Wingstop Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended December 30, 2017 (52 weeks). The filing also reports fourth-quarter results; FY2016 had 53 weeks, including a 14-week fourth quarter, so comparisons are not like-for-like. Wingstop is primarily a franchisor: 1,110 of its 1,133 restaurants were franchised at year-end.
Financial performance and key metrics
| Metric | FY2017 | FY2016 |
|---|---|---|
| Total revenue | $105.6 million (+15.5%) | $91.4 million |
| Royalty revenue and franchise fees | $68.5 million (+20.0%) | $57.1 million |
| Company-owned restaurant sales | $37.1 million (+8.1%) | $34.3 million |
| Operating income / margin | $36.3 million / 34.4% | $29.2 million / 32.0% |
| Net income | $27.3 million (+76.9%) | $15.4 million |
| Diluted EPS | $0.93 | $0.53 |
| Operating cash flow | $27.0 million | $23.3 million |
| Capital expenditures | $2.5 million | $2.1 million |
| Adjusted EBITDA | $41.5 million (+16.7%) | $35.6 million |
System-wide sales rose 11.8% to $1.087 billion, while domestic same-store sales growth slowed to 2.6% from 3.2%. Domestic AUV was $1.10 million versus $1.113 million. The system added 135 net restaurants and ended the year with 1,133 locations; domestic and international development commitments were 450 and 584, respectively.
Company-restaurant cost of sales increased to 77.5% of company-owned sales from 73.8%, reducing company-segment profit 16.0% to $4.6 million. Bone-in wing commodity prices averaged 18% higher; food, beverage and packaging costs rose to 40.0% of company sales from 37.4%, and labor costs rose to 23.9% from 22.4%. Franchise-segment profit increased 22.4% to $31.6 million.
Fourth quarter: Revenue was $28.3 million, operating income $9.4 million, net income $10.5 million and diluted EPS $0.36. The comparable FY2016 quarter reported $24.8 million, $8.3 million, $4.3 million and $0.15, respectively, but included an extra week.
Cash, debt and liquidity
Year-end cash was $4.1 million; working capital was negative $3.0 million. Gross debt was $133.8 million, down from $151.3 million, and shareholders’ deficit was $48.3 million. Operating cash flow less capital expenditures was approximately $24.5 million, before restaurant acquisitions and financing uses. The company reported compliance with its credit-facility covenants at year-end and said existing liquidity sources should support operations and growth.
In January 2018, Wingstop replaced its facility with a $250 million senior secured facility, including a $100 million term loan and $150 million revolver. It refinanced approximately $133.8 million of debt and paid a special dividend of approximately $95 million ($3.17 per share). The facility matures in 2023 and is secured by substantially all company assets.
Outlook, commentary and material risks
- Management sees long-term domestic potential of approximately 2,500 restaurants and expects growth through franchised openings, national advertising, digital ordering, flavor innovation and delivery. No specific annual earnings or opening guidance was provided.
- Delivery testing in Las Vegas generated an approximately 10% sales lift; management anticipated market-by-market expansion during 2018 and 2019 as provider coverage improved. Digital sales were 23% of sales in Q4 2017.
- Net income benefited from a provisional $5.5 million tax benefit from the U.S. Tax Cuts and Jobs Act and $2.5 million in excess share-based compensation tax benefits. The reported 12.3% effective tax rate therefore is not necessarily indicative of a recurring rate.
- Other unusual revenue support included higher vendor rebates, including a one-time payment under a new vendor agreement; the funding primarily supported national advertising. Advertising fund contributions were shifted from 2% to 3% of gross sales, reallocating the historical 4% advertising spend rather than increasing the stated total requirement.
- Key risks include volatile chicken-wing costs, franchisee execution and financing, competition and weaker same-store sales, food safety and supply-chain disruption, labor and regulatory changes, cybersecurity, and potential franchisor joint-employer liability. The filing notes that bone-in wings were about 31% of company-restaurant cost of sales; a hypothetical 10% price increase would add roughly $0.9 million to annual cost of sales.
- The company disclosed no material pending legal proceedings. It reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- How much of FY2017 net-income growth reflects the tax-law benefit and share-based compensation tax benefit, versus recurring operating improvement.
- Whether same-store sales and AUV stabilize or recover, and whether delivery expansion adds incremental sales after costs and fees.
- Whether elevated wing prices and labor costs continue to pressure company-owned restaurant margins and franchisee economics.
- How the January 2018 refinancing and special dividend affect leverage, interest expense, covenant headroom and future dividend capacity.
- How many signed domestic and international development commitments convert into opened restaurants; the filing cautions that some commitments are terminated.
- The expected impact of FY2018 revenue-recognition adoption, including the disclosed anticipated opening accumulated-deficit adjustment and changes to fee timing and advertising presentation.