeing along with strong flow to they've been observing so far in 2020 as well.
While you're doing work before the pandemic help shrink the size the restaurant prototype leasing a dire and then perhaps the elimination of diagram altogether to help maximize ROI can you talk about your confidence that this will manifest in a development uptick in 2021 domestically.
It's a great question and as you know we've had a variety of footprint. So we've been well ahead of the curve on different sizes, we have that traditional freestanding restaurants said 65 plus seeds.
All the way down to us more 2.0 designs with with 30 seats. We also have a new appetite to look at drive through only restaurants, and we've got some prototypes that are going out in place to continue to test and learn on that front.
And I think it is important to have a portfolio of restaurants of different sizes.
To to really make sure that we've got solutions for any trade area. That's out there and if you think about the access to real estate, Yes, you think about the excess for conversions and we got to conversion task force in place and really comfortable converting any type restaurant into a wendy's restaurants, I think all of those play into an opportunity to to accelerate development.
Into the future, but most importantly, the the confidence in the health of our franchise system with the franchisees completely repaid all of the deferrals their confidence and we're breakfast can go post pandemic their confidence in where we're going on the delivery on the digital front moving into the future and the work that we've been doing to create even.
Better restaurants, with the margin profile thats going to lend into a ton of confidence to continue to rebuild that pipeline across the U.S.
Your next question comes from Eric Gonzalez of Keybanc Capital. Your line is open.
Hey, Thanks for the question.
Ask you about October obviously very strong momentum in the month and I'm. Just curious you launched this new class of chicken Sandwich, I'm wondering how that might have factored into those results and whether youre getting good trial versus expectations.
And then on that Sandwich do you think you're getting credit from the consumer for the quality improvement.
And whether that consumers willing to pay up to the four nine price point, which is a little bit higher than some of your competitors. Thanks.
Yes, if you look at our October results classic chicken hasn't even really been launch we've had some PR it started to roll into the restaurants late in October.
But were really scheduled to launch this in a big way starting next week, we're going to include it into two for five promotion to to ensure we drive a lot of trial. The work that the team did to create a new crispy and you'll see us delays were plate proud of new build with the pick on it. We think this has got a great opportunity to continue to drive a.
A lot of business on on the chicken side of the equation and a nice complement to our lineup as we continue to upgrade the quality of our food and our premium items on the chicken side.
As well as the performance you've seen on things like the principle of cheeseburger and and chicken sandwiches that it really got our made to crave units the highest that we've ever seen so really trading folks up into our premium items striving some nice mix and importantly, getting folks into our highest quality food items.
Your next question comes from Jeffrey Bernstein with Barclays. Your line is open.
Great. Thank you very much.
Follow up fit to be short term focused but it just seems like in the recovery phase its current required here so.
Over you mentioned that the comps are up six six and I think you said the two year stack was in the low teens.
In the slide deck, you talk about you were running a 14 four in September. So I'm, just wondering that low teens is that comparable to that 14, four implying that in a very difficult month of October you've held steady.
Try to assess whether you're seeing anything with the cobot spike or dine in restrictions, increasing or maybe colder weather kicking in I.
I think some of actually said that while no one wants any of these factors.
Many of them could actually help quick service rather than hurt them in terms of.
Some of those factors at play so just trying to get a better sense for October relative to September and the recent factors that have perhaps a pressure some of the restaurant industry. Thank you.
Okay.
Good morning, Chad, but it is going to yes, you've got the numbers right was 6.6% in October and low low teens on a two year basis, you're happy with the results. So we continue to have momentum and it's really in line with our financial plan that we have in the fourth quarter. So we're happy about it they love the fact that it could be playing in.
We don't want to go into the details obviously is on the call, but let's take away is we are on plan with.
Okay Perfect October.
Your next question comes from Nicole Miller of Piper sounds like.
Align us with.
Good morning, and thank you.
Since there is a little bit of question around 5% of the enterprise could you just talk about the health of the franchise system overall little bit murky Todd. If you think about your volume performance. For example, what are the common traits are they spread among fintech and geography, if you think about your pot possible performers, perhaps what ours.
Standard best practices. Thanks.
If you look at the the health of the franchise system by and large and.
It's very strong.
I think the real Testament is all the deferrals that we put in place through the early days with the coveted relief package getting all of that repaid the momentum that we're having in our business.
The margin health that we're seeing right now the prospect of.
Ours is continuing to be strong as commodities turn a little more favorable into the fourth quarter. Those are all positives for the system and we're very proud where the system since from from a profitability perspective in fact coming out of our virtual family update our virtual convention if you will.
