Wingstop Inc. — Q1 2020 Form 10-Q
Reporting period: Thirteen weeks ended March 28, 2020; comparisons are with the thirteen weeks ended March 30, 2019. Wingstop is predominantly a franchisor, with 1,381 franchised restaurants and 32 company-operated restaurants at quarter-end.
Financial performance
| Metric | Q1 2020 | Prior year | Change |
|---|---|---|---|
| Total revenue | $55.4 million | $48.1 million | +15.4% |
| Operating income | $13.5 million | $11.8 million | +14.4% |
| Net income | $8.1 million | $6.6 million | +22.6% |
| Diluted EPS | $0.27 | $0.22 | Up $0.05 |
| Operating cash flow | $12.5 million | $9.6 million | Up $2.9 million |
| Capital expenditures | $1.6 million | $0.6 million | Up $0.9 million |
- Revenue growth reflected 137 net franchise openings since the prior-year quarter, domestic same-store sales growth of 9.9%, and increased company-owned restaurant sales. System-wide sales rose 18.6% to $429.9 million.
- Operating margin was approximately 24.3%, versus 24.5% a year earlier; net margin was approximately 14.6%, versus 13.7%. Company-owned restaurant cost of sales increased to 73.4% of sales from 72.0%, including higher packaging costs from delivery/takeout and higher labor costs, partly associated with COVID-related incentive pay.
- Adjusted EBITDA, a non-GAAP measure, was $16.4 million, up from $13.9 million. The company cautions that this measure is not a substitute for GAAP results or cash flow.
- Cash and cash equivalents were $31.0 million at quarter-end; total cash, cash equivalents, and restricted cash were $44.3 million. Operating cash flow was offset in part by $3.2 million in dividends and other financing activity.
- Total debt was $332.8 million before $6.3 million of unamortized issuance costs; the balance-sheet carrying amount was $326.5 million. This included $316.8 million of 4.97% fixed-rate notes and $16.0 million drawn under variable funding notes. The company also had $4.0 million of letters of credit outstanding.
- Effective tax rate was 13.2%, compared with 10.3%. Both periods included $1.2 million in tax benefits from excess stock-based compensation tax benefits.
Changes and notable items
- Domestic same-store sales growth was 9.9%, compared with 7.1%; company-owned domestic same-store sales growth was 6.2%, compared with 4.7%. The system had 1,413 restaurants, up from 1,273 a year earlier.
- On March 16, Wingstop closed domestic dining rooms and shifted to carryout and delivery. Management reported that carryout and delivery had represented about 80% of domestic sales before the pandemic, and digital sales were just over 40%.
- Management reported increased domestic same-store sales growth in the last two weeks of March through the first four weeks of fiscal Q2, citing the shift to off-premise dining and delivery promotions. No percentage was provided. International same-store sales declined overall amid dining-room closures and temporary restaurant closures.
- The company borrowed $16 million under its variable funding facility as a precaution to strengthen liquidity. With its leverage ratio below 5.0x, it said it would cease principal payments on the Class A-2 notes beginning in Q2, subject to the debt terms.
- After quarter-end, the board declared a $0.11-per-share dividend, payable June 25, 2020. The company also agreed to sell seven company-owned restaurants for approximately $4.8 million, subject to customary closing conditions and expected to close in Q2.
Outlook, risks, and contingencies
- Wingstop stated that it believed available liquidity would support operations and its growth strategy for at least the next 12 months. It provided no quantitative earnings, sales, or same-store-sales guidance.
- Management said the pandemic’s ultimate impact and duration were not determinable. Risks identified include continued disruption to guest traffic, international sales, restaurant openings, operating costs, franchisee royalty payments, staffing, food supply, and access to liquidity.
- The company reported no first-quarter supply-chain difficulties but cautioned that future challenges could occur. It also highlighted exposure to fresh bone-in chicken wing prices; a hypothetical 10% price increase would have raised quarterly cost of sales by approximately $0.3 million.
- Ordinary-course legal claims were described as generally insured and not expected by management to materially affect the company. The filing reported no material pending legal proceedings.
Important facts for investors to verify
- Whether the reported improvement in domestic sales persisted after the first four weeks of Q2, and how international performance and temporary closures evolved.
- Whether franchisees continued operating and paying royalties, and whether COVID-related support or payment relief became necessary.
- Cash generation, availability under the $20 million variable funding facility, debt service and covenant compliance, and the sustainability of quarterly dividends.
- The effect of food, labor, packaging, and delivery costs on company-owned restaurant margins.
- Completion and proceeds of the planned seven-restaurant refranchising transactions.