Essay Wow!

The first Wendy’s restaurant opened in Columbus, Ohio on November 15, 1969 at 257 East Broad Street by Dave Thomas (Wendy’s. com). In 1972, the first franchise outside of Ohio was opened in Indianapolis, Indiana. Wendy’s is known as the home of the old fashioned hamburger, and is “the #3 hamburger chain by sales. Its sales trail only McDonald’s and Burger King. There are almost 6,700 Wendy’s restaurants worldwide; about 78% of them are franchised” (Hoover’s fact sheet). Wendy’s offers high quality in customer service and allows customers to have their hamburger made the way they want it done. Wendy’s is on the New York Stock Exchange under the symbol of WEN.

McDonald’s was started in the early 1954s by Dick and Mac McDonald in San Bernardino, California. McDonald’s then opened in Chicago Illinois in 1955, and by the year 2000, McDonald’s had grown to 25,000 restaurants in about 120 countries. McDonald’s is known as one of the best places to get a hamburger and good customer service. (McDonalds.com). McDonald’s is on the New York Stock Exchange under the symbol of MCD.

“McDonald’s is the world’s #1 fast-food company by sales, with more than 31,000 flagship restaurants serving burgers and fries in more than 100 countries. Almost 30% of its locations are company-owned; the others are run by franchisees” (Hoover’s Fact Sheet). McDonald’s is not only #1 in the United States, but around the globe as has been proven by their currently opening a restaurant in Beijing, China.

Both McDonalds and Wendy’s are both publicly traded on the New York Stock Exchange (NYSE). At the end of business day, October 11, 2005 McDonalds (MCD) on the NYSE was selling at #32.34 and Wendy’s (WEN) was at $45.60 McDonald’s earning/Share was reported at 1.91 with a 52 week high of 35.03 and a 52 week low of 27.31 (www.mcdonalds.com). Wendy’s 52-week high and low stock prices range varied from 31.74 to 53.62 (www.investorguide.com).

The consolidated financial statements for McDonald’s and Wendy’s both, are consistent in each report were the balance sheet, the statements of income, the statements of cash flow, the statements of income/shareholder equity, and the statements of comprehensive income. Of the given statements, the first three statements are a requirement of public companies and the generally accepted accounting principles (GAAP), while the latter two statements are used to articulate the assets, liabilities, and owner’s equity of each enterprise.

Notes included with each companies financial statements consisted of the description of the business and several pages of definitions and/or interpretations of such topics as property, equipment, leases, goodwill and other intangibles, revenues, taxes, inventories, employee benefits/retirement, foreign operations, and more.

Those owning interest in McDonald’s and Wendy’s have profited from continuous dividend increases. Over the past three years McDonald’s has seen quarterly dividend increases of $.24 per share in 2002, $.40 per share in 2003, and $.55 per share in 2004 (McDonald’s Corporation, 2005) while Wendy’s realized quarterly dividend increases of $.24 per share in 2002 and 2003 and $.48 in 2004 (Wendy’s International, 2005).

Since going public in 1965, McDonald’s has paid twelve stock splits. In fact, an investment of $2,250 in 100 shares at that time had grown to 74,360 shares worth approximately $2.4 million on December 31, 2004.

McDonald’s has a long history of increasing our dividend. In fact, since the Company began paying dividends in 1976 it has increased the dividend per common share amount 31 times. Dividends are paid on an annual basis, generally in December.

McDonald’s and Wendy’s have more than one type of stock in their portfolio. The first is common stock. Common stock is defined as representing ownership in a providing and entitling the holder to a share of the company’s success through and/or In the event of liquidation, common stockholders have rights to a company’s only after other debt holders, and preferred stockholders have been satisfied. Typically, common stockholders receive one vote per share to elect the company’s board of directors (although the number of votes is not always directly proportional to the number of shares owned). McDonald’s has 16,600 of common stock as of December 31, 2004, while Wendy’s has 11,809 as of January of 2005(mergentonline.com, 2005).

The board of directors is the group of individuals that represents the owners of the corporation and oversees major decisions for the company. Common shareholders also receive voting rights regarding other company matters such as and company objectives. In addition to voting rights, common shareholders sometimes enjoy what are called “Preemptive rights allow common shareholders to maintain their proportional ownership in the company in the event that the company issues another offering of. This means that common shareholders with preemptive rights have the right but not the obligation to purchase, as many new shares of the stock as it would take to maintain their proportional ownership in the company.

The second type of stock that McDonald’s and Wendy’s have is treasury stock. A Corporation to be retired or resold to the public reacquires this stock. Treasury stock is issued but not, and is not taken into consideration when calculating or, or for voting purposes. McDonald’s has 9,578,100 of treasury stock opposed to Wendy’s who has 195,124 or treasury stock.