We've got 85% of our franchise community, saying that their financial health is in a better position. This year than it was last year. So thats a good testament to how we're performing and we'll continue to build on that momentum and leverage that into the future.
Your next question comes from Chris Ocull of Stifel. Your line is open.
Thanks.
Todd it's encouraging to see the breakfast sales mix stay relatively stable sales recover for the remaining day parts, but.
With the comp heavily skewed by check average changes, it's hard to know whether breakfast is generating the number of transactions that you guys. Initially expected to justify continuing to move into that business. So can you shed some little by little more light into the breakfast economics are franchisees compared to where you expected. It initially.
Really.
Yes, Chris.
Clearly with mobility down in in the morning routine disrupted.
We'd be hoping for even more on the breakfast front, but we're still at the low end of what we had guided to a year ago, which was pre pandemic. So with all of those headwinds to still be within that guidance range. We feel very proud youre seeing average check to be a little bit higher as folks are utilizing breakfast a little bit differently.
Is it.
Adams per.
Per per half hour seemed to skew a little bit later in the morning, rather than early in the morning.
You do see some of those breakfast items being brought back home.
But when you look at where we stand with the performance of our business knowing that we've only got 50%.
Awareness today, knowing that we have so many opportunities on trial I think we sit in a very good position today to continue to drive growth and in green the habit.
And and drive a nice tailwind for our business for years to come.
Your next question comes from Jeff Farmer of Gordon Haskett. Your line is open.
Thanks, and good morning, just keeping them with breakfast I'm curious if the competitive response to to your entry to breakfast has surprised you guys in any way was a more aggressive less aggressive do you think there's more to come in terms of sort of competitive response as we get deeper into the fourth quarter any color there would be helpful.
Good morning, Jeff, Yes, you are happy with our breakfast performance.
As we said repeatedly in the past whenever we launched breakfast we knew it would be competitive I would say early part of the year. It was probably less competitive spend if we sold it to us.
Stepped up a little bit tend to be a prepared for it and be a continue to be pleased with our breakfast results right, though sales have grown into.
In the third quarter versus versus the second quarter, we had great sales levels and as Todd said lot of a lot of tailwinds to be head as one interesting factoid I want to point out to be always said is going to take it.
The amount of time to ingrained habit and as you know we had breakfast in about 350 of our restaurants keep old version all fade, we converted this and what's really encouraging there was a habit ingrained with advertising and all the stuff we have done on the promotional front the sales on those would be core legacy restaurants.
Year to date on the 40% versus prior year. So it goes to show just breakfast these well like.
And then as we keep getting added and building the heavy keep making investments this year and next year on the bus would be collected from our franchisees.
Which we think we have created a very very solid breakfast business.
Your next question comes from some of Longbow Research. Your line is open.
Hi, Good morning, I just wanted to ask.
Back to point about your average ticket being up for me. Please.
Just kind of ballpark as to how big that impact is by day part I presume that kind of lost preference might be bigger the dinner, but any kind of color give us as to.
How the average ticket trends over the course of these day parts.
And if you look at average tickets ultimately it is up double digits year on year, and it's really primarily driven by items per transaction, so items per transaction thrower.
Within the restaurant up over 10% today.
And you're seeing some of that driven by.
The dinner occasion, you guys, yet full family dinners being brought home you see some of that being driven by digital.
Digital checks are a little bit higher.
And we're also seeing you know to complement that dinner comment.
Larger.
Family meals being taken back up back to the house. So you really see in the dinner Daypart help.
Helped drive some of that average check with the resiliency of that Daypart.
But you're also seeing it across the rest of the day, let's say an awful lot of schools.
At home or or Highbred theres, a lot of meals that are being but back to the house, which is contributing to to the higher average check and we're seeing a little bit of mix, which is great. As we trade folks have been or premium items between two for five and pretzel pub.
And we have a little bit of pricing, but a lot of it is average items per transaction.
Okay.
Your next question comes from Dennis Geiger of dubious your line is open.
Great. Thanks for the question just wondering if we could talk a little bit more about the breakfast awareness levels I think that the 50% level are you surprised thats where awareness is that it hasn't moved up some is that generally the expectation and just kind of going back to the drivers of the awareness from here is it increased marketing is it increased mobility.
Utilization of digital and loyalty efforts more or GP I think you talked about just just time for the breakfast business in general is it just time to to build that that awareness just just curious.
Biggest drivers of growing that that metric. Thank you.
And we are happy we though we and his levels why did we came out of the gate screaming definitely meeting our expectations and you have seen the environment. We are in good morning day body still heavily affected and that really be below prior year, because as a category.
