Business context and reporting period
Wingstop Inc. is primarily a franchisor, with about 98% of its restaurants operated by franchisees. At September 25, 2021, it had 1,461 domestic and 180 international franchised restaurants, plus 32 company-operated restaurants. This unaudited Form 10-Q covers the 13 and 39 weeks ended September 25, 2021, compared with the respective periods ended September 26, 2020.
Financial performance and liquidity
| Metric | 13 weeks 2021 | 13 weeks 2020 | 39 weeks 2021 | 39 weeks 2020 |
|---|---|---|---|---|
| Total revenue | $65.8m | $64.0m | $210.5m | $185.5m |
| Operating income | $20.8m | $14.3m | $59.5m | $47.3m |
| Net income | $11.3m | $10.1m | $35.8m | $29.7m |
| Diluted EPS | $0.38 | $0.34 | $1.19 | $1.00 |
| Adjusted EBITDA | $21.4m | $18.4m | $68.2m | $55.7m |
Q3 revenue rose 2.8%, operating income 45.7% and net income 12.0% year over year. For the 39 weeks, revenue rose 13.4%, operating income 25.8% and net income 20.3%. Calculated operating margin was 31.7% for Q3 (22.3% prior year) and 28.3% for the 39 weeks (25.5% prior year); calculated net margin was 17.2% and 17.0%, respectively, versus 15.8% and 16.0%. The quarter’s adjusted net income was $8.6m, down from $9.1m; adjusted diluted EPS was $0.29 versus $0.31. These non-GAAP measures exclude the restaurant-sale gain and related tax effect.
System-wide sales increased 16.7% in Q3 and 20.4% for the 39 weeks. Domestic same-store sales growth was 3.9% in Q3 and 8.1% year to date, compared with unusually strong prior-year growth of 25.4% and 22.5%. Domestic AUV was $1.579m, up from $1.435m. Q3 company-operated same-store sales declined 0.2%; the 39-week measure increased 2.9%.
Cash provided by operations was $54.0m for the 39 weeks, versus $46.8m. Investing used $18.4m, including $16.5m in property and equipment and a $4.2m UK investment; financing used $18.3m, including $14.7m of dividends paid. Cash and cash equivalents were $50.1m; cash, cash equivalents and restricted cash totaled $76.6m. Current assets were $88.8m and current liabilities $59.3m, including restricted advertising-fund balances. Stockholders’ deficit was $314.1m.
Debt principal was $477.6m, or $469.1m net of issuance costs, under fixed-rate 2.84% securitized notes; no revolving-note borrowings were outstanding, and $3.5m of letters of credit were issued. The notes’ anticipated repayment date is December 2027. With leverage below 5.0x, the company elected to suspend scheduled principal payments after its Q3 payment. The board declared a $0.17-per-share dividend payable in December, estimated at $5.1m.
Material changes and unusual items
- Company-owned restaurant cost of sales rose to 87.5% of sales in Q3 from 76.0%; for the 39 weeks, it rose to 80.2% from 74.1%. Food, beverage and packaging costs were 48.1% of company-owned sales in Q3 and 44.5% year to date, versus 36.4% and 34.8%. Management attributed the increase mainly to bone-in wing costs, up 48.9% in Q3 and 46.4% year to date versus prior-year periods that included unusually significant deflation.
- A $6.9m advertising-surplus rebate to franchisees reduced Q3 advertising-fee revenue and helped offset higher food and labor costs. Advertising revenue and expense are recognized in the same periods, though timing may not match spending.
- The sale of six Colorado company-owned restaurants generated $7.2m proceeds and a $3.6m pretax gain. The company also acquired three franchised restaurants for $4.9m. The gain boosted reported earnings and is excluded from adjusted earnings measures.
- Interest expense declined following the October 2020 refinancing, which increased debt by $162.4m and reduced the stated rate from 4.97% to 2.84%. Q3’s effective tax rate was 34.1%, versus a 1.9% benefit rate in the prior-year quarter; the filing cites nondeductible executive compensation and lower excess stock-compensation tax benefits.
- Beginning in 2021, advertising-fund support headcount costs were presented within advertising expense rather than SG&A. Prior periods were reclassified; operating income and cash flows were unaffected.
Outlook, risks and contingencies
The company provided no specific financial guidance. Management said available liquidity should support operations and growth for at least the next 12 months. It expected elevated bone-in wing costs to continue through fiscal 2021, citing demand and poultry-industry labor shortages. Other highlighted risks include food and supply costs, labor availability and expense, franchisee performance, supply-chain interruptions, COVID-19 effects, competition, digital and cybersecurity risks, international expansion, and the ability to service securitized debt. Management reported no material pending legal proceedings and believes ordinary-course claims are not likely to have a material adverse effect. Disclosure controls were assessed as effective; no material change in internal control was reported.
Important facts for investors to verify
- Whether wing-cost inflation and competitive labor costs persist, and how effectively pricing or other actions offset them.
- Whether same-store sales and system-wide sales growth continue after comparison with unusually strong 2020 results.
- The effect of the $6.9m advertising rebate and other advertising-fund movements on reported revenue and cash-flow comparisons.
- Debt covenant headroom, the implications of suspended principal amortization, and capacity to maintain dividends alongside investment needs.
- How much future earnings depend on restaurant-sale gains versus recurring operations; compare GAAP results with management’s non-GAAP adjustments.