Wingstop Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 26, 2020 (52 weeks), compared with the fiscal year ended December 28, 2019. This is an annual report, not a standalone fourth-quarter filing; the filing provides limited Q4-specific information.
Business context
Wingstop is primarily a franchisor: at year-end, 1,506 of its 1,538 restaurants were franchised, and 32 were company-operated. It earns royalties and fees from franchisees, collects advertising-fund contributions, and operates a small number of restaurants directly. Management reported one operating and reporting segment following a reassessment in Q2 2020.
Financial and operating performance
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Total revenue | $248.8 million | $199.7 million | +24.6% |
| Operating income | $57.4 million | $42.9 million | +33.8% |
| Net income | $23.3 million | $20.5 million | +13.8% |
| Diluted EPS | $0.78 | $0.69 | +13.0% |
| Adjusted EBITDA | $71.9 million | $57.0 million | +26.1% |
| Adjusted net income / diluted EPS | $32.5 million / $1.09 | $21.7 million / $0.73 | +49.7% / +49.3% |
| Cash from operating activities | $65.5 million | $38.6 million | +69.8% |
System-wide sales rose 28.8% to approximately $1.95 billion; this includes franchisee sales and is not Wingstop’s reported revenue. Domestic same-store sales increased 21.4% (company-operated domestic same-store sales rose 14.2%). Domestic average unit volume reached approximately $1.489 million, up from $1.246 million. The system added 153 net restaurants, ending the year with 1,538 locations.
Calculated from reported figures, operating margin was approximately 23.1%, versus 21.5% in FY2019; GAAP net margin was approximately 9.4%, versus 10.3%. The lower net margin despite higher operating income reflects a $13.7 million refinancing and debt-extinguishment charge in 2020. Adjusted results exclude specified items and are non-GAAP measures.
Company-owned restaurant cost of sales was 74.7% of company-owned sales, compared with 74.1% a year earlier. Food, beverage and packaging costs improved to 35.9% from 36.6%, while labor costs rose to 24.3% from 22.7%, principally due to COVID-related incentive pay. These restaurant cost ratios apply to company-operated restaurants, not the full franchised system.
Cash, debt and liquidity
- Cash and cash equivalents were $40.9 million at year-end, versus $12.8 million; cash, cash equivalents and restricted cash totaled $59.3 million. Operating cash flow was $65.5 million; investing cash outflow was $8.0 million and financing cash outflow was $19.4 million.
- Gross debt was $480.0 million, compared with $320.8 million of reported debt principal at FY2019 year-end. The October 2020 refinancing replaced the prior facility with $480 million of fixed-rate notes bearing 2.84% interest, generally amortizing at 1% annually, with an anticipated repayment date in December 2027. Debt issuance costs reduced the balance-sheet carrying amount.
- The refinancing also provided a $50 million variable-funding facility; no borrowings were outstanding at year-end, and $4.9 million of letters of credit were outstanding. The company reported compliance with financial covenants.
- Current assets were $72.6 million and current liabilities were $50.5 million, including matching restricted advertising-fund assets and liabilities. Management said liquidity sources should support operations and growth for at least the next 12 months.
Material changes, outlook and risks
- COVID-19: Domestic dining rooms closed in March 2020, shifting sales toward carryout, delivery and digital orders. Management said the domestic business was well positioned for off-premise dining and domestic same-store sales grew; international sales were pressured by dining-room closures and temporary restaurant closures. Digital sales were 62.5% of sales in Q4 2020, versus 38.2% in Q4 2019.
- Refinancing and distributions: The company refinanced its securitized debt in October, paying a $5.00-per-share special dividend totaling approximately $148.4 million in December. Regular dividends totaled $14.8 million for FY2020. The board declared a further $0.14-per-share quarterly dividend in February 2021. Future dividends remain discretionary and subject to capital availability and debt restrictions.
- Unusual and adjusted items: The debt refinancing generated a $13.7 million GAAP loss, including a write-off of prior financing costs and make-whole interest. Adjusted EBITDA and adjusted net income also exclude consulting costs and the gain on refranchising seven company restaurants; adjusted measures are not substitutes for GAAP results or cash flow.
- Outlook: The filing provides no specific numerical revenue, earnings, unit-opening or same-store-sales guidance. Management’s stated strategy is to grow through new franchised restaurants, same-store sales, brand awareness, innovation and international expansion; its long-term vision includes more than 3,000 U.S. restaurants and more than 3,000 international restaurants.
- Key risks: Management highlights uncertainty around the duration and effects of COVID-19, volatile chicken-wing costs, dependence on franchisee performance and access to development financing, supply-chain concentration, competition, labor and wage costs, delivery and digital-platform reliance, cybersecurity, and debt covenants/refinancing. Bone-in chicken represented about 65% of restaurant purchases; a hypothetical 10% increase in bone-in wing costs would have raised FY2020 cost of sales by approximately $1.3 million.
- The company reported no material pending legal proceedings to its knowledge. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting. The audit identified royalty revenue and advertising fees as a critical audit matter because they depend on franchisee-reported sales.
Important facts for investors to verify
- How much of FY2020 sales and same-store growth persists after pandemic-related shifts and unusually strong domestic demand.
- Whether franchisee development commitments convert into openings, and whether new locations sustain reported AUV and franchisee-return targets.
- Chicken-wing prices, labor costs, delivery fees and their effects on restaurant economics and franchisee health.
- The company’s ability to service and refinance $480 million of securitized debt, maintain covenant compliance, and continue dividends.
- The composition and sustainability of adjusted earnings growth relative to GAAP net income, including the impact of refinancing costs and other excluded items.