Wingstop Inc. — Q3 2015 Form 10-Q
Business context and reporting period. The unaudited quarter ended September 26, 2015 (13 weeks), with year-to-date results covering 39 weeks. Wingstop operated a predominantly franchised restaurant system: 807 restaurants at quarter-end, including 788 franchised locations and 19 company-owned restaurants. The company completed its IPO in June 2015.
Key financial metrics
| Metric | Q3 2015 | Q3 2014 | 39 weeks 2015 | 39 weeks 2014 |
|---|---|---|---|---|
| Revenue | $19.1 million | $16.4 million | $57.4 million | $49.4 million |
| Operating income | $5.9 million | $4.0 million | $13.2 million | $14.8 million |
| Net income | $3.2 million | $2.0 million | $6.3 million | $7.5 million |
| Diluted EPS | $0.11 | $0.08 | $0.23 | $0.29 |
| Operating margin | 30.6% | 24.4% | 23.0% | 30.1% |
| Net margin | 16.6% | 12.1% | 11.0% | 15.2% |
| Operating cash flow | — | — | $7.9 million | $10.5 million |
Revenue and operating trends. Q3 revenue grew 16.5%; year-to-date revenue grew 16.2%. Franchise royalties and fees rose 22.3% in Q3 and 25.1% year to date, supported by restaurant expansion and domestic same-store sales growth. System-wide sales increased 19.7% in Q3 to $201.7 million; domestic same-store sales growth was 6.3%, down from 12.4% a year earlier. Q3 domestic company-owned same-store sales grew 8.7%. Year-to-date same-store growth was 8.7% system-wide and 9.3% at company-owned restaurants.
Q3 net income increased 59.2%, while year-to-date net income declined 15.7%. Year-to-date SG&A rose 49.6%, including a $3.3 million fee to terminate the Roark management agreement, public-company preparation costs, and growth-support expenses. Adjusted EBITDA, a non-GAAP measure, increased to $6.5 million in Q3 from $5.7 million and to $21.0 million year to date from $18.6 million.
Liquidity, debt and capital
- Cash and cash equivalents were $5.7 million at September 26, 2015, down from $9.7 million at fiscal year-end 2014. Cash flow from operations was $7.9 million; capital expenditures were $1.3 million.
- Total debt was $95.5 million, all long-term, with no revolver borrowings. The variable-rate secured facility had a $137.5 million total commitment and matures in March 2020. No scheduled principal payments were due until September 2019; the company reported compliance with financial covenants.
- The company received approximately $34.7 million of net IPO proceeds and used $32.0 million to prepay debt; it also made a further $5.0 million debt prepayment during Q3. The company paid a $48.0 million dividend during the first quarter, funded with facility proceeds and cash on hand. Stockholders’ deficit was $14.3 million at quarter-end.
- Management stated available liquidity was expected to be sufficient for operations, growth plans, and public-company costs for at least the next 12 months. No specific earnings or sales guidance was provided.
Material changes, commentary and risks
- Franchised restaurants increased to 788 from 659 a year earlier; total system restaurants rose to 807 from 678.
- Company-owned cost of sales rose to 71.3% of sales year to date from 68.5%. Management cited bone-in wing commodity rates up 28% year over year for the 39-week period; wing prices and availability remain a material exposure. A hypothetical 10% increase in wing costs would have added approximately $0.5 million to year-to-date cost of sales.
- Interest-rate exposure arises from floating-rate debt. The filing estimates a one-percentage-point rate change would affect annualized interest expense by approximately $1.0 million; interest-rate caps covered $66.9 million of notional debt.
- Ordinary-course legal claims were described as not expected to have a material adverse effect. The filing reported no material change in previously disclosed risk factors, no off-balance-sheet arrangements, and effective disclosure controls.
- Results may be affected by chicken and other input costs, labor costs, franchisee performance and recruitment, restaurant openings, competition, food safety, and execution in new and international markets. Forward-looking statements are subject to these and other risks.
Important facts for investors to verify
- Whether same-store sales growth and restaurant openings can sustain franchise royalty growth as comparable sales moderate.
- Whether wing commodity inflation can be offset through pricing, sourcing, or operating efficiencies without hurting demand or restaurant economics.
- How recurring SG&A and public-company costs compare with the one-time IPO, transaction, and management-agreement termination items.
- Debt servicing capacity, covenant headroom, variable-rate exposure, and the effect of the large dividend on balance-sheet flexibility.
- Reconciliation and comparability of Adjusted EBITDA to GAAP results; the filing cautions that this non-GAAP measure is not a substitute for net income or operating cash flow.