McDonalds’ and Wendy’s both have outstanding shares. These shares are remaining, in existence. For, not yet paid. For, in the hands of investors. In other words, these are shares set aside for thee investors that are not yet paid for at this present time. McDonalds’s year-end outstanding shares as of December 2004 were listed as 1,269,900 and Wendy’s was listed as having outstanding shares of 112,409 as of January 2005.

Through research, there is no evidence that either company has any outstanding bonds. A bond secured by a mortgage on a property. Mortgage bonds are backed by real estate or physical equipment that can be liquidated. These are usually considered high-grade, safe investments. If an issuer in default has both secured and unsecured bonds outstanding, secured bondholders are paid off first, then unsecured bondholders. Naturally, because unsecured bonds carry greater risk than secured bonds, they usually pay higher yields.

The influencing factors that have the most impact upon each of these fast-food companies’ bottom line have been the growth of competitors and their own expanding product lines. “Net income for McDonald’s fell to $530.4 million, or 42 cents a share, from $590.7 million, or 47 cents a share. The latest report includes an incremental tax expense of $112 million, or 9 cents a share, resulting from a move to repatriate approximately 3.2 billion in foreign earnings under the Homeland Investment Act,” (Gray, 2005). The revenue of the chains 13,000 plus U. S. restaurants rose 7% for the second quarter of 2005 partly driven by new products, such as fruit-and-walnut salads and the introduction of deli-type sandwiches. Current shares, as of October 28, 2005 were $32.29, up .74 cents for McDonald’s and Wendy’s last offering was $45.80, up $1.17. This is good news for investors.

By reviewing both of the chosen company’s financial statements it became apparent that both McDonald’s Corporation and Wendy’s International have experienced large increases in revenues over the past three years but saw smaller net incomes in 2004 than in past years due increased operations costs.

McDonald’s revenues for 2002 were $15,405.7 million with a net income of $992.1 million. In 2003 McDonald’s revenues were $3,148,912 million with a net income of $1,508.2 million and in 2004 revenues were $19,064.7 million with a net income of $2,278.5 million.

Wendy’s International generated revenues of $2,730,261 with a net income of $218,781,000 in 2002. In 2003 Wendy’s revenues were $3,148,912 with net incomes of $235,999 and in 2004 Wendy’s saw revenues of $3,635,438 with a net income of only $52,035. This huge drop in net income in 2004 was allocated as goodwill impairment, which was not used in previous years. Goodwill impairment is defined in the note to consolidated financial statement as “the excess of the cost of an acquired entity over fair value of acquired net assets,” (www.wendys.com).

The current ratio is an indication of a company’s ability to meet short-term debt obligations; the higher the ratio, the more liquid the company is (Investorword.com). The industry average is .97%. Current ratio is equal to current assets divided by current liabilities. If the current assets of a company are more than twice the current liabilities, then that company is generally considered to have good short-term financial strength. If current liabilities exceed current assets, then the company may have problems meeting its short-term obligations. In the case for McDonald’s they fall below the industry average at .81, while Wendy’s is at .67%.

Return on Equity (ROE).

A measure of how well a company used reinvested earnings to generate additional earnings, equal to a fiscal year’s after-tax income (after preferred stock dividends but before dividends) divided by book value, expressed as a percentage. It is used as a general indication of the company’s efficiency; in other words, how much profit it is able to generate given the resources provided by its shareholders. Investors usually look for companies with returns on equity that are high and growing. McDonald’s is by far in better shape in this category also with a percentage of 6.36 % compared to the industry average of 6.75%, while Wendy’s lags behind in this category also at a low percentage of 3.03%.

Debt ratio is defined as the debt capital divided by total assets. This will tell you how much the company relies on debt to finance assets. When calculating this ratio, it is conventional to consider both current and non-current debt and assets. In general, the lower the company’s reliance on debt for asset formation, the less risky the company is since excessive debt can lead to a very heavy and repayment burden. However, when a company chooses to forgo debt and rely largely on equity, they are also giving up the tax reduction effect of interest payments. Thus, a company will have to consider both risk and tax issues when deciding on an optimal debt ratio. If one was to look at McDonald’s debt ratio of .31 compared to Wendy’s which is at .19 one could surmise that McDonald’s is heavily leveraged without looking at all of the facts. The proof is all in the financials; McDonald’s is a very profitable company and understands how to manage their debt, while Wendy’s is more conservative and generates profits more from equity investments rather than leverage.

There are several regulations, both governmental and non-governmental, that impact the companies chosen. For the purpose of this report, the roles of regulatory bodies in the financial markets will be discussed.

All public businesses must pay income taxes. The Internal Revenue Service is the government organization under the U.S. department of Treasury that handles the millions of income tax returns filed by individuals and businesses and performs audit functions to verify the data contained in those returns.

