Wingstop Inc. — FY2015 Form 10-K
Business context and reporting period. Wingstop is a highly franchised chicken-wing restaurant chain. This annual report covers the 52-week fiscal year ended December 26, 2015; the filing also reports unaudited fourth-quarter results. At year-end, the system had 845 restaurants: 826 franchised and 19 company-operated. Franchise operations generated 59.9% of company revenue. The company completed its IPO in June 2015.
Financial performance and liquidity
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Total revenue | $78.0 million | $67.4 million | +15.6% |
| Royalty revenue and franchise fees | $46.7 million | $38.0 million | +22.8% |
| Company-owned restaurant sales | $31.3 million | $29.4 million | +6.3% |
| Operating income | $19.7 million | $18.1 million | +9.1% |
| Net income | $10.1 million | $9.0 million | +12.5% |
| Diluted EPS | $0.36 | $0.34 | Up $0.02 |
| Adjusted EBITDA | $28.9 million | $24.4 million | +18.5% |
| Operating cash flow | $13.0 million | $14.4 million | Down $1.3 million |
Operating margin was 25.3% of revenue, versus 26.8% in FY2014; net margin was 13.0%, versus 13.3%. Adjusted EBITDA margin rose to 37.0% from 36.1% (non-GAAP). Domestic same-store sales increased 7.9%, down from 12.5%; company-owned same-store sales rose 9.4%, versus 16.0%. System-wide sales grew 21.0% to $821.2 million, and domestic AUV increased to $1.126 million from $1.073 million.
Cash and cash equivalents were $10.7 million at year-end, working capital was $7.1 million, and total debt was $95.5 million. Net cash increased by $1.0 million. Investing used $1.9 million, including capital expenditures; financing used $10.2 million. The company reported no revolver borrowings and compliance with credit-facility covenants. The $137.5 million secured facility matures in March 2020; scheduled term-loan principal payments resume in September 2019. Debt is variable-rate and secured by substantially all assets.
Material changes and unusual items
- Revenue growth was led by franchise royalties and fees, reflecting 133 net restaurant additions and same-store sales growth. The system added 142 restaurants and closed nine during the year.
- Company-owned restaurant cost of sales rose to 71.0% of company-owned sales from 69.6%. Food, beverage and packaging costs increased to 36.8% of sales from 35.1%, primarily as bone-in wing commodity prices rose 17.1%; labor costs improved to 20.8% from 22.6%.
- SG&A increased 28.2% to $33.4 million, including a one-time $3.3 million payment to terminate the Roark management agreement, as well as increased headcount and professional fees.
- The company raised approximately $35 million net in its IPO, used $32 million to prepay debt and made an additional $5 million debt prepayment. The year also included a $48.0 million shareholder dividend, funded in part by debt refinancing. IPO proceeds included shares sold by existing holders; Wingstop received no proceeds from those sales.
- Fourth-quarter FY2015 revenue was $20.6 million, operating income $6.5 million, and net income $3.8 million (unaudited). Quarterly results varied, including lower operating income and net income in Q2, partly reflecting IPO-related costs.
Outlook, risks and contingencies
Management described continued growth through franchised restaurant openings and same-store sales, and estimated long-term domestic potential of approximately 2,500 restaurants. It reported 530 domestic and 284 international restaurant commitments at year-end; commitments are not guarantees of openings. No specific annual opening target or formal earnings guidance was provided.
Management highlighted flavor innovation, brand awareness, online ordering, advertising efficiency and continued expansion as growth drivers. Online ordering represented 15% of sales in Q4 2015, compared with less than 7% before the updated platform launch. Subsequent to year-end, Wingstop closed its three Russian franchised restaurants, terminated the agreements and exited Russia.
- Commodity exposure: Bone-in wings were 28.9% of company-owned restaurant cost of sales; the company stated it does not effectively hedge wing prices. A hypothetical 10% increase in wing costs would have raised FY2015 cost of sales by about $0.6 million.
- Franchise and expansion risks: Growth depends on franchisee financing, execution and conversion of development commitments; openings may be delayed or cancelled. Franchisee conduct can affect brand reputation and royalty collections.
- Debt and rates: Floating-rate borrowings expose earnings and cash flow to interest-rate increases; a one-percentage-point rate change was estimated to affect annual interest expense by $1.0 million.
- Controls: Management said disclosure controls were effective, but the previously identified material weakness in IT controls over financial reporting was not remediated as of year-end. Management planned further remediation and internal audit/compliance investment.
- Other risks: Competition, food safety and supply interruptions, labor and minimum-wage costs, regulation, cyber/payment-card security, international operations, and potential franchisor joint-employer liability were identified as risks. Ordinary-course legal matters were not expected by management to have a material adverse effect.
Most important facts for investors to verify
- Whether the 530 domestic and 284 international commitments convert into openings, and how unit growth affects sales and returns.
- Whether same-store sales and AUV growth remain strong as domestic same-store growth moderated to 7.9%.
- Whether higher chicken costs can be offset through pricing, mix or operating efficiencies without weakening demand or margins.
- Debt repayment capacity, variable-rate exposure, covenant headroom and the effect of the $48 million dividend on leverage and financial flexibility.
- Progress in remediating the material weakness in IT controls, and any subsequent changes to management’s controls conclusion.
- How the IPO-related and other adjustments affect interpretation of Adjusted EBITDA; it is a non-GAAP measure and excludes items including the management-agreement termination fee.