Wingstop Inc. — Q3 2020 Form 10-Q
Reporting period: Thirteen weeks ended September 26, 2020; year-to-date results cover 39 weeks. Comparisons are with the corresponding 2019 periods. Amounts below are in millions unless stated otherwise. Wingstop is a predominantly franchised restaurant business; at quarter-end it had 1,448 franchised locations and 31 company-operated restaurants, or 1,479 systemwide.
Financial performance
| Metric | Q3 2020 | Q3 2019 | 39 weeks 2020 | 39 weeks 2019 |
|---|---|---|---|---|
| Total revenue | $64.0 | $49.9 | $185.5 | $146.5 |
| Operating income | $14.3 | $11.9 | $47.3 | $34.0 |
| Net income | $10.1 | $5.9 | $29.7 | $17.4 |
| Diluted EPS | $0.34 | $0.20 | $1.00 | $0.59 |
| Adjusted EBITDA (non-GAAP) | $18.4 | $15.4 | $55.7 | $42.8 |
- Q3 revenue rose 28.3%; operating income rose 19.7%, and net income rose 70.7%. Year-to-date revenue rose 26.6% and net income rose 70.5%.
- Calculated operating margin was approximately 22.4% in Q3, versus 24.0% a year earlier; year-to-date it was approximately 25.5%, versus 23.2%. Net margin was approximately 15.8% in Q3 versus 11.8%, and 16.0% year-to-date versus 11.9%.
- Q3 domestic same-store sales grew 25.4% (company-operated: 15.2%); year-to-date domestic same-store sales grew 22.5% (company-operated: 15.3%). Systemwide sales were $509.2 million for Q3 and $1.448 billion year-to-date.
- Q3 company-restaurant cost of sales was 76.0% of company sales, compared with 74.2% a year earlier; year-to-date it was 74.1% in both periods. Lower chicken-wing costs helped food costs, while COVID-related incentive pay increased labor costs.
- Operating cash flow was $46.8 million year-to-date, versus $28.6 million. Investing used $4.6 million, compared with $22.3 million; financing provided $5.1 million, versus $5.8 million used. Cash, cash equivalents and restricted cash totaled $68.5 million at quarter-end, including $48.2 million unrestricted cash.
Balance sheet, liquidity and capital returns
- Current assets were $82.3 million and current liabilities $57.4 million, implying working capital of approximately $24.9 million. Total assets were $219.7 million; total liabilities were $403.2 million and stockholders’ deficit was $183.5 million.
- Debt totaled $332.8 million before unamortized issuance costs: $316.8 million of fixed-rate 2018 Class A-2 notes and $16.0 million drawn on variable-funding notes. The $16.0 million borrowing was taken in Q1 as a precautionary liquidity measure. The company said it had maintained a leverage ratio below 5.0x and stopped principal payments on the Class A-2 notes beginning in Q2 under the debt terms.
- Management stated that available liquidity was expected to fund operations and growth for at least 12 months. It reported no supply-chain difficulties through the first three quarters, but cautioned that future disruption remained possible.
- After quarter-end, on October 30, the company refinanced the facility with $480 million of 2.84% fixed-rate notes, anticipated repayment in December 2027, and a revolving facility allowing up to $50 million in borrowings. Proceeds repaid the prior debt and were intended to strengthen liquidity and support general corporate purposes, including shareholder returns.
- The company paid $0.36 per share in dividends year-to-date. Subsequent to quarter-end, it announced a regular $0.14-per-share dividend and a $5.00-per-share special dividend, approximately $149 million in total.
Material changes, outlook and risks
- Management attributed growth to strong domestic same-store sales and 138 net franchise openings since the prior-year comparison. Off-premise dining was already about 80% of domestic sales before COVID-19, and digital sales were just over 40%; management said the business was positioned for the shift to carryout and delivery.
- Domestic dining rooms had been closed beginning March 16, with service focused on carryout and delivery. At quarter-end, about four international and one domestic restaurant were temporarily closed. International same-store sales remained pressured by dining-room restrictions, although the decline eased as locations reopened.
- There was no specific financial guidance in the filing. Management cautioned that COVID-19’s duration and effects were uncertain and could affect guest traffic, international sales, costs, restaurant openings, franchisee support needs and liquidity. Risks also include chicken-wing price volatility, labor and delivery costs, supply interruptions, reliance on digital and third-party delivery platforms, franchisee performance, and debt-service and refinancing obligations.
- Unusual items included $3.2 million of year-to-date gains on sales of company restaurants to franchisees, recorded in SG&A; $2.9 million of Q3 and $4.4 million of year-to-date tax benefits from excess tax benefits related to stock compensation; and a $1.0 million year-to-date donation to the National Restaurant Employee Relief Fund. Q3 tax benefit was $0.2 million.
- Management reported no material pending legal proceedings and considered ordinary-course claims unlikely to have a material adverse effect. Disclosure controls were assessed as effective, with no significant quarter-end changes in internal control over financial reporting.
Important facts for investors to verify
- Whether the elevated domestic same-store sales growth persists as pandemic conditions, restrictions and consumer behavior change.
- How international dining-room restrictions, reopening trends and temporary closures affect franchisee sales and royalty revenue.
- Whether restaurant-level labor, delivery and other operating costs offset sales growth, and how chicken-wing prices evolve.
- The completed refinancing’s final cash proceeds, debt-service burden and terms, and the effect of the announced special dividend on liquidity and leverage.
- How much reported earnings growth reflects ongoing operations versus restaurant-sale gains and stock-compensation-related tax benefits; compare GAAP results with the company’s non-GAAP Adjusted EBITDA.