Wingstop Inc. — Form 10-Q Summary
Reporting period: Thirteen and thirty-nine weeks ended September 29, 2018; comparative periods ended September 30, 2017. Amounts below are in U.S. dollars. The company operates a predominantly franchised restaurant business: 1,189 franchised and 26 company-operated locations across ten countries at quarter-end.
Financial performance
| Metric | Q3 2018 | Q3 2017 | 39 weeks 2018 | 39 weeks 2017 |
|---|---|---|---|---|
| Total revenue | $38.2 million | $33.1 million | $112.7 million | $98.1 million |
| Operating income | $10.4 million | $8.7 million | $29.8 million | $25.4 million |
| Net income | $6.3 million | $4.7 million | $19.3 million | $15.9 million |
| Diluted EPS | $0.21 | $0.16 | $0.65 | $0.54 |
| Adjusted EBITDA, non-GAAP | $12.2 million | $9.9 million | $36.5 million | $28.7 million |
- Q3 revenue increased 15.5%; net income rose 33.8%. For the 39-week period, revenue grew 14.8% and net income grew 21.6%.
- Q3 operating margin was approximately 27.1%, versus 26.3%; net margin was approximately 16.5%, versus 14.2%. Year-to-date operating margin was approximately 26.5%, versus 25.9%; net margin was approximately 17.1%, versus 16.2%.
- System-wide sales increased 15.1% in Q3 to $315.3 million and 16.3% year to date to $933.3 million. Domestic same-store sales growth was 6.3% in Q3 and 6.7% year to date. The domestic restaurant AUV was $1.131 million.
- At September 29, cash and cash equivalents were $3.0 million; total current assets were $17.7 million and current liabilities were $23.5 million. Cash, cash equivalents and restricted cash totaled $9.8 million, including restricted advertising-fund cash.
- Operating cash flow was $30.6 million for the 39 weeks, compared with $19.9 million in 2017; investing cash outflow was $8.9 million and financing cash outflow was $18.3 million. The filing attributes the operating cash flow increase to higher net income and working-capital timing.
- Debt principal outstanding was $215.4 million, comprising a $96.3 million term loan and $119.1 million revolving-credit balance; reported debt net of issuance costs was approximately $214.9 million. The facility carried a 4.49% rate at quarter-end and matures in January 2023. The company reported covenant compliance.
Drivers and material changes
- Franchise revenue growth reflected net franchise openings and same-store sales gains. The system added 127 net restaurants year over year, reaching 1,215 locations.
- Company-owned sales rose 22.5% in Q3, partly from acquiring three franchise restaurants since the prior-year comparable period and 5.0% company-owned same-store sales growth. Year-to-date company-owned sales increased 26.8%, including contributions from five acquired restaurants and 6.8% same-store growth.
- Company-owned restaurant cost of sales fell to 67.9% of sales in Q3 from 80.9%, and to 67.5% year to date from 78.7%. Management cited lower bone-in wing costs—down 29.8% in Q3 and 21.5% year to date—as well as labor and operating-cost leverage.
- Q3 interest expense increased 95.5% to $2.5 million; year-to-date expense increased 69.5% to $6.6 million, primarily following the January refinancing and higher debt and rates. Lower effective tax rates also supported net income: 19.4% in Q3 and 16.9% year to date, versus 36.4% and 26.2%, respectively, in 2017.
- Year-to-date SG&A included $1.5 million of refinancing and special-dividend transaction costs, as well as higher payroll and benefits from planned headcount additions. A prior-year one-time vendor payment also made year-to-date other revenue comparison less favorable.
Capital allocation, outlook and risks
- In January 2018, the company refinanced its prior credit facility and paid a $92.7 million special dividend, funded with new borrowing. Regular dividends totaled $0.23 per share for the first three quarters; the third-quarter dividend was $0.09 per share. A further $0.09 dividend was declared after quarter-end.
- After quarter-end, the company announced plans to issue approximately $300 million of fixed-rate notes to retire existing debt, cover transaction costs and provide general corporate funds, and to arrange a $25 million variable funding note facility. Management anticipated closing in fiscal Q4 2018; completion was not assured.
- Management stated that available liquidity was expected to be sufficient for operations and growth over the next 12 months. No specific revenue, earnings or unit-opening guidance was provided in the filing.
- Key risks include chicken-wing and other food-cost volatility, labor and minimum-wage inflation, franchisee performance and recruitment, food safety and supply interruptions, competition, expansion execution, cybersecurity, litigation, and compliance with debt covenants. A hypothetical 10% increase in wing costs would have raised year-to-date cost of sales by about $0.6 million; a one-percentage-point interest-rate change would affect annualized interest expense by about $2.2 million.
- Operating lease commitments totaled $14.1 million in scheduled minimum rent payments. The company expected adoption of the new lease standard in 2019 to materially increase balance-sheet assets and liabilities. Ordinary-course claims were described as not expected to have a material adverse impact; no material pending legal proceedings were reported.
Important facts for investors to verify
- Whether the announced refinancing closed on expected terms, including its interest cost, fees, maturity, covenants and effect on liquidity.
- Whether strong same-store sales and restaurant growth continue, and whether lower chicken-wing costs persist or reverse.
- How higher interest expense, planned corporate hiring and recurring costs affect operating margins and cash generation.
- The sustainability of dividend payments given leverage, restricted cash and the company’s capital requirements.
- The balance-sheet and reporting effects of adopting lease accounting, and the final accounting for Tax Act-related amounts, which the company said remained subject to refinement.
- Comparability of reported revenue: 2017 figures were retrospectively adjusted for revenue-accounting adoption, and advertising-fund contributions and expenses are reported gross while largely offsetting.