The Financial Accounting Standards Board (FASB) and the Securities and Exchange Commission (SEC) are two United States organizations that are of particular importance. The FASB is an independent rule-making body that is authorized to issue statements of financial accounting standards by constructing the framework for financial reporting. The FASB is a non-governmental part of the private sector of the economy in charge of setting the criteria for what to include in financial statements and the valuation concepts relating to statement amounts.

The SEC is a governmental agency with the legal power to establish accounting principles and financial reporting requirements for publicly owned corporations. The SEC’s responsibility is to promote full disclosure and to protect investors against fraudulent and manipulative practices in the securities markets, (Investorwords.com). By working closely with the FASB the principles developed in the private sector are given the force of law when they are adopted by the SEC. All public companies in the United States must supply the SEC with their financial statements. Some reports are due on a monthly basis, some are due quarterly, and others are reported annually in an attempt to ensure that businesses are operating legally and reporting their finances properly.

McDonald’s Corporation and Wendy’s International both have several filings with the SEC such as form 8-K Results of Operations, which is a monthly report, and form 10-Q which is a quarterly report. This process helps to ensure that both businesses are continually updating their financial positions and reporting their activities to the government.

Unfortunately, the SEC’s authority was not enough to keep all big businesses and their accountants honest in their financial reporting so the PCAOB was formed. The Public Company Accounting Oversight Board (PCAOB) is a private sector non-profit corporation created by the Sarbanes-Oxley Act of 2002. The main purpose of the PCAOB is to oversee the auditors of public companies in order to protect the interests of investors and further the public interest in the preparation of informative, fair, and independent audit reports.

McDonalds and Wendy’s both have notes in their financial statements concerning the SEC and the PCAOB. SFAS 143, Accounting for Asset Retirement Obligations, SFAS 142, Goodwill and Other Intangible Assets, and SFAS 95, statement of cash flows, are discussed in both company’s annual reports.

In an on-line article to investors McDonald’s states that, “under the Sarbanes-Oxley Act of 2002 the audit committee of the Board of Directors shall review their policies annually for purposes of assuring continued appropriateness and compliance with applicable laws and listing standards, including the regulations of the SEC and PCAOB,”(McDonalds.com).

Both companies, although based in the United States, have franchises in foreign countries. This means that there are several other regulations they must meet. The International Accounting Standards Board (IASB) consists of the accounting bodies of Australia, Canada, France, Germany, Japan, Mexico, the Netherlands, the United Kingdom, Ireland, and the United States. This group was founded to set international accounting laws to ensure consistency.

Strong brand presence world wide. McDonald’s is one of the worlds most well-known and valuable brands and holds a leading share in the globally branded quick service restaurant segment of the informal eating-out market in every country where they have operations. Low cost structure based on assembly line procedures, product standardization, and high volume. McDonald’s recruits from the lower cost labor market; which targets schools and colleges. The chain is well placed politically and financially to engage successfully in its operations round the globe.

McDonald’s centralized marketing activities helping reduce costs while maintaining consistencies. Strong operations and bargaining power within the supply-chain distribution; McDonald’s is able to insert influence within the channel and members are able to source globally with speed and influence. McDonald’s operates on the basis of franchising its stores, where it has been able to work with the local communities giving rise to the local presences and acceptability. The franchisees are responsible of meeting operating costs of the stores.

The company has bad publicity in recent years. It is facing attacks from all over the world because of the way the company operates. Many anti-globalization movements associate McDonald’s with an icon of western exploitation. The brand is associated with junk food and obesity. Consumers are beginning to take notice of the negative association of the brand and there are fears within the industry that consumers may abandoned the brand.

Wendy’s International operates a system of quick service and fast casual restaurants. As of January 2, 2005, Wendy’s had 6,671 restaurants in operation in the United States and in 19 other countries and territories. Of these restaurants, 1,487 were operated by Wendy’s International and 5,184 by franchisees. Also, Wendy’s and its franchisees operated 2,721 Tim Horton’s restaurants with 2,470 restaurants in Canada and 251 restaurants in the United States. Of these restaurants open at January 2, 2005, 98 were operated by Wendy’s International. Additionally; Wendy’s International operated 295 Baja Fresh Mexican Grill restaurants and 19 Cafe Express restaurants.

To understand both companies we must look at the snap shot of both corporations from a financial perspective. McDonald’s is very impressive financially due to the negativity in general relating to the fast food industry in recent years.

