During Wendy's Q3 earnings call Thursday, executives discussed the brand's progress on its Image Activation efforts, which include extensive restaurant remodels based on prototypes that were initially introduced last year.
CEO Emil Brolick said the company's cash flow is strong enough to invest up to $500 million for Image Activation by the end of 2015 in order to reach its goal of reimaging 50 percent of company restaurants.
To motivate franchisees to invest in the remodeling efforts, Wendy's announced an incentive in August where the company offers $100,000 to the first 100 franchisees who complete a Tier I reimage in 2013.
"We've seen a really solid response. We've had many franchisees apply and so far we have awarded nearly half of this incentive offer," Brolick said.
On average, restaurants that undergo the transformation close for about eight weeks during construction. This set the third quarter adjusted EBITDA back by approximately $4 million during Q3, but the company expects fourth quarter results to benefit from those remodeled restaurants, as they're showing a strong return so far.
"The prototype restaurants we opened in 2011 have sustained average annualized sales lifts of more than 25 percent above pre-Image Activation levels," Brolick said. "The 25-percent increase is even more impressive as eight of the 10 prototypes have now been open for a full 12 months."
Wendy's reopened 47 Activation Teir I reimages in the third quarter and fourth quarter to date. In 2013, the company plans to double the number by reimaging 100 company restaurants. There will also be 25 new builds in the new design. Franchisee plans are to open up to 100 reimages in 2013 and 50 new restaurants, which would result in nearly 350 completed by the end of next year.
Tiered system remodel
As previously announced, Wendy's is offering three levels of remodeled designs – Tier I, II and III. The Tier I investment is estimated at $750,000, while Tier II and III are around $550,000 and $375,000, respectively.
"We will continue to refine our plans for all three tiers in 2013 and expect more than 50 of the 2013 reimages to be Tier II or III designs," Brolick said. "We have shifted more emphasis to Tier II and III as our confidence in these designs is growing. We expect this will help accelerate systemwide adoption of Image Activation."
Design differences, he added, are subtle between the three options. The exterior and exterior signage are similar, as is self-serve beverages, TVs, WiFi, fireplaces and lounge seating.
Some of the differences include digital merchandising (Tier I) versus backlit merchandising; simplified interiors; simplified finish on the exterior and pickup window; and slight changes in the roofline design. Also, Tier III restaurants will feature a different ordering setup.
"If you look at this from the perspective of a consumer who has been going to a restaurant that maybe is 20 or 25 years old, it's going to be an 'Oh my gosh' factor when they see this restaurant," Brolick said.
Executives also discussed Wendy's menu initiatives, which helped drive the 2.7 percent lift in North American company-owned same-store sales during Q3. The third quarter increase was the result of an increase in average check. Franchisee same-store sales were also up by 2.9 percent.
During Q3, Wendy's promoted the Son of Baconator cheeseburger and the Asiago Ranch Chicken Club. The company hinted at a few changes coming up, including "lowering food costs without lowering quality."
"Historically, our brand has been focused on quality and it will always be focused on quality. But I think at times we've almost inordinately focused on ingredient quality and have not been as sensitive as we need to be about perceived quality," Brolick said. "The fact is that consumers pay for perceived quality. So we're just going to be a lot smarter about making sure we preserve our ingredient quality but put the cost where the consumer is willing to pay for them."
The company is also testing a "right price, right size" menu, which Brolick said has had positive impact on the cost side of the business. The menu provides consumers with fixed items priced at 99 cents and a series of items priced above 99 cents.
"We think this menu provides us an opportunity to get continuity across our system," Brolick added.
While Image Activation and menu initiatives were the main focus during the earnings call, Wendy's executives also discussed the impact of Obamacare.
"We've studied very carefully the laws and we think (the impact) would be less than $25,000 per restaurant impact. We're not going to settle with that. We have a cross functional team internally and, the good news is we have until 2014 to get fully prepared," said John Barker, chief communications officer.
Q3 by the numbers
Financial highlights from the quarter included:
- Consolidated revenues were $636.3 million, an increase of 4.1 percent compared to $611.4 million in Q3 2011.
- Wendy's North America company-operated restaurants generated a same-store sales increase of 2.7 percent. Franchise same-store sales in North America increased 2.9 percent. This is the sixth consecutive quarter of positive same-store sales for both.
- Company-operated restaurant margin was 13.9 percent, a 20 basis-point improvement compared to 13.7 percent in Q3 2011. Same-store sales growth drove the margin improvement and offset costs related to the company's investments in customer service initiatives and Image Activation.
- During Q3, the company opened two restaurants; franchisees opened 23 restaurants. The company closed two underperforming restaurants and franchisees closed 27 restaurants.
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