Wingstop Inc. — Q1 2023 Form 10-Q
Business context and period. The filing covers the 13 weeks ended April 1, 2023, compared with the 13 weeks ended March 26, 2022. Wingstop operated 1,996 restaurants at quarter-end, approximately 98% franchised. Fiscal 2023 has 52 weeks; fiscal 2022 had 53 weeks.
Financial performance
| Metric | Q1 2023 | Prior-year quarter | Change |
|---|---|---|---|
| Total revenue | $108.7 million | $76.2 million | +42.7% |
| Operating income | $25.7 million | $16.6 million | +54.6% |
| Net income | $15.7 million | $8.7 million | +80.6% |
| Diluted EPS | $0.52 | $0.29 | Higher |
| Operating cash flow | $35.7 million | $20.4 million | Higher |
| Capital expenditures | $4.3 million | $6.3 million | Lower |
- Revenue comprised $48.2 million of royalties, franchise fees and other revenue; $37.5 million of advertising fees; and $23.1 million of company-owned restaurant sales. Advertising fees are accompanied by advertising expenses, which were $39.6 million.
- Operating margin was approximately 23.6%, versus 21.8% in the prior-year quarter; net margin was approximately 14.4%, versus 11.4%.
- Adjusted EBITDA, a non-GAAP measure, was $34.6 million, up 59.8%; adjusted net income was $17.8 million. The company added back $2.8 million of consulting fees and $3.3 million of stock-based compensation in its Adjusted EBITDA reconciliation.
- Domestic same-store sales grew 20.1%; company-owned domestic same-store sales grew 10.3%. System-wide sales rose 30.4% to $821.6 million, digital sales reached 65.2%, and domestic restaurant AUV was $1.662 million.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $196.2 million; cash plus restricted cash totaled $227.0 million at April 1, 2023.
- Total debt principal was approximately $722.8 million, with $712.8 million reported net of unamortized debt issuance costs; $7.3 million was classified as current. Debt consists primarily of fixed-rate securitized notes. The $200 million variable funding facility had no borrowings outstanding.
- Operating cash flow was $35.7 million, investing cash outflow was $4.3 million, and financing cash outflow was $10.1 million. The company attributed higher operating cash flow to increased operating income and working-capital timing.
- The company paid a $0.19-per-share quarterly dividend, approximately $5.7 million in total, and declared another $0.19 dividend payable in June 2023. The prior-year per-share dividend shown in the income statement was $4.17, reflecting the prior period’s special dividend as well as regular dividends.
Material changes, outlook and risks
- Growth reflected 199 net franchise restaurant openings since the prior-year comparison, strong domestic same-store sales, and the higher advertising-fund contribution rate of 5%, up from 4% beginning in Q2 2022. The system added 37 net locations during Q1.
- Company-owned restaurant cost of sales fell to 72.4% of sales from 84.3%. Food, beverage and packaging costs declined to 32.4% from 42.8%, primarily because bone-in wing costs were 52.8% lower year over year. Labor leverage also improved; other restaurant operating expenses increased as a share of sales.
- SG&A increased 30.7%, including $2.8 million of consulting fees related to strategic initiatives, higher incentive and performance-based compensation, and added headcount. Interest expense rose 9.1%, partly due to the 2022 debt issuance, offset in part by higher interest income.
- Management expects operating cash flows and available securitized-facility borrowing capacity to cover capital expenditures, working capital and debt service for at least the next 12 months and foreseeable future. The filing gives no specific revenue, earnings or comparable-sales guidance.
- Risks highlighted include franchisee performance and growth execution, food and wing-price volatility, labor and supply availability, competition, digital and delivery-platform dependence, food safety, litigation, international expansion, and servicing securitized debt. A hypothetical 10% increase in bone-in wing costs would have added about $0.3 million to Q1 cost of sales.
- Ordinary-course legal claims were not considered likely to have a material adverse effect by management. Subsequent to quarter-end, Wingstop acquired two Dallas-area restaurants for $4.4 million in cash; purchase-price allocation was still being determined.
Important facts for investors to verify
- Whether strong same-store sales and system-wide sales growth persist, and how much is driven by transactions, pricing and mix.
- Whether lower wing costs continue; the filing identifies wing-price volatility and inflation in other food costs as risks.
- How consulting and other strategic-initiative spending affects future reported results and non-GAAP adjustments.
- Debt-service capacity, facility borrowing conditions and the effect of future refinancing rates, alongside the company’s dividend and growth plans.
- Results and final purchase-price allocation for the two restaurant acquisitions, and whether the company’s liquidity outlook remains on track.