Wingstop Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The fiscal year included 53 weeks; FY2015 included 52 weeks. The fourth quarter included 14 weeks. This is an annual filing, not a standalone Q4 report.
Business context
Wingstop is a predominantly franchised chicken-wing restaurant company. At year-end it had 998 restaurants: 977 franchised locations (901 domestic and 76 international) and 21 company-operated locations. Carry-out represented approximately 75% of sales. Franchise royalties and fees provided 62.5% of company revenue.
Financial and operating performance
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Revenue | $91.4 million | $78.0 million | +17.2% |
| Operating income | $29.2 million | $19.7 million | +48.1% |
| Net income | $15.4 million | $10.1 million | +52.7% |
| Diluted EPS | $0.53 | $0.36 | — |
| Adjusted EBITDA | $35.6 million | $28.9 million | +23.2% |
| Operating cash flow | $22.2 million | $13.0 million | — |
| Capital expenditures | $2.1 million | $1.9 million | — |
Operating margin was 32.0%, versus 25.3%; net margin was 16.9%, versus 13.0%; and Adjusted EBITDA margin was 38.9%, versus 37.0%. Adjusted EBITDA is a non-GAAP measure. Operating cash flow less capital expenditures was approximately $20.1 million, a simple derived measure, not company-reported free cash flow.
System-wide sales rose 18.4% to $972.3 million. Domestic same-store sales growth slowed to 3.2% from 7.9%; company-owned domestic same-store sales grew 5.4%, versus 9.4%. Domestic AUV was $1.113 million, compared with $1.126 million. The system added 153 net restaurants and opened 159 locations during the year.
Company-owned restaurant cost of sales increased to 73.8% of company-owned sales from 71.0%. Management attributed the pressure to higher chicken commodity costs and wing size, increased staffing, and expenses related to two new company restaurants. Company segment profit declined 3.7% to $5.5 million, while franchise segment profit increased 31.2% to $25.9 million.
Liquidity, debt and capital allocation
Cash was $3.8 million at year-end, down from $10.7 million; working capital was negative $5.6 million, versus positive $7.1 million. Total debt was $151.3 million, up from $95.5 million. The June 2016 refinancing established a $180 million senior secured facility: a $70 million term loan and a $110 million revolver. Year-end balances were $68.3 million and $83.0 million, respectively, with both bearing 3.27% interest at year-end. The facility matures in June 2021; the company reported covenant compliance. Debt is secured by substantially all company assets.
Financing activities used $27.1 million, including an $83.3 million special dividend ($2.90 per share), funded in connection with the refinancing. The company also made $23.8 million of principal prepayments. Three 2016 secondary stock offerings generated no proceeds for Wingstop. The filing states that future dividends are not assured.
Changes, outlook and notable items
- Franchise revenue grew 22.2%, principally from restaurant openings and same-store sales, while company-owned restaurant sales grew 9.6%. FY2016 revenue included approximately $1.5 million associated with the extra 53rd week.
- Management cited a domestic development pipeline of 518 franchise commitments and an estimated long-term U.S. opportunity of approximately 2,500 restaurants; commitments may not convert into openings. International commitments totaled 349, including new agreements for 100 locations in Saudi Arabia over 10 years and 30 in Colombia and Panama over five years.
- Wingstop began transitioning to a national advertising program in 2017. The planned allocation is 3% of gross sales to the national ad fund and 1% to local advertising; management expects broader media reach. No specific numerical financial guidance is provided.
- Online orders reached 19.7% of sales in Q4 2016; management reported an average online transaction approximately $4 higher than other orders. The POS upgrade was substantially complete.
- Chicken is a key exposure: bone-in wings were approximately 29.1% of company-owned restaurant cost of sales; their average price per pound rose to $1.89 from $1.81. Management estimated a 10% wing-cost increase would add about $0.7 million to FY2016 cost of sales.
- Other material risks include franchisee financing and execution, competition and changing consumer preferences, food safety and supply disruption, wage and regulatory costs, cybersecurity, international operations and foreign exchange, and potential franchisor joint-employer liability. Texas, California and Illinois accounted for 61% of domestic restaurants.
- Management reported effective disclosure controls and internal control over financial reporting at year-end. A previously reported IT-control material weakness was reported as remediated. The auditor issued an unqualified opinion on the financial statements but did not attest to internal controls.
- Management reported no legal proceedings expected to have a material adverse effect. The company adopted debt-issuance-cost presentation guidance; it expected the forthcoming revenue standard to affect the timing of recognition of initial franchise, development, territory and renewal fees.
Important facts for investors to verify
- How much of revenue, earnings and cash-flow growth reflects the extra fiscal week, restaurant additions, same-store sales, and non-recurring or adjusted items?
- Can the company sustain same-store sales growth while containing chicken, labor and other restaurant-level costs?
- What is the pace and conversion rate of domestic and international development commitments, and what investment or support will national advertising require?
- How will the higher debt balance, variable interest rates, negative working capital and dividend-related borrowing affect liquidity, covenant headroom and future capital returns?
- What will be the quantified timing and presentation effects of the new revenue-recognition and lease-accounting standards?