Wendy's 2011 Annual Report Download - page 36

costs ($11.5 million), and post closing purchase price adjustments primarily related to working capital ($14.8
million). The Companies recognized income tax expense associated with the loss on disposal of $3.6 million during
the year ended January 1, 2012. This income tax expense was comprised of (1) an income tax benefit of $1.9 million
on the pre-tax loss on disposal and (2) income tax expense of $5.5 million due to a permanent difference between the
book and tax basis of Arby’s goodwill.
Wendy’s Restaurants also entered into a stockholders agreement with Buyer Parent and ARG Investment
Corporation, an entity affiliated with Buyer Parent, which sets forth certain agreements among the parties thereto
concerning, among other things, the governance of Buyer Parent and transfer rights, information rights and
registration rights with respect to the equity securities of Buyer Parent. In addition, Wendy’s Restaurants entered into
a transition services agreement with Buyer, pursuant to which it provided and was reimbursed for continuing
corporate and shared services to Buyer for a limited period of time; such services were completed in the fourth quarter
of 2011.
Our Continuing Business
As of January 1, 2012, the Wendy’s restaurant system was comprised of 6,594 restaurants, of which 1,417 were
owned and operated by the Companies. Our company-owned restaurants are located principally in the U.S. and to a
lesser extent in Canada.
Wendy’s operating results have been impacted by a number of factors, including high unemployment, negative
general economic trends and intense price competition, as well as increased commodity costs in 2011. These increased
costs negatively affected cost of sales and restaurant margins.
Wendy’s long-term growth opportunities include (1) improving our North America business by elevating the
total customer experience through core menu improvement, step-change product innovation and focused execution of
its brand positioning, (2) investing in an Image Activation program for our new and remodeled restaurants,
(3) continuing to develop our breakfast program, (4) employing financial strategies to improve our net income and
(5) building the brand worldwide.
Wendy’s revenues for 2011 include: (1) $2,050.1 million of sales at company-owned restaurants, (2) $74.3
million from the sale of bakery items, (3) $2.2 million from the sale of kids’ meal promotion items to our franchisees,
(4) $280.5 million of royalty income from franchisees, and (5) $24.3 million of other franchise-related revenue and
other revenues. Substantially all of our Wendy’s royalty agreements provided for royalties of 4.0% of franchise
revenues for the year ended January 1, 2012. During the first quarter of 2011, Wendy’s purchasing cooperative,
Quality Supply Chain Co-op, Inc. (“QSCC”) began managing the operations for kids’ meal promotion items sold to
franchisees. Our sales of kids’ meal promotion items during 2011 were made from inventory on hand prior to
QSCC’s management of this process. Therefore, we will not generate any future revenues from sales of kids’ meal
promotion items sold to franchisees.
Key Business Measures
We track our results of operations and manage our business using the following key business measures:
• Same-Store Sales
We report same-store sales commencing after a store has been open for at least 15 continuous months and
as of the beginning of the previous fiscal year. This methodology is consistent with the metric used by our
management for internal reporting and analysis. Same-store sales exclude the impact of currency
translation.
• Restaurant Margin
We define restaurant margin as sales from company-owned restaurants less cost of sales divided by sales
from company-owned restaurants. Cost of sales includes food and paper, restaurant labor, and occupancy,
advertising and other operating costs. Sales and cost of sales exclude amounts related to bakery items and
kids’ meal promotion items sold to franchisees. Restaurant margin is influenced by factors such as
restaurant openings and closures, price increases, the effectiveness of our advertising and marketing
initiatives, featured products, product mix, the level of our fixed and semi-variable costs, and fluctuations
in food and labor costs.
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