Wingstop Inc. — Q2 2015 Form 10-Q
Reporting period: 13 weeks ended June 27, 2015; year-to-date figures cover 26 weeks. Comparisons are with the periods ended June 28, 2014. The company operates a predominantly franchised chicken-wing restaurant system.
Financial performance
| Metric | Q2 2015 | Q2 2014 | 26 weeks 2015 | 26 weeks 2014 |
|---|---|---|---|---|
| Revenue | $19.2m | $16.3m | $38.3m | $33.0m |
| Operating income | $2.4m | $5.0m | $7.4m | $10.8m |
| Net income | $0.6m | $2.5m | $3.1m | $5.5m |
| Adjusted EBITDA* | $7.2m | $6.1m | $14.4m | $12.8m |
| Operating cash flow | Not separately provided | Not separately provided | $0.9m | $7.3m |
- Q2 revenue increased 18.0%; royalty revenue and franchise fees rose 24.6%, while company-owned restaurant sales rose 9.5%. For the first half, revenue increased 16.0%.
- Operating income fell 52.3% in Q2 and 32.1% year to date; net income fell 76.7% and 42.9%, respectively. The filing attributes much of the SG&A increase to a $3.3m one-time fee to terminate the Roark management agreement, public-company preparation costs, and other transaction expenses.
- Company-owned restaurant cost of sales was 70.5% of sales in Q2 versus 69.5%; first-half cost of sales was 71.7% versus 67.7%. Higher bone-in wing costs were partly offset by menu pricing and improved labor and other operating cost leverage.
- System-wide domestic same-store sales grew 9.0% in Q2 and 9.9% year to date, below prior-year growth of 15.3% and 12.5%. Q2 domestic company-owned same-store sales grew 9.5%, compared with 21.0% a year earlier.
- *Adjusted EBITDA is a non-GAAP measure. Q2 includes add-backs for the management-agreement termination fee and transaction costs; it is not a substitute for GAAP earnings or operating cash flow.
Liquidity, debt and capital actions
- Cash was $4.9m at June 27, down from $9.7m at year-end 2014. First-half cash flow was $0.9m from operations, $0.3m used in investing, and $5.4m used in financing.
- Debt was $100.5m, all long-term; the $5.0m revolver was undrawn. Debt is floating-rate, secured by substantially all company assets, and subject to financial and non-financial covenants. The company reported covenant compliance.
- June IPO: the company issued 2.15m shares at $19 per share and received approximately $34.8m net proceeds. It used $32.0m to prepay debt; the remainder funded the management-agreement termination fee and transaction expenses. Selling stockholders sold 4.52m shares and received those proceeds themselves.
- A $48.0m shareholder dividend was paid in the first half, financed with facility borrowings and cash on hand. No scheduled term-loan principal payments are due until March 2019; $92.75m is scheduled for fiscal 2020, with maturity in March 2020.
- Management stated that available liquidity was expected to fund operations, growth plans, and public-company costs for at least 12 months.
Business changes, outlook and risks
- The system had 785 restaurants at quarter-end versus 657 a year earlier: 714 domestic franchised, 52 international franchised, and 19 company-owned. The company opened 41 franchised restaurants during the quarter.
- No specific revenue, earnings, or restaurant-opening guidance was provided. Management described continued growth plans and identified forward-looking statements as subject to significant risks.
- Bone-in wings are a notable commodity exposure: their average price was $1.87 per pound in the first half versus $1.40, and they represented 29.6% of company-owned cost of sales versus 23.2%. A hypothetical 10% wing-cost increase would have raised first-half cost of sales by about $0.3m. Management noted no established fixed-price market for bone-in wings.
- Variable-rate debt creates interest-rate exposure; a 1 percentage-point rate change would affect annualized interest expense by about $1.0m, with interest-rate caps covering $66.9m of notional debt. Other disclosed risks include labor and food costs, franchisee execution, competition, food safety, and expansion into unfamiliar markets.
- Ordinary-course legal claims were not expected by management to have a material adverse effect. Operating lease commitments totaled $10.6m. No off-balance-sheet arrangements were reported.
Important facts for investors to verify
- How much of the earnings decline reflects recurring operating performance versus the IPO, transaction, and management-termination costs added back to Adjusted EBITDA.
- Whether wing-cost inflation and weaker same-store-sales growth persist, and how effectively pricing and cost controls offset them.
- Cash generation relative to debt service, the timing and terms of debt maturities, and compliance with credit-facility covenants.
- The economics and execution of planned franchise growth, including international expansion and the company’s ability to sustain restaurant openings and franchisee performance.