Wingstop Inc. — Q3 2017 Form 10-Q
Reporting period: Thirteen and thirty-nine weeks ended September 30, 2017; comparatives are the periods ended September 24, 2016. Wingstop operates and franchises restaurants. At quarter-end, it had 1,088 restaurants: 1,065 franchised and 23 company-operated.
Financial performance
| Metric | Q3 2017 | Q3 2016 | 39 weeks 2017 | 39 weeks 2016 |
|---|---|---|---|---|
| Revenue | $26.0m | $21.8m | $77.3m | $66.6m |
| Operating income | $9.2m | $6.1m | $26.9m | $20.9m |
| Net income | $5.0m | $2.8m | $16.8m | $11.1m |
| Diluted EPS | $0.17 | $0.09 | $0.57 | $0.38 |
| Adjusted EBITDA | $10.4m | $8.3m | $30.2m | $25.5m |
- Q3 revenue rose 19.3%, operating income 51.0%, and net income 82.1% year over year. For the 39-week period, increases were 16.0%, 28.3%, and 51.1%, respectively.
- Approximate operating margin was 35.3% in Q3 (27.9% prior year) and 34.8% year to date (31.4% prior year); approximate net margin was 19.3% and 21.7%, respectively, versus 12.6% and 16.7%.
- System-wide sales were $274.0m in Q3 and $802.4m year to date. Domestic same-store sales growth was 4.1% in Q3 and 1.7% year to date; domestic AUV was $1.102m versus $1.126m in the prior-year comparison.
- Q3 royalty and franchise-fee revenue increased 19.7%, supported by restaurant growth and same-store sales. Company-owned restaurant sales rose 18.7%, partly reflecting two restaurants acquired from a franchisee.
- Company-owned cost of sales increased to 80.9% of sales in Q3 from 74.7%; year to date it was 78.7% versus 73.0%. Bone-in wing commodity rates rose 41.3% in Q3 and 20.5% year to date, pressuring company-segment profit. Year-to-date labor costs also rose as a share of sales, reflecting wage rates and staffing investments.
Cash flow, debt and liquidity
- For the 39 weeks, operating cash flow was $18.0m (prior year $16.1m); capital expenditures were $1.8m, and the $3.9m restaurant acquisition contributed to $5.8m of investing cash use. Financing used $11.4m, including $14.1m of debt repayments, $3.5m of borrowings and $2.0m of dividends. Cash increased $0.8m to $4.6m.
- At September 30, cash was $4.6m, current assets $17.2m and current liabilities $19.3m. Current liabilities include $4.7m of restricted advertising-fund liabilities, matched by restricted assets.
- Credit-facility borrowings were $140.6m: $65.6m term loan and $75.0m revolving facility. The balance sheet reports debt net of issuance costs of $140.2m, including $3.5m current. The facility bears variable interest; the reported rate was 3.33%. Approximately $35m of revolving capacity remained before any borrowing conditions. Debt matures in June 2021, with a substantial scheduled payment in fiscal 2021. The company reported covenant compliance.
- The board declared a $0.07-per-share quarterly dividend, paid in September; another $0.07 dividend was declared after quarter-end, payable in December.
Changes, outlook and risks
- Franchised restaurants increased from 929 to 1,065 year over year; total system restaurants grew from 949 to 1,088. Franchise-segment profit increased, while company-segment profit declined 25.0% in Q3 and 26.8% year to date, principally reflecting higher wing costs and, year to date, labor pressures.
- Year-to-date revenue benefited from a vendor agreement that included a one-time payment based on prior-year system purchasing volumes, primarily intended to support national advertising. The company also made $4.8m of discretionary advertising-fund contributions year to date, versus $1.7m in the prior-year period.
- Year-to-date income tax expense included $2.5m of excess stock-compensation tax benefits under a newly adopted accounting standard, lowering the effective tax rate to 26.8% from 37.6%. This benefit contributed to net income growth.
- No numerical earnings or sales guidance was provided. Management said existing liquidity sources were expected to support operations and its growth strategy. It expects to adopt the new revenue standard in 2018; most recurring royalties and restaurant revenue were not expected to change, but franchise-fee timing and gross presentation of advertising-fund contributions and spending were expected to change. Management expected those advertising amounts to largely offset in earnings.
- Key risks include volatile chicken-wing commodity prices, labor cost increases, food safety, franchisee and supplier performance, competition, expansion execution, variable interest rates, and compliance with debt covenants. A hypothetical 10% increase in wing costs would have increased year-to-date company-owned cost of sales by about $0.7m; a one-percentage-point interest-rate change would affect annualized interest expense by about $1.4m.
- Ordinary-course employment and premises-liability matters were disclosed; management did not expect their resolution to materially affect the company. The company anticipated becoming a large accelerated filer after fiscal 2017, bringing additional reporting and internal-control requirements.
Important facts for investors to verify
- Whether wing prices and labor costs continue to pressure company-operated margins and segment profit.
- How much revenue and earnings growth is recurring versus attributable to restaurant additions, vendor-related payments and tax benefits.
- Comparable-sales trends, AUV, and the pace and economics of franchise openings.
- Debt repayment, variable-rate exposure, remaining revolver availability and covenant headroom.
- The eventual reported impact of revenue-standard adoption, including advertising-fund presentation and franchise-fee recognition.