Happy that actually in the context of all the competitive activity that goes on that would be.
Actually we are maintaining our awareness levels, what's the tailwinds. We are believing in it is clearly trial trial trial right. We have strong repeat numbers, but we have still a fairly large percentage of even our own existing customers that haven't tried our own breakfast, yet and obviously still a lot of.
Other customers that has not yet tried us, but the bad debt into a breakfast from other competitors.
The marketing investments behind it the building of our loyalty base all of those push is going to make sure that we are penetrating the market. He said, it's a longer term play.
It will be appealing to invest over and above 4.3 year period. We do increase this year, we are definitely doing you'd next year, as well and that money and that focus.
It's going to drive trial and repeat into thriving business for us.
Your next question comes from Brett Levy of MKM Partners. Your line is open great.
Great. Thank you.
Obviously, we've.
We've seen a lot more of.
Incremental costs out there and now that you have a.
New dedicated Chief operating officer in place how are you thinking about the way you are going to approach the inbox operations, whether it's from menu or from pricing needs.
These additional tech investments, especially as we're in an environment, where there are incremental costs related to the crisis as well as we're so we just saw referendum would increase minimum wage in one state. So just.
How should we think about that for the intermediate in the near term in the intermediate term. Thanks.
Yes, a couple of things for you Brad So first of all on the restaurant margin right Barry.
Very happy with our rest on margin performance in the third quarter at 17% I mean keep in mind, there was 5% commodity inflation for person labor inflation. So that combined is actually creating a 270 basis points headwind for us and despite that headwind, we were able to actually expand profit.
Stability, but about 70 basis points.
And we have obviously the additional run close to be PPV and what have you that obviously digested in our financials.
SB fast forward into quarter four.
Definitely commodities are going to be slightly deflationary.
Labor inflation is going to be stealing the 4% range. We're definitely expecting we see a continued sales growth at our marching into fourth quarter sequentially going to improve warsaw's versus.
The third quarter and without giving any guidance for 2021 I would also say that we would expect that our restaurant margin in 2021 is going to be up versus 2020, So thats kind of on the rest of much inside on the chicken a side, we're going to stay disciplined to IPO we are definitely.
Be wanting to get to one of the hospice and sales level. It will take a little bit of time either.
If you could talk to talk about an organizational restructuring that was really in the spirit of accelerating growth. So the savings that have been generated out of transactions that led to the restructuring plan. They were basically you redeployed.
Into a couple of things when they were redeployed into diversity equity intuitional phase into a little bit more technology investments because we think that's the place to make investments.
And last but not least also international franchise recruiting so.
We're trying to manage it carefully and to start trying to stay efficient company.
Your next question comes from Andrew Strelzik of BMO. Your line is open.
Great. Thank you and good morning.
I'm curious, what you're learning about the rewards program and the.
Rewards gas customer I guess.
And how to best connect with that member through that channel.
And through the drive here I'm just curious operation are you happy with how that's going is there any impact to speed are there any operational tweaks that you're considering thanks.
No. The the Great news is everybody that had a wendy's that was immediately a wendy's reward user. So we are able to start from a strong base and as rewards and started to to get rolled out we started to create awareness. We saw active app downloads increased over 15% since the program's been out there.
It's still early right in the in the rewards phase, we're seeing actually scans on rewards today, but what we do know is that is driving frequency like we had thought it would it is driving higher average check that that we thought and then operationally. It is is most seamless and frankly frictionless. If you go in with the mobile order so when even impact the restaurant.
Thats stage to automatically get your rewards points, but if you decide you I'd just scan at the restaurant you pull up a code and not going to get scanned and quickly.
We haven't seen any impact on our speed of service or the operational complexity in the restaurants. So we feel good about how thats working at this stage even at at the restaurant level.
Your next question comes from Greg Francfort Fluffy go ahead. Your line is open.
Hey, Thanks for the question I just had a follow up this is John I think those questions.
On some of the technology initiatives can you maybe talk about I think the the way.
You guys have structured it so far is a large portion of the tech stack at least a piece of it is outsourced to accenture.
I guess.
This change how you're thinking about how much of.
Technology is outsourced versus in sourced with.
Mr. Mr. Visconti is hiring sense.
Good morning, Greg Yeah, maybe get May be made you are absolutely right to be made and outsourcing move for both digital technology and run services.
So far these Detroit this transition is actually going very well we are happy with the results. We are getting and then be really having our technology organization focused on more strategic initiatives and not being sidetracked with kind of run issues to come maybe up come up every single day.
