Wingstop Inc. — Q2 2019 Form 10-Q
Reporting period: Thirteen weeks ended June 29, 2019; year-to-date comparisons cover the twenty-six weeks ended June 29, 2019. Comparative periods ended June 30, 2018. Wingstop is primarily a franchisor, with 1,274 franchised restaurants and 29 company-operated restaurants at quarter-end.
Financial performance
- Q2 revenue: $48.6 million, up 31.1%. Royalty revenue, franchise fees and other were $21.2 million; advertising fees and related income were $13.5 million; company restaurant sales were $13.9 million.
- Q2 profit: Operating income was $10.3 million, up 3.6%; net income was $4.9 million, down 28.1%; diluted EPS was $0.17 versus $0.23. Operating margin was approximately 21.2% versus 26.8%; net margin was approximately 10.1% versus 18.5%.
- First half: Revenue was $96.6 million, up 29.8%; operating income was $22.1 million, up 13.2%; net income was $11.5 million, down 11.4%; diluted EPS was $0.39 versus $0.44. Operating margin was approximately 22.8% versus 26.2%; net margin was approximately 11.9% versus 17.5%.
- Cash flow, first half: Operating cash flow was $10.5 million, down from $17.5 million, primarily reflecting timing of working-capital changes, including tax payments. Capital spending was $1.4 million; cash used in financing was $6.8 million. Cash, cash equivalents and restricted cash ended at $23.2 million, including $17.1 million unrestricted cash.
- Debt and liquidity: Principal outstanding on fixed-rate securitized notes was $319.2 million, bearing 4.97% interest, with anticipated repayment in December 2023. The $20 million variable funding facility had no borrowings and $4.0 million of letters of credit outstanding. The company reported compliance with debt covenants and said available resources should fund operations and growth for at least twelve months.
- Balance sheet: Total assets were $150.0 million and total liabilities were $366.4 million at June 29, 2019; stockholders’ deficit was $216.4 million. Current assets were $33.4 million versus current liabilities of $23.9 million, which include restricted advertising-fund balances.
Performance drivers and material changes
- System-wide sales rose 21.9% in Q2 and 18.8% in the first half. Domestic same-store sales increased 12.8% in Q2 and 9.9% year to date; domestic AUV was $1.189 million, compared with $1.124 million.
- The system had 1,303 restaurants, up from 1,188 a year earlier. Management attributed royalty growth to net franchise openings and same-store sales growth.
- Advertising-fund contributions increased from 3% to 4% of gross sales in 2019. This lifted advertising revenue and expense, which largely offset each other and do not materially contribute to net income.
- Higher costs pressured company-operated restaurant profitability: cost of sales reached 76.1% of company restaurant sales in Q2 versus 67.5%. Management cited a 32.1% year-over-year increase in bone-in chicken wing costs, higher advertising-fund contributions and delivery fees. Company-segment profit fell 24.9% in Q2 and 15.0% in the first half.
- Interest expense increased 83.6% in Q2 and 113.6% in the first half, primarily because of higher average debt balances and applicable interest rates compared with the prior-year periods. This weighed on net income despite revenue and operating-income growth.
Outlook, risks and notable items
- The filing provides no quantified revenue, earnings or same-store-sales guidance. Management expects liquidity to be sufficient for at least the next twelve months.
- Management cited risks including food and labor cost inflation, supply interruptions, franchisee performance, food safety, competition, digital and cybersecurity risks, and the ability to service or refinance debt. Bone-in wings are not covered by established fixed-price markets; management estimated a 10% price increase would add approximately $0.6 million to first-half company restaurant cost of sales.
- On June 25, the company agreed to acquire an office building for $18.3 million, expected to close in Q3 and be funded primarily with cash. On July 10, it agreed to acquire a Dallas-area franchised restaurant for $1.2 million, also expected to close in Q3.
- The board declared a subsequent quarterly dividend of $0.11 per share, approximately $3.2 million, payable September 13, 2019. The company adopted lease accounting in 2019, recording approximately $8.5 million in right-of-use assets and $10.3 million in lease liabilities at adoption, with no material impact on operations or cash flows.
- Management said ordinary-course legal claims are not expected to have a material adverse impact; the filing reported no material pending legal proceedings and no material changes to previously disclosed risk factors.
Key facts for investors to verify
- Whether strong same-store-sales growth and restaurant openings continue, and how much revenue growth reflects the higher advertising-fund contribution rate.
- Whether chicken-wing costs, delivery fees and labor investments continue to compress company-operated margins, and whether menu pricing offsets those pressures.
- Debt-service capacity and refinancing exposure, including the December 2023 anticipated repayment date and covenant requirements.
- Cash availability after the planned $18.3 million headquarters building purchase, the restaurant acquisition, dividends and other investment needs.
- How recurring cash generation compares with reported earnings, given the first-half decline in operating cash flow and the company’s substantial stockholders’ deficit.