Wingstop Inc. — Q2 2021 Form 10-Q
Business context and period: The filing covers the 13 and 26 weeks ended June 26, 2021, compared with the periods ended June 27, 2020. Wingstop is predominantly a franchisor; at quarter-end it had 1,415 domestic and 175 international franchised restaurants, plus 34 company-operated restaurants, for 1,624 system-wide locations.
Financial performance
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Total revenue | $74.0m | $66.1m | $144.7m | $121.5m |
| Operating income | $18.9m | $19.5m | $38.7m | $33.0m |
| Net income | $11.3m | $11.5m | $24.5m | $19.6m |
| Diluted EPS | $0.38 | $0.39 | $0.82 | $0.66 |
| Adjusted EBITDA | $22.9m | $20.9m | $46.8m | $37.2m |
- Q2 revenue rose 11.9%, while operating income fell 3.2% and net income fell 2.0%. First-half revenue increased 19.0% and net income increased 24.6%.
- System-wide sales increased 15.8% in Q2 and 22.3% in the first half. Domestic same-store sales growth was 2.1% and 10.4%, respectively; Q2 company-owned same-store sales declined 3.1%.
- Q2 cost of sales at company-owned restaurants was 77.7% of sales, up from 73.1%; first-half ratio was 76.7%, versus 73.2%. The company cited sharply higher bone-in wing costs, partly offset by lower labor and other operating costs as a percentage of sales.
- Cash from operations was $31.6m for the first half, compared with $25.6m. Investing used $12.4m, including $8.3m in property and equipment purchases and a $4.2m investment in a UK franchisee; financing used $11.8m. Cash from operations less property and equipment purchases was approximately $23.4m.
- At June 26, cash and cash equivalents were $43.5m; cash, cash equivalents and restricted cash totaled $66.7m. Total debt was $480.0m principal, or $470.0m net of issuance costs, including $1.2m current portion. Stockholders’ deficit was $322.2m.
Changes, outlook and risks
- Revenue growth reflected franchise royalties and fees, advertising fees, same-store sales, and 184 net franchise openings since the prior-year quarter. Franchisees generated the substantial majority of system sales.
- Q2 operating income and net income comparisons were affected by a $2.0m prior-year gain on refranchising restaurants, with no comparable gain in 2021. The company also reclassified advertising-fund support headcount costs from SG&A to advertising expense; this did not change operating income or cash flows.
- Debt consists primarily of fixed-rate 2.84% notes with an anticipated repayment date of December 2027. The company reported leverage below 5.0x and expected to suspend principal payments after the third-quarter payment under the debt terms. A $50m variable funding facility had no borrowings; $3.5m of letters of credit were outstanding.
- No specific full-year revenue or earnings guidance was provided. Management said it expected elevated bone-in chicken wing costs to continue through fiscal 2021, citing demand and poultry-industry labor challenges. A hypothetical 10% wing-cost increase would have raised first-half cost of sales by approximately $1.0m.
- Management believed liquidity was sufficient for operations and growth for at least the next 12 months. Key stated risks include food and labor costs, supply interruptions, franchisee performance, COVID-19 impacts, competition, digital and delivery dependence, cybersecurity, international expansion, and servicing securitized debt.
- After quarter-end, the board declared a $0.17-per-share dividend, approximately $5.1m, payable September 3, 2021. The company also acquired two franchised restaurants for $3.9m and expected to complete a sale of six company-owned Colorado restaurants for approximately $6.7m in Q3.
Important facts for investors to verify
- Whether elevated chicken-wing costs persist and how they affect company-owned restaurant economics and margins.
- Whether system sales, same-store sales and new restaurant openings sustain growth, particularly given the much slower Q2 domestic same-store sales increase.
- Debt repayment suspension terms, leverage covenant calculations, and capacity to maintain dividends while meeting debt obligations.
- Actual cash investment and returns from technology, headquarters remodeling, and the UK franchisee investment.
- Completion and financial effects of the announced restaurant sale and post-quarter acquisitions.