McDonald’s income statement (fiscal period ending Dec-2004) reveals the following:

Total revenue= $19,064,700

Expenses= $6,945,200

Operating income= $3,540,500

Pre-tax income= $3,202,400

Net Income= $2,278,500

Wendy’s International income statement (fiscal period ending January 2005) reveals the following:

Total revenue= $2,805,809

Expenses= $2,482,018

Operating income= $323,791

Pre-tax income= $293,111

Net income= $194,104

McDonald’s balance sheet (fiscal period ending Dec-2004)

Assets= $27,837,500

Liabilities= $13,636,000

Equity= $14,201,500

Wendy’s International balance sheet (fiscal period ending Jan-2005)

Assets= $3,426,283

Liabilities= $614,779

Equity= $3,426,283

Wendy’s International has several strengths, among them are the total revenue reported at $961 million, compared to $914 million in the third quarter of 2004; Wendy’s® same-store sales decreased 5.0% at U.S. company stores and 5.5% at U.S. franchised restaurants, compared to positive sales in the third quarter a year ago. Same-store sales were strong at Tim Horton’s®, with a 3.6% increase in Canada and a 4.7% increase in the United States. Baja Fresh Ò Mexican Grill’s system same-store sales declined 4.1%. (See “Third Quarter Same-Store Sales Summary” below.)Pretax income was $106.9 million, compared to $108.8 million in the third quarter of 2004.

Wendy’s effective tax rate was 32.6% in the third quarter of 2005, compared to 36.5% in the third quarter of 2004, which had a positive effect on reported results. The lower tax rate reflects differences in treatment of certain items for tax, versus accounting purposes, primarily influenced by changes in Canadian currency; with a Net income at $72.1 million, a 4.3% increase compared to $69.1 million a year ago.

A few outstanding weaknesses of Wendy’s International that had a major impact on the company is that of an increase of beef costs ($1.55 per pound in 3Q 2005, up 18.4% vs. $1.31 in 3Q 2004), which had a negative impact on EPS of about $0.025. Expenses related to the initial public offering (IPO) of 15% to 18% of Tim Horton’s (also announced on July 29), which had a negative impact on EPS of about $0.01.

McDonald’s Corporation boasts its strengths as being a high rate of global sales which rose 4.1 % for the third quarter; U.S. sales rose 3.7% for the third quarter; Europe comparable sales rose 5.1% for the third quarter; Third quarter EPS is expected to be $0.58 and U.S. businesses have posted 30 months of continual growth.

On the flip-side, no pun intended, McDonald’s International also has weaknesses, which consist of: an overwhelming variety of menu selections, excess Long term debt; Low profit franchises and the attention from the media regarding a high-fat, high-calorie diet which promotes childhood obesity.

Although both companies are making money; they both need to stream line their operations as far as it relates geographic markets. Both companies need to understand that what one part of the country like/dislikes another par t of the country may have totally different like/dislikes. Both companies must watch their debt to equity ratio. McDonald’s which is at 65% and Wendy’s which is at 42%. Though McDonalds has a heavier debt burden they still seem to come out on the positive side.

In conclusion, while McDonald’s is a household first in fast-food choices, Wendy’s is coming up third behind and gaining ground with their wider choice of nutritious menu choices. McDonald’s cannot set back and rest on its laurels as being the leading fast-food restaurant with the competition gaining popularity. It would be advisable for McDonald’s to keep its finger on the pulse of the populous as well as the stock market in guiding its financial decisions.

References:

Anderson, Kerri B., 2005. CFO’s Message to Shareholders. Retrieved October 19, 2005. Using the World Wide Web at www.wendys.com.

Brealey, R.A., Marcus A.J. & Myers S.C, 2004. Fundamentals of Corporate

Finance (4th ed.) McGraw-Hill/Irwin: New York, NY, 2004.

Development of the NAICS, (2005). Retrieved October 11, 2005 on the U.S. Census Bureau Web-Site located at http://www.census.gov/edcd/www/naicsdev.htm.

Gray, Steven, staff reporter for the Wall Street Journal, July 22, 2005. McDonald’s Profit Falls 10% Despite 8% Increase in Revenues. Retrieved October 22, 2005 using the World Wide Web at www.licensessnews.com.

Investorwords.com, retrieved October 20, 2005. Securities and Exchange Commission. Investing Glossary.

Hoover’s Fact Sheet - McDonald’s Corporation, Hoover’s Fact Sheet - Wendy’s International, Inc. http://cobrands.hoovers.com. Retrieved October 15, 2005 from the World Wide Web.

McDonalds Corporation 2004 Financial Report, (p.1,2005). 11-year Summary. Retrieved October 12, 2005 using the World Wide Web at http://www.mcdonalds.com.

Mergentonline.com, retrieved October 13, 2005

Summary Annual Report to Shareholders, (p.33, 2005). Eleven-year Selected Financial Data. Wendy’s International, Inc. Retrieved October 12, 2005 using the World Wide Web at http://www.wendys-invest.com/fin/annual/2004/wen04ar.pdf.

Yahoo, 2005. Wendy’s International Inc. (WEN): Cash Flows for Wendy’s International Inc. McDonald’s Corporation (MCD): Balance Sheet for McDonald Corporation. Retrieved October 18, 2005 using the World Wide Web at www.finance.yahoo.com.

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