Wingstop Inc. — Q1 2016 Form 10-Q
Reporting period: Thirteen weeks ended March 26, 2016; comparative period ended March 28, 2015. Unaudited interim results. Wingstop is primarily a franchisor, with 854 franchised and 19 company-owned restaurants at quarter-end.
Key financial results
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total revenue | $22.1 million | $19.0 million | +16.0% |
| Royalty revenue and franchise fees | $13.5 million | $11.2 million | +21.0% |
| Company-owned restaurant sales | $8.6 million | $7.9 million | +9.0% |
| Operating income | $7.6 million | $5.0 million | +54.1% |
| Net income | $4.3 million | $2.6 million | +68.0% |
| Diluted EPS | $0.15 | $0.10 | — |
| Adjusted EBITDA (non-GAAP) | $8.9 million | $7.2 million | +23.9% |
Operating margin was approximately 34.5%, versus 26.0%; net margin was approximately 19.4%, versus 13.4%. Cost of sales at company-owned restaurants was 70.8% of those sales, down from 72.9%. Wingstop attributed the improvement to lower bone-in wing commodity rates, menu price increases, and better fixed-cost leverage. Adjusted EBITDA is a company-defined non-GAAP measure and should not be viewed as a substitute for GAAP results or operating cash flow.
System-wide sales were $235.8 million, up from $199.2 million. Domestic same-store sales growth was 4.6%, compared with 10.7% a year earlier; company-owned domestic same-store sales growth was 9.0%, versus 9.6%. Domestic average unit volume was $1.122 million, compared with $1.097 million.
Cash, debt, and liquidity
- Cash and cash equivalents were $8.3 million at March 26, down from $10.7 million at December 26, 2015.
- Operating cash flow was $7.5 million, versus $2.5 million; capital expenditures were $0.3 million. Financing activities used $9.5 million, including a $10.0 million debt principal prepayment.
- Long-term debt had a stated outstanding balance of $85.5 million (carrying value, net, was $85.0 million), bearing interest at 3.11%. No scheduled principal payments are due before the March 2020 maturity. The facility is secured by substantially all company assets; Wingstop reported covenant compliance.
- Management stated that cash, operating cash flow, and debt resources were expected to be sufficient for operations and the growth strategy. No off-balance-sheet arrangements were reported.
Material changes, outlook, and risks
- Revenue and earnings increased, primarily reflecting a larger franchise base, same-store sales growth, and stronger company-owned restaurant sales. System-wide restaurants increased to 873 from 745 a year earlier.
- Franchise fees included amounts recognized following termination of franchise agreements associated with Wingstop’s exit from Russia. The filing does not quantify this item separately.
- SG&A was broadly flat year over year and included $0.5 million of follow-on offering costs, compared with $1.3 million of public-company preparation costs in the prior-year quarter. The March 2016 follow-on offering consisted entirely of selling-stockholder shares; Wingstop received no proceeds.
- No specific financial guidance or quantified forward outlook was provided. Management expressed confidence in available liquidity and continued growth, while noting that interim results are not necessarily indicative of full-year results.
- Key exposures include chicken-wing and other commodity costs, wage inflation, competition and same-store sales trends, food safety, franchisee execution, and variable-rate debt. Wingstop reported that a hypothetical 10% increase in bone-in chicken wing costs would have raised quarterly cost of sales by about $0.2 million. A 1 percentage-point interest-rate change was estimated to affect annualized interest expense by about $0.9 million; interest-rate caps covered specified portions of the debt through December 2016 and March 2018.
- Ordinary-course legal claims were described as generally insured and not expected by management to materially affect the company. The filing reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether the slower system-wide same-store sales growth rate and lower year-over-year comparison reflect a sustained trend.
- The extent to which franchise-fee growth included nonrecurring Russia-related termination fees.
- Debt terms, interest-rate-cap coverage, covenant headroom, and the company’s ability to fund growth while servicing variable-rate debt.
- Whether lower chicken-wing costs and restaurant-level margin improvements persist as commodity prices and labor costs change.
- The assumptions behind management’s liquidity assessment and the company’s non-GAAP Adjusted EBITDA calculation.