Wingstop Inc. — Form 10-Q Summary
Reporting period: 13 and 39 weeks ended September 24, 2016; comparable periods ended September 26, 2015. Amounts are in U.S. dollars. Fiscal 2016 has 53 weeks.
Business context
Wingstop franchises and operates chicken-wing restaurants. At quarter-end, it had 949 restaurants: 929 franchised (862 domestic and 67 international) and 20 company-operated. The system was approximately 98% franchised.
Financial performance and liquidity
| Metric | 13 weeks 2016 | 13 weeks 2015 | 39 weeks 2016 | 39 weeks 2015 |
|---|---|---|---|---|
| Total revenue | $21.8 million | $19.1 million | $66.6 million | $57.4 million |
| Operating income | $6.1 million | $5.9 million | $20.9 million | $13.2 million |
| Net income | $2.8 million | $3.2 million | $11.1 million | $6.3 million |
| Diluted EPS | $0.09 | $0.11 | $0.38 | $0.23 |
| Adjusted EBITDA (non-GAAP) | $8.3 million | $6.5 million | $25.5 million | $21.0 million |
Quarterly revenue rose 14.0%, but net income fell 13.2%. Calculated operating margin was approximately 27.9% versus 30.6% a year earlier; calculated net margin was 12.6% versus 16.6%. For the 39-week period, revenue rose 16.1%, net income 76.2%, and calculated operating margin was approximately 31.4% versus 23.0%.
Franchise royalties and fees drove most revenue growth: up 17.9% for the quarter and 21.4% year to date, supported by restaurant growth and domestic same-store sales growth of 4.1% and 3.9%, respectively. System-wide domestic same-store sales growth slowed from 6.3% to 4.1% quarterly and from 8.7% to 3.9% year to date. Domestic AUV was $1.126 million versus $1.122 million.
Company-owned restaurant cost of sales increased to 74.7% of sales for the quarter (70.7% prior year) and 73.0% year to date (71.3% prior year), primarily reflecting higher labor and other operating costs, staffing investments, and new-store ramp-up; wing commodity costs also affected the year-to-date comparison. Bone-in chicken wing prices decreased 1.9% year over year in the quarter but increased 1.4% year to date.
Operating cash flow was $15.1 million for 39 weeks, versus $7.9 million; capital expenditures were $1.5 million. Cash declined $6.9 million to $3.8 million, mainly reflecting financing outflows. Current assets were $11.4 million and current liabilities $15.9 million. Debt principal was $158.0 million, including $70.0 million term debt and $88.0 million revolver borrowings; the $110.0 million revolving facility therefore had $22.0 million undrawn. The reported balance-sheet debt carrying amount was approximately $157.4 million, including current and long-term portions.
Material changes, outlook, and risks
- In June 2016, Wingstop replaced its credit facility with a $180 million senior secured facility, maturing in June 2021. The company used proceeds and cash on hand to refinance debt and fund an $83.3 million shareholder dividend. Debt bears variable rates; the company reported covenant compliance at quarter-end.
- Quarterly SG&A included approximately $1.4 million of refinancing- and dividend-related costs; higher debt and rates increased quarterly interest expense 73.8%. Year-to-date SG&A was lower than the prior year partly because prior-year costs included the management-agreement termination fee and IPO-related expenses. Transaction costs were $2.3 million year to date in 2016.
- Management said available liquidity was expected to support operations and its growth strategy; the filing provides no numerical earnings or revenue guidance.
- Key disclosed risks include food and especially chicken-wing commodity prices, labor and wage inflation, variable-rate interest expense, franchisee and restaurant execution, food safety, competition, and the ability to recruit franchisees and sustain sales growth. A 10% increase in wing costs would have raised 39-week cost of sales by approximately $0.5 million; a one-percentage-point rate change would affect annualized interest expense by approximately $1.6 million.
- Ordinary-course legal matters were not expected by management to have a material adverse effect. The company reported no material change to its previously disclosed risk factors and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether domestic same-store sales and AUV trends strengthen or continue to moderate as the restaurant base expands.
- Whether company-owned restaurant labor and operating-cost pressures ease as the new restaurant ramps up and remodel investments proceed.
- Debt servicing capacity, variable-rate exposure, covenant headroom, and the effect of the large debt-funded shareholder dividend on liquidity.
- How much growth in year-to-date franchise revenue and profit reflects recurring royalties versus convention contributions, termination fees, and other items.
- The comparability and limitations of Adjusted EBITDA, which is a non-GAAP measure and excludes certain costs.