Wingstop Inc. — Q3 2019 Form 10-Q
Reporting period: Thirteen and thirty-nine weeks ended September 28, 2019, compared with the periods ended September 29, 2018. Amounts are in U.S. dollars; financial statement amounts below are in millions unless stated otherwise.
Business context
Wingstop franchises and operates chicken-wing restaurants. At quarter-end, its system had 1,340 restaurants: 1,310 franchised and 30 company-owned. The business remained predominantly franchised, with 141 franchised locations internationally.
Financial and operating performance
| Metric | Q3 2019 | Q3 2018 | 39 weeks 2019 | 39 weeks 2018 |
|---|---|---|---|---|
| Total revenue | $49.9 | $38.2 | $146.5 | $112.7 |
| Operating income | $11.9 | $10.4 | $34.0 | $29.8 |
| Net income | $5.9 | $6.3 | $17.4 | $19.3 |
| Diluted EPS | $0.20 | $0.21 | $0.59 | $0.65 |
| Adjusted EBITDA | $15.4 | $12.2 | $42.8 | $36.5 |
| Operating cash flow | Not separately stated | Not separately stated | $28.6 | $30.6 |
- Q3 revenue rose 30.4%; royalty revenue, franchise fees and other increased 23.0%, advertising fees and related income 63.2%, and company-owned restaurant sales 17.7%. The advertising increase principally reflected the domestic Ad Fund contribution rate rising from 3% to 4% of gross sales, alongside system sales growth.
- Q3 system-wide sales increased 21.6% to $383.5 million; domestic same-store sales grew 12.3%, and domestic restaurant AUV was $1.219 million. The company reported 31 domestic and 7 international franchise openings in the quarter.
- Operating income increased, but net income declined as interest expense rose 66.7% to $4.2 million. For the 39-week period, interest expense nearly doubled to $13.0 million, contributing to a 9.7% decline in net income despite 30.0% revenue growth.
- Company-owned restaurant cost of sales rose to 74.2% of company-owned sales in Q3 from 67.9%; for the 39 weeks it was 74.1%, versus 67.5%. Management cited higher bone-in wing costs, the higher Ad Fund contribution, and increased delivery fees. Bone-in wing costs were up 22.7% in Q3 and 21.1% year to date.
- Operating cash flow was $28.6 million; investing cash outflow was $22.3 million, including the $18.3 million headquarters building purchase. Financing cash outflow was $5.8 million. Cash, cash equivalents and restricted cash totaled $21.5 million at period-end, including $9.5 million of unrestricted cash and $4.8 million of restricted cash outside the advertising fund.
- Debt on the balance sheet was $316.3 million net of issuance costs, including $8.2 million current and $308.1 million long-term. The company also reported $318.4 million outstanding principal on its fixed-rate Class A-2 notes and $5.0 million drawn on its $20 million variable funding facility; $4.0 million of letters of credit were outstanding. Class A-2 notes bear 4.97% interest and have an anticipated repayment date of December 2023. The company said it was in compliance with debt covenants.
- Quarterly dividend was $0.11 per share; $8.5 million, or $0.29 per share, was paid during the 39 weeks. A further $0.11-per-share dividend was declared after quarter-end.
Material changes and notable items
- Franchise segment revenue increased 36.1% in Q3 and 34.2% year to date. Company segment profit decreased 13.9% in Q3 and 12.6% year to date, primarily reflecting cost pressure and delivery expenses.
- Operating expenses grew faster than revenue in the 39-week period, while interest expense increased materially. Adjusted EBITDA increased, but it is a non-GAAP measure and includes adjustments for stock-based compensation.
- Wingstop acquired one franchisee-operated restaurant for $1.2 million in August. It also purchased an Addison, Texas headquarters building for $18.3 million; the build-out was expected to be completed and depreciation to begin around the start of fiscal 2021.
- Adoption of lease accounting standard ASC 842 added approximately $8.5 million of right-of-use assets and $10.3 million of lease liabilities at the start of fiscal 2019, with immaterial retained-earnings impact and no material effect on operating results or cash flows.
Outlook, risks and contingencies
No specific financial guidance was provided. Management stated that available liquidity and capital resources were expected to fund operations and the growth strategy for at least the next twelve months. Key identified risks include food and supply costs—particularly bone-in chicken wings, for which fixed-price markets are unavailable—labor and inflation, franchisee performance, competition, food safety, supply-chain interruptions, delivery-platform dependence, cybersecurity, regulation, litigation, and the ability to service securitized debt. Management said ordinary-course legal matters were generally insured and were not expected to have a material adverse effect; the filing reported no material pending legal proceedings and no material changes to previously disclosed risk factors.
Facts investors should verify
- Whether strong same-store sales and restaurant openings can sustain royalty growth, apart from the higher Ad Fund contribution rate that increases both advertising revenue and expense.
- Whether chicken-wing costs, labor, and delivery fees continue to pressure company-owned restaurant margins and segment profit.
- Debt-service capacity and refinancing exposure around the December 2023 anticipated repayment date, including the effect of variable-rate borrowings.
- The cash and capital allocation implications of headquarters construction, regular dividends, and the company’s expansion plans.
- Comparability of adjusted EBITDA with prior periods and other companies, given its non-GAAP definition and stock-compensation adjustments.