Finally, Kevin is going to look at these operations and look at the level of Elland, we'd be seem to be have a bed. Helen this technology organization out there that is going to be able to accelerate since we have kind of removed. The shack closed around keep doing firefighting help desk tickets and the like so we think it will be like.
Elevate under his leadership and as we pointed out.
Some of the savings out of the restructuring were reinvested back into the technology organization, the strength and that sorta.
Your next question comes from James Anderson of Northcoast Research. Your line is open.
Good morning. Thanks for the question I wanted to briefly follow up on your expansion into the UK. You mentioned that you still intend to open up a store I think in first half of 2021.
I was wondering whether youve revisited the store design potentially pulling back on dine in and potentially focusing more on our premises business on delivery third party, just more or less any change in the way you are looking at expansion into Europe post code, but thank you.
Thanks for the question, Joe still committed to open restaurants in the UK in the first half of next year. Although there are more restriction is going on in that market. Today construction is exempted. So we'll have the opportunity to continue to build for the future.
As we've looked at the sites and we do have a combination of traditional in line, but we also have some drive thru sites.
But as we looked at the design of that restaurant and it really is a technology enabled.
It does allow for for a mobile experience to get easy.
And I hope.
It does get set up quite nicely for us for delivery experiences. So all of those things have already been.
Contemplated in the design and we feel good that we will have a good mix of locations.
Traditional freestanding would drive throughs as well as in line that our technology enabled and operationally efficient to support the consumer and the drivers.
Your next question comes from James Rutherford of Stephens. Your line is open.
Yes. Thank you it seems like most of your promotions have centered around chicken in the third quarter and so far into the fourth quarter. Here I was just curious with beef prices haven't really moved into your favorite here in the fourth quarter is there potentially you would shift some of those promotions more to core beef, which perhaps would bring a higher check.
It's a great question as you think about the third quarter. We did have this spicy crispy chicken sandwich that we put into the four for four which drove some news around four for four of which which was good to keep the awareness high but if you think about third quarter. You know the pretzel pub cheeseburger was a it was a big play on the Hamburger and that was featured more than the chicken sandwich.
So we did have a nice balance on.
On chicken and Hamburger in in Q3, I think about Q4, we're talking about the classic chicken sandwich coming back, but but well said it was in the two for five promotion, which will allow us to to feature a lot of our premium items not just tied chicken necessarily.
Your next question comes from Jared because <unk> of.
Of Goldman Sachs. Your line is open.
Hi, Thanks for taking the question can you just.
Give us a little color on the increase of the Capex guidance and how you're planning to split that between I guess development and continued spending on technology. Thanks.
Good morning, Joe It yes.
We are doing better right, we have momentum in our business. We have good outlook on our liquidity position and we literally went back to the original plan go see again, what is different than Mccain, we'd be slowed down some development capital and some mighty capable and speed than having more confidence based.
Ugly restarting those plans on both the development side entered technology side, so back to original plan and take it to the end there abouts capital levels that we have talked about pretty pathetic.
Your next question comes from John Tower of Wells Fargo. Your line is open.
Great. Thanks for taking my question.
Just curious what your largest competitor the U.S. moved to different marketing tack in September and clearly your results held up very well in the face of that what seemingly it was a very strong.
Promotion by that brand, but I'm curious to get your point of view on how perhaps that may have shifted your own thinking around marketing going forward.
In the us whether that be through different channels than what you've done in the past either social and digital media or use of television media or perhaps even bringing other people as celebrity spokesman for the brand itself.
John Great question I mean, we're on we're focused on our playbook I mean, we feel good about what we're doing around one more visit one more dollar what we're doing on on the value side to keep news around for for for what we're doing to to renovate and innovate into our premium items. Our focus is really on quality is a differentiator in full.
Looking for the long term and making sure that folks understand our four for four platform is something that only wendy's provides making sure that our made to crave platform is something that only wendy's provides.
Well sprinkle that in with some price pointed promotions as as appropriate but.
But we do think we got a nice playbook that really focuses all day.
Around quality initiatives at breakfast and dinner.
And it gets all complemented by the work that we're doing to continue to up our game operationally integrate more consistent.
Experience is to continue to drive speed at the drive thru to make our digital initiatives, even more frictionless. So we we feel good about our game others can play their game, but ours is really around building our brand for the long run.
Thank you John that was our last question of the call. Thank you Todd and GP and thank you everyone for participating this morning.
Look forward to speaking with you again on our fourth quarter call in early March have a great day, everyone. You may now disconnect.
[music].
[music].