Wingstop Inc. — Q1 2019 Form 10-Q
Business context and reporting period. The filing covers the 13 weeks ended March 30, 2019, compared with the 13 weeks ended March 31, 2018. Wingstop operates and franchises chicken-wing restaurants. At quarter-end, its system comprised 1,273 restaurants: 1,244 franchised and 29 company-operated.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $48.1 million | $37.4 million | +28.5% |
| Operating income | $11.8 million | $9.6 million | +23.1% |
| Net income | $6.6 million | $6.2 million | +7.1% |
| Diluted EPS | $0.22 | $0.21 | + $0.01 |
| Operating cash flow | $9.6 million | $9.5 million | Relatively unchanged |
| Cash used in investing activities | $0.6 million | $2.3 million | Lower, primarily due to no comparable restaurant acquisition |
| Cash used in financing activities | $3.2 million | $5.9 million | Lower, with prior-year special dividend and debt refinancing affecting comparison |
- System-wide sales were $362.4 million, up 15.8%. System-wide domestic same-store sales growth was 7.1%, versus 9.5%; company-owned domestic same-store sales growth was 4.7%, versus 12.5%. Domestic AUV increased to $1.156 million from $1.120 million.
- Franchise-segment revenue increased 30.9% to $34.5 million; company-segment revenue increased 22.8% to $13.5 million. Franchise segment profit rose 10.3% to $9.3 million, while company segment profit fell 4.7% to $2.5 million.
- Operating margin was approximately 24.5%, versus 25.6%; net margin was approximately 13.7%, versus 16.5%. These are calculated from reported revenue and income.
- At March 30, cash and cash equivalents were $13.6 million, with additional restricted cash and advertising-fund assets. Current assets were $34.4 million and current liabilities $29.0 million. Debt carrying value was approximately $312.1 million, including current debt; the notes had $320 million principal outstanding. Stockholders’ deficit was $220.5 million.
- Q1 dividends paid totaled $2.6 million ($0.09 per share). A further $0.09-per-share dividend was declared after quarter-end.
Material changes and management commentary
- Revenue growth reflected 111 net franchise restaurant openings since the prior-year period, 7.1% domestic same-store sales growth, higher franchise termination fees, and increased advertising-fund contributions. The domestic Ad Fund contribution rate increased from 3% to 4% of gross sales in 2019; related advertising revenue and expense are largely offsetting.
- Company restaurant cost of sales rose to 72.0% of company-owned sales from 67.2%. Management cited a 10% increase in bone-in chicken-wing costs, higher labor and other operating costs, and the higher Ad Fund contribution rate. Company-owned same-store sales growth partly offset these pressures.
- Interest expense increased to $4.4 million from $1.7 million, primarily due to higher average debt and interest costs. Pretax income declined 6.0%, but net income increased as the effective tax rate fell to 10.3% from 21.2%, including $1.2 million of excess tax benefits from stock-based compensation.
- Management stated that available liquidity was expected to be sufficient for operations and growth for at least the next 12 months. No specific numerical full-year guidance was provided.
- The company’s $320 million securitized notes bear fixed interest at 4.97%, amortize at 1% annually, and have an anticipated repayment date in December 2023. A variable funding facility permits up to $20 million in borrowings; $5 million of letters of credit were outstanding and there were no borrowings. The company reported compliance with debt covenants.
- Adoption of lease accounting standard ASC 842 resulted in an approximately $8.5 million right-of-use asset and $10.3 million of lease liabilities at adoption, with no material income-statement or cash-flow impact. Quarter-end operating lease liabilities totaled $9.9 million.
Risks, contingencies, and unusual items
- Management highlighted exposure to food, labor, energy, and construction-cost inflation. Bone-in wings have no established fixed-price market; a hypothetical 10% increase in wing costs would have increased Q1 cost of sales by approximately $0.3 million.
- Other cited risks include franchisee performance, growth execution, food safety, supply-chain disruptions, competition, cybersecurity and digital-commerce reliance, regulation, litigation, and the ability to service securitized debt.
- Ordinary-course employment and premises-liability claims are generally insured; management did not expect them to materially affect financial position, results, or cash flows. The filing reported no material pending legal proceedings and no material changes to previously disclosed risk factors.
- The prior-year comparison included $1.5 million in refinancing and special-dividend transaction costs. The 2018 refinancing also funded a special cash dividend of approximately $89.7 million; Q1 2019 financing cash use included only the regular quarterly dividend.
Important facts for investors to verify
- Whether same-store sales and restaurant growth remain strong, particularly as domestic same-store sales growth moderated year over year.
- Whether elevated chicken-wing, labor, and operating costs pressure company-owned restaurant profitability and whether pricing can offset those costs.
- Debt-service capacity and refinancing risk around the notes’ December 2023 anticipated repayment date, including the impact of the securitization’s covenants and collateral structure.
- How much reported revenue growth reflects underlying royalties and restaurant sales versus the increased, largely pass-through Ad Fund contribution rate.
- Whether cash generation supports ongoing growth investment and dividends; management’s liquidity statement is an expectation, not a guarantee.