Wingstop Inc. — Q2 2020 Form 10-Q
Business context and period. The filing covers the 13 and 26 weeks ended June 27, 2020, compared with the corresponding 2019 periods. Wingstop operates a predominantly franchised restaurant system; at quarter-end it had 1,244 domestic and 162 international franchised restaurants, plus 30 company-owned restaurants (1,436 total). Amounts below are in millions except per-share data and percentages.
Financial performance
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Total revenue | $66.1 | $48.6 | $121.5 | $96.6 |
| Operating income | $19.5 | $10.3 | $33.0 | $22.1 |
| Net income | $11.5 | $4.9 | $19.6 | $11.5 |
| Diluted EPS | $0.39 | $0.17 | $0.66 | $0.39 |
| Adjusted EBITDA (non-GAAP) | $20.9 | $13.5 | $37.2 | $27.4 |
| Operating margin | 29.6% | 21.2% | 27.2% | 22.8% |
- Q2 revenue increased 36.1%, operating income 89.9%, and net income 134.6% year over year. First-half revenue rose 25.8% and net income 70.4%.
- Q2 revenue comprised $27.9 million in royalty revenue, franchise fees and other; $19.9 million in advertising fees and related income; and $18.3 million in company-owned restaurant sales. Advertising revenue and expense largely move together.
- System-wide sales grew 37.0% in Q2 and 27.9% in the first half. Domestic same-store sales increased 31.9% and 21.0%, respectively; domestic restaurant AUV was $1.366 million, versus $1.189 million in the prior-year comparison.
- Company-owned restaurant cost of sales was 73.1% of sales in Q2 versus 76.1% a year earlier; for the first half it was 73.2% versus 74.1%. Lower bone-in wing costs helped, while COVID-related team-member incentive pay increased labor costs.
- Cash provided by operating activities was $25.6 million for the first half, versus $10.5 million; capital spending was $2.7 million and investing cash outflow net of asset-sale proceeds was $0.4 million. Dividends paid were $6.5 million.
Balance sheet, debt and liquidity
- At June 27, 2020, cash and cash equivalents were $45.8 million, restricted cash was $4.1 million, and total current assets were $67.5 million versus current liabilities of $47.6 million.
- Total debt carrying value was $326.8 million: $316.8 million of fixed-rate Class A-2 notes and $16.0 million drawn on the variable funding facility, net of debt issuance costs. The facility permits up to $20 million of borrowings and had $4.0 million of letters of credit outstanding. The Class A-2 notes bear 4.97% interest; their anticipated repayment date is December 2023.
- Wingstop borrowed $16.0 million under the variable facility in Q1 as a precaution to strengthen liquidity. With its leverage ratio below 5.0x, the company stopped Class A-2 principal payments beginning in Q2 under the debt terms. Management said it expected available liquidity to fund operations and growth for at least 12 months.
Material changes, outlook and risks
- COVID-19 led Wingstop to close domestic dining rooms from March 16 and shift service to carryout and delivery; about eight international and six domestic locations were temporarily closed at quarter-end. Management reported higher domestic same-store sales amid the off-premise shift, but weaker international same-store sales, where dine-in is more prevalent. No supply-chain difficulties had occurred through Q2, but future disruption remained possible.
- Management gave no numerical full-year guidance. It noted uncertainty around the pandemic’s duration and effects on sales, costs, restaurant openings, franchisees, liquidity and supply availability. The company had incurred added incentive pay and COVID-related support costs; construction and permitting disruptions slowed planned openings in March and April.
- Q2 SG&A included a $2.0 million pre-tax gain from refranchising two Houston restaurants, offset in part by a $1.0 million employee-relief donation and pandemic-related expenses. Two restaurants were sold during the quarter for $2.3 million; five Kansas City restaurants were sold after quarter-end for $2.5 million.
- The Board declared a $0.14-per-share dividend after quarter-end, approximately $4.1 million in total, payable September 11, 2020. Management said it did not expect debt restrictions to prevent regular quarterly dividends, but future dividends remain subject to Board discretion and available capital.
- Key stated risks include continuing COVID-19 impacts, franchisee and international-market performance, food and labor costs, chicken-wing price volatility, supply interruption, dependence on digital and third-party delivery channels, competition, and servicing or refinancing securitized debt. Management reported no material pending legal proceedings and considered ordinary-course claims unlikely to materially affect results.
Important facts for investors to verify
- Whether domestic sales momentum and the off-premise mix persist as restrictions and consumer behavior change, and whether international operations recover.
- Whether unusually strong same-store sales, system-wide sales and earnings translate into sustained performance; consider the $2.0 million refranchising gain and non-GAAP adjustments when assessing comparisons.
- How food costs, especially bone-in wings, and pandemic-related labor, delivery and support expenses affect company-owned restaurant economics and franchisee health.
- Liquidity and debt-service capacity: cash includes restricted balances, the company drew $16.0 million under its variable facility, and debt is secured by revenue-generating assets and intellectual property.
- Whether planned openings, post-quarter restaurant sales, and the declared dividend affect growth, cash needs and capital returns. The filing does not provide clear numerical full-year guidance.