Wingstop Inc. — Q1 2024 Form 10-Q
Business context and period: The filing covers the 13 weeks ended March 30, 2024, compared with the 13 weeks ended April 1, 2023. Wingstop operates a predominantly franchised restaurant system: 2,279 locations at quarter-end, approximately 98% franchised, including 305 international franchised locations.
Financial and operating performance
- Revenue: $145.8 million, up 34.1%. Royalty revenue, franchise fees and other revenue rose 39.2% to $67.1 million; advertising fees rose 33.9% to $50.1 million; company-owned restaurant sales rose 23.7% to $28.5 million.
- System performance: System-wide sales were $1.124 billion, up 36.8%; domestic same-store sales increased 21.6%, and domestic AUV rose to $1.918 million from $1.662 million. Digital sales were 68.3% of system-wide sales. The company added 65 net restaurants, ending the quarter with 2,279.
- Profitability: Operating income was $42.7 million, up 66.5%; net income was $28.7 million, up 83.5%. Diluted EPS was $0.98 versus $0.52. Operating margin was approximately 29.3% versus 23.6%, and net margin approximately 19.7% versus 14.4%.
- Non-GAAP measures: Adjusted EBITDA was $50.3 million, up 45.3%. Adjusted net income was $28.7 million versus $17.8 million, and adjusted diluted EPS was $0.98 versus $0.59. The prior-year adjusted figures included $2.8 million of consulting fees excluded from the non-GAAP measures.
- Costs: Company-owned restaurant cost of sales was $21.3 million, or 74.5% of company-owned sales, compared with 72.4%. Food, beverage and packaging costs increased to 34.7% of company-owned sales from 32.4%, primarily reflecting a 34.8% increase in bone-in wing costs. Labor costs improved as a share of sales, while other restaurant operating expenses increased as a share.
- Cash flow and investment: Operating cash flow was $44.7 million versus $35.7 million. Investing cash outflow was $11.7 million, including $11.2 million of property and equipment purchases, compared with $4.3 million of investing outflow in the prior period. Financing cash outflow was $9.6 million, including $6.6 million of dividends paid.
- Liquidity and debt: Cash and cash equivalents were $108.3 million; total cash, cash equivalents and restricted cash were $143.1 million. Debt was $712.8 million net of issuance costs, or $720.9 million before those costs. The debt is predominantly fixed-rate; no borrowings were outstanding on the $200 million variable funding facility. The company reported a leverage ratio below 5.0x and classified the notes as long-term, with principal payments suspended under the debt terms.
- Capital returns: The company paid a $0.22-per-share quarterly dividend. A further $0.22 dividend was declared after quarter-end. No shares were repurchased during the quarter; $125 million remained under the $250 million repurchase authorization.
Material changes and management commentary
Revenue and earnings grew substantially, supported by strong domestic same-store sales, new restaurant development and higher system sales. Company-owned same-store sales growth slowed to 6.2% from 10.3%, while domestic system same-store sales increased to 21.6% from 20.1%. Management attributed higher food costs principally to the prior-year comparison benefiting from significant spot-market deflation in bone-in wings. SG&A rose 6.5%, with growth-related headcount and professional fees partly offset by the absence of $2.8 million in prior-year non-recurring consulting costs.
Outlook, risks and unusual items
- Outlook: The filing provides no specific revenue, earnings or unit-growth guidance. Management expects operating cash flows and available borrowing capacity to cover capital expenditure, working-capital and debt-service needs for at least the next 12 months and the foreseeable future.
- Cost and operating risks: Wing prices are volatile and lack established fixed-price markets; a hypothetical 10% increase in bone-in wing costs would have increased quarterly cost of sales by approximately $0.4 million. Other disclosed risks include food and supply availability, labor costs, franchisee performance, competition, digital and cybersecurity risks, and the ability to expand successfully.
- Lease commitment: The company signed a corporate office lease with $66.9 million of undiscounted fixed payments over an initial 13.3-year term. It had not commenced or been recognized on the balance sheet at quarter-end; commencement was expected in Q2 2024.
- Subsequent event: After quarter-end, Wingstop acquired one franchisee-operated restaurant for $3.3 million in cash; purchase accounting was still in progress.
- Contingencies and controls: The company reported ordinary-course employment- and franchise-related claims and did not believe pending proceedings would have a material adverse effect. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether domestic same-store sales growth and new restaurant openings remain strong, and how much growth comes from sales versus unit expansion.
- Whether bone-in chicken wing inflation persists and how it affects company-owned restaurant margins and franchise economics.
- Debt terms, leverage tests, the timing of principal repayment, and the availability and conditions of the unused variable funding facility.
- The commencement and balance-sheet impact of the office lease, alongside technology-related capital spending.
- Future dividend and repurchase decisions, given cash needs, debt restrictions and the remaining repurchase authorization.