Wingstop Inc. — Q2 2016 Form 10-Q
Business context and period. The unaudited quarter comprised 13 weeks ended June 25, 2016; year-to-date (YTD) results cover 26 weeks. Wingstop franchises and operates chicken-wing restaurants. At quarter-end, its system included 914 restaurants: 894 franchised and 20 company-owned; approximately 98% of the system was franchised.
Financial and operating performance
| Metric | Q2 2016 | Q2 2015 | YTD 2016 | YTD 2015 |
|---|---|---|---|---|
| Total revenue | $22.7m | $19.2m | $44.8m | $38.3m |
| Operating income | $7.2m | $2.4m | $14.9m | $7.4m |
| Net income | $4.1m | $0.6m | $8.4m | $3.1m |
| Diluted EPS | $0.14 | $0.02 | $0.29 | $0.12 |
| Adjusted EBITDA (non-GAAP) | $8.3m | $7.2m | $17.2m | $14.4m |
| Operating margin (calculated) | 31.9% | 12.5% | 33.2% | 19.2% |
- Q2 revenue increased 18.2%; royalty revenue and franchise fees rose 25.5%, while company-owned restaurant sales increased 7.5%. YTD revenue rose 17.1%.
- Q2 system-wide domestic same-store sales growth was 3.1%, versus 9.0% a year earlier; company-owned domestic same-store sales growth was 6.8%, versus 9.5%. YTD rates were 3.8% and 7.9%, respectively, compared with 9.9% and 9.5%.
- System-wide sales were $235.3m in Q2 and $471.1m YTD. Domestic AUV was $1.123m, compared with $1.110m a year earlier.
- Franchise growth contributed materially: 128 net franchise openings since June 27, 2015. The system had 914 restaurants versus 785 a year earlier. Q2 included $0.9m of vendor contributions for a franchisee convention; the convention occurs every 18 months.
Cash, debt and liquidity
- YTD operating cash flow was $9.3m, versus $0.9m in 2015; capital expenditures were $1.0m, versus $0.3m. Financing cash outflow was $9.0m, including $10.0m of debt principal payments. Cash declined $0.7m to $10.0m.
- At June 25, cash was $10.0m, current assets $16.3m and current liabilities $9.6m. Long-term debt, net, was $85.1m; the term facility balance was $85.5m and bore interest at 3.13%. The company had no scheduled principal payments before March 2020 under the facility then in effect and reported compliance with its covenants.
- On June 30, after quarter-end, Wingstop refinanced that facility with a $70m term loan and up to $110m revolving facility, maturing in June 2021. Proceeds and cash on hand were used to refinance $85.5m of debt and pay an $83.2m shareholder dividend. The board declared a separate special dividend of $2.90 per share, payable July 15 to holders of record July 12.
- Management said available liquidity was expected to fund operations and the growth strategy. The filing reports no off-balance-sheet arrangements.
Material changes, commentary and risks
- Profitability improved substantially year over year, helped by higher franchise revenue and lower SG&A and interest expense. Q2 SG&A fell 19.6%, partly because the prior-year period included a $3.3m management-agreement termination fee and IPO-related costs. Current-period expenses included convention costs and refinancing-related costs.
- Company-owned restaurant cost of sales rose to 73.5% of sales in Q2 from 70.5%; YTD it was 72.1% versus 71.7%. Bone-in chicken wing commodity rates increased 7.8% in Q2 and 2.9% YTD. Labor, staffing, rent and new-store pre-opening expenses also pressured costs. Company-segment profit fell 16.1% in Q2 but increased 5.2% YTD.
- Management identified food and supply costs—especially chicken wings—labor costs, competition, franchisee execution, food safety, growth and international expansion, and variable-rate debt as risks. A 10% increase in wing costs would have raised YTD cost of sales by approximately $0.4m; a one-percentage-point interest-rate change would affect annualized interest expense by about $0.9m. Interest-rate caps covered specified portions of debt through December 2016 and March 2018.
- No quantified revenue, earnings or same-store-sales guidance is provided. Management’s forward-looking statements are subject to risks and actual results may differ. Ordinary-course legal claims were described as generally insured and not expected to materially affect the company; no material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Post-quarter refinancing terms, revolving-facility availability, interest costs, covenant headroom and leverage after the $83.2m dividend and $2.90-per-share distribution.
- Whether lower same-store-sales growth persists and how new restaurant openings translate into franchise royalties and system-wide sales.
- Whether higher chicken, labor and operating costs can be offset by pricing, vendor terms or productivity without weakening sales or margins.
- The sustainability of reported earnings growth, including the effects of convention contributions, prior-year one-time charges and current transaction costs; Adjusted EBITDA is a non-GAAP measure and is not a substitute for cash flow or net income.