Wingstop Inc. — Q1 2021 Form 10-Q
Reporting period: Thirteen weeks ended March 27, 2021; comparisons are to the thirteen weeks ended March 28, 2020. Wingstop is primarily a franchisor. At quarter-end it had 1,371 domestic and 175 international franchised restaurants, plus 33 company-owned restaurants, for 1,579 locations system-wide.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total revenue | $70.7 million | $55.4 million | +27.5% |
| Operating income | $19.8 million | $13.5 million | +47.0% |
| Net income | $13.2 million | $8.1 million | +62.5% |
| Diluted earnings per share | $0.44 | $0.27 | +$0.17 |
| Adjusted EBITDA | $23.9 million | $16.4 million | +46.2% |
| Cash provided by operating activities | $13.8 million | $12.5 million | +$1.3 million |
Royalty revenue, franchise fees and other rose 30.6% to $31.6 million; advertising fees increased 34.4% to $21.5 million; and company-owned restaurant sales grew 15.4% to $17.6 million. System-wide sales increased 30.0% to $558.9 million. Domestic same-store sales grew 20.7% system-wide and 13.4% at company-owned restaurants. Domestic restaurant AUV was $1.547 million, versus $1.272 million.
Operating margin was approximately 28.0% of reported revenue, compared with 24.3% a year earlier; net margin was approximately 18.6%, versus 14.6%. These are calculated from reported revenue and income. Company-owned restaurant cost of sales rose to 75.6% of company-owned sales from 73.4%. Food, beverage and packaging costs increased to 41.6% of company-owned sales from 36.0%, primarily reflecting a 25.8% increase in bone-in wing costs. Labor and other restaurant operating costs declined as a percentage of company-owned sales, reflecting sales leverage.
Net cash used in investing activities was $2.8 million, primarily capital expenditures. Operating cash flow less capital expenditures was approximately $10.9 million, versus $10.9 million in Q1 2020. Financing activities used $6.4 million, including $4.7 million of dividends paid. Cash and cash equivalents were $40.0 million; restricted cash was $4.7 million, with additional restricted advertising-fund cash included in advertising fund assets. Total cash, cash equivalents and restricted cash were $63.8 million.
Balance sheet, debt and liquidity
At March 27, 2021, total assets were $217.8 million and total liabilities were $549.5 million; stockholders’ deficit was $331.7 million. Debt principal was $480.0 million, primarily represented by $466.1 million of long-term debt net of issuance costs and current portion, plus $4.8 million current debt. The Class A-2 notes carry a fixed 2.84% rate and generally amortize at 1% annually, with an anticipated repayment date of December 2027. The $50 million variable funding facility had no borrowings outstanding; $3.5 million of letters of credit were outstanding.
Management stated that available liquidity was expected to be sufficient for operations and the growth strategy for at least the next twelve months. The company paid a quarterly dividend of $0.14 per share in March and declared another $0.14 dividend in April for payment in June, subject to the board’s discretion and capital availability.
Material changes, outlook and risks
- Revenue and earnings growth reflected strong same-store sales and 165 net franchise restaurant openings since the prior-year quarter. System-wide restaurants increased from 1,413 to 1,579.
- Wing costs were a notable pressure: bone-in wings represented 33.8% of company-owned restaurant cost of sales, compared with 27.4% a year earlier. Management expected elevated wing demand and costs to continue through fiscal 2021, citing poultry-industry challenges including labor shortages. A hypothetical 10% increase in wing costs would have raised quarterly cost of sales by about $0.4 million.
- Interest expense declined following the October 2020 refinancing, which raised the fixed-note rate structure’s principal amount to $480 million while reducing the fixed interest rate from 4.97% to 2.84%. The refinancing proceeds also funded a special dividend of approximately $148.4 million in December 2020.
- No numerical full-year revenue, earnings or same-store-sales guidance was provided in the filing. Management described its liquidity outlook as sufficient for at least twelve months. Forward-looking risks include COVID-19 effects, food and supply costs, franchisee performance, supply-chain availability, digital and delivery dependence, competition, and the ability to service securitized debt.
- The company agreed to refranchise six Colorado company-owned restaurants for approximately $6.7 million, subject to customary closing conditions, with closing expected in Q3 2021. Assets held for sale were $4.3 million at quarter-end.
- Management reported no material pending legal proceedings, no material changes to previously disclosed risk factors, and effective disclosure controls. A presentation change moved national-advertising-fund headcount expenses from SG&A to advertising expenses; prior periods were reclassified and operating income was unaffected.
Important facts for investors to verify
- Whether elevated bone-in wing prices and supply conditions persist, and how they affect company-owned restaurant margins.
- Whether strong domestic same-store sales and system-wide growth continue beyond the pandemic-influenced comparison period.
- Debt-service capacity and covenant headroom under the securitized financing, including the implications of the substantial debt balance and restricted assets.
- Completion, timing and proceeds of the planned Colorado refranchising transaction.
- Future dividend decisions and capital needs; the filing does not provide specific full-year operating guidance.