Wingstop Inc. — Q1 2018 Form 10-Q
Reporting period: Thirteen weeks ended March 31, 2018; comparison is with the thirteen weeks ended April 1, 2017. Results are unaudited. Prior-period figures were retrospectively adjusted for adoption of revenue-recognition guidance.
Business context
Wingstop franchises and operates chicken-wing restaurants. At quarter-end, it had 1,157 restaurants: 1,133 franchised locations, including 112 international restaurants, and 24 company-owned restaurants. The business is approximately 98% franchised.
Financial and operating highlights
| Metric | Q1 2018 | Prior period | Change |
|---|---|---|---|
| Total revenue | $37.4 million | $33.4 million | +11.9% |
| Operating income | $9.6 million | $8.5 million | +12.2% |
| Net income | $6.2 million | $6.3 million | -1.4% |
| Diluted EPS | $0.21 | $0.21 | Flat |
| Adjusted EBITDA (non-GAAP) | $12.5 million | $9.5 million | +31.0% |
| Operating cash flow | $9.5 million | $7.4 million | +$2.1 million |
Revenue gains reflected restaurant growth and strong comparable sales. System-wide sales rose 20.4% to $313.0 million; domestic same-store sales increased 9.5% system-wide and 12.5% at company-owned restaurants. Domestic restaurant AUV was $1.12 million, versus $1.10 million. The company opened 28 net restaurants during the period, including 22 domestic franchised and six international locations.
Operating margin was approximately 25.6%, compared with 25.5%; net margin was approximately 16.5%, compared with 18.7%. Company-owned restaurant cost of sales improved to 67.2% of sales from 77.2%, primarily reflecting an 11.3% decline in bone-in wing costs and improved labor and other cost leverage. SG&A increased 31.4%, including $1.5 million of refinancing- and dividend-related transaction costs and higher payroll and benefits. Interest expense rose 33.6% to $1.7 million.
Cash used in investing was $2.3 million, including a $1.9 million restaurant acquisition. Cash used in financing was $5.9 million, after approximately $94.8 million in dividends and net debt borrowings of $89.6 million. Cash, cash equivalents and restricted cash totaled $7.6 million at quarter-end; unrestricted cash on the balance sheet was $3.8 million.
At March 31, current assets were $14.8 million and current liabilities were $20.2 million. Debt was $223.4 million in principal outstanding ($222.8 million net of issuance costs on the balance sheet). The company reported a stockholders’ deficit of $146.5 million, following the special dividend. The filing states that the company complied with credit-facility covenants at quarter-end.
Material changes and unusual items
- On January 30, Wingstop refinanced its prior facility with a $100 million term loan and a revolving facility of up to $150 million, maturing in January 2023. Quarter-end balances were $98.8 million on the term loan and $124.6 million on the revolver, at a reported 3.63% interest rate.
- The refinancing funded a $92.7 million special dividend ($3.17 per share); the company also paid a $0.07 quarterly dividend. Total dividends paid in the quarter were $94.8 million. A further $0.07 quarterly dividend was approved for payment in June.
- Q1 revenue comparisons include accounting changes: adoption of ASC 606 changed the timing of franchise-fee recognition and gross presentation of advertising contributions and expenditures. Management also cited a prior-year one-time vendor payment that affected other revenue and advertising expense.
- One restaurant was acquired from a franchisee for $1.9 million. Two additional restaurant acquisitions, for $1.9 million and $2.2 million, were completed after quarter-end.
- Tax expense was $1.7 million and the effective tax rate was 21.2%, versus 13.4% a year earlier. The prior-year period benefited from $1.7 million of excess stock-compensation tax benefits, compared with $0.4 million in Q1 2018.
Outlook, risks and contingencies
The filing provides no specific numerical revenue, earnings or unit-growth guidance. Management said it believes liquidity and capital resources are sufficient to support operations and its growth strategy. The company expects adoption of the new lease standard in 2019 to materially increase reported assets and liabilities; its impact assessment was ongoing. It also expected to complete its analysis of the Tax Cuts and Jobs Act by Q4 2018, and noted recorded tax amounts could change.
Key risks include food and labor cost inflation, chicken-wing price volatility, supply interruptions, franchisee and restaurant execution, competition, food safety, regulation, litigation, and the ability to meet debt covenants. A hypothetical 10% increase in bone-in wing costs would have increased Q1 cost of sales by about $0.2 million. A one-percentage-point change in facility interest rates would affect annualized interest expense by about $2.2 million. Ordinary-course legal claims are generally insured; management did not expect them to materially affect the company. The filing reports no material pending legal proceedings and no material changes to previously disclosed risk factors.
Investor verification priorities
- Review the facility’s variable-rate exposure, repayment schedule, covenant headroom and refinancing-related terms.
- Assess the sustainability of 9.5% system-wide same-store sales growth and the impact of chicken-wing and labor costs.
- Separate recurring performance from the $1.5 million transaction costs, prior-year vendor-payment comparison and non-GAAP Adjusted EBITDA adjustments.
- Evaluate the effect of the special dividend and leverage on liquidity, future investment and ongoing quarterly dividends.
- Confirm the eventual effects of ASC 606, the upcoming lease-accounting standard and the final tax-reform analysis.