Wingstop Inc. — Q1 2017 Form 10-Q
Reporting period: Thirteen weeks ended April 1, 2017; comparable period ended March 26, 2016. Wingstop operates and franchises chicken-wing restaurants. At quarter-end, its system had 1,031 restaurants: 1,010 franchised and 21 company-operated.
Financial results
| Metric | Q1 2017 | Comparable period | Change |
|---|---|---|---|
| Total revenue | $26.6 million | $22.1 million | +20.4% |
| Royalty revenue and franchise fees | $18.0 million | $13.5 million | +33.5% |
| Company-owned restaurant sales | $8.5 million | $8.6 million | -0.3% |
| Operating income | $9.0 million | $7.6 million | +17.4% |
| Net income | $6.5 million | $4.3 million | +52.2% |
| Diluted EPS | $0.22 | $0.15 | — |
| Adjusted EBITDA | $10.0 million | $8.9 million | +11.7% |
| Operating cash flow | $5.4 million | $7.9 million | Down $2.5 million |
System-wide sales were $259.9 million, versus $235.8 million. Domestic same-store sales declined 1.1% system-wide and 5.1% at company-owned restaurants, compared with increases of 4.6% and 9.0%, respectively. Domestic restaurant AUV was $1.101 million, versus $1.122 million.
Cost of sales at company-owned restaurants rose to 77.2% of sales from 70.8%. Food, beverage and packaging costs were 39.2% of sales (37.4% prior year), while labor was 24.8% (20.3%). The filing reports income tax expense of $1.1 million and a 14.7% effective tax rate, versus $2.5 million and 37.3%; the 2017 period included $1.7 million of excess tax benefits from share-based compensation. Cash and cash equivalents were $3.4 million at quarter-end.
Debt, liquidity and cash flow
- Debt outstanding under the senior secured credit facility was $145.4 million: $67.4 million term loan and $78.0 million revolver. The balance-sheet long-term debt, net, was $141.4 million, with $3.5 million current portion.
- The facility provides a $70 million term loan and $110 million revolving facility. Borrowings bore interest at 3.40% at quarter-end; the company was in compliance with covenants. The facility is secured by substantially all company assets and matures in June 2021.
- Cash flow from investing activities was negative $0.4 million; financing activities used $5.3 million, including $5.9 million of debt repayments. Cash declined $0.3 million during the quarter.
- Management stated it believed available liquidity and capital resources were sufficient for operations and its growth strategy. The filing lists $10.7 million of future minimum operating-lease payments.
Material changes and notable items
- Franchise revenue growth reflected restaurant expansion: franchised locations increased to 1,010 from 854 year over year. The company opened 28 domestic and 7 international franchised restaurants during the quarter, with 2 domestic closures.
- Franchise revenue included a one-time $3.1 million payment under a new vendor agreement, based on prior-year system-wide purchase volumes. The company made a $2.9 million discretionary advertising-fund contribution, primarily to support national advertising; management said the arrangement funded the campaign and was not an increase in the established 4% advertising allocation.
- The company began transitioning to national advertising in 2017. The advertising-fund contribution collected from franchisees and company restaurants increased from 2% to 3% of gross sales as part of that reallocation.
- Higher bone-in chicken-wing commodity costs, wage and staffing investments, and lower comparable sales pressured company-restaurant profitability. Company segment profit fell 36.8% to $1.1 million; franchise segment profit increased 23.6% to $7.9 million.
- Interest expense increased 70.7% to $1.3 million, primarily due to the debt refinancing in June 2016. The lower tax expense benefited from adoption of a share-based compensation accounting standard.
Outlook, risks and contingencies
The filing provides no specific numerical revenue, earnings or comparable-sales guidance. Management described national advertising and continued restaurant growth as business priorities and said it expected available resources to support operations and growth. These are forward-looking statements, not guarantees.
- Key exposures include volatile chicken-wing prices, labor and wage costs, variable-rate debt, competition and the ability to sustain comparable sales and successfully open new restaurants.
- A hypothetical 10% increase in bone-in wing costs would have added approximately $0.2 million to quarterly cost of sales. A 1 percentage-point change in interest rates would affect annualized interest expense by approximately $1.5 million.
- The company reported ordinary-course employment and premises-liability claims, generally covered by insurance, and did not expect their resolution to have a material adverse effect. No material risk-factor changes were reported.
- The company expects adoption of the new revenue-recognition standard in fiscal 2018; it preliminarily expects changed timing of recognition for certain initial franchise, development, territory and renewal fees. It was still evaluating the full impact.
Most important facts for investors to verify
- How much of reported franchise-revenue growth and earnings reflects the one-time $3.1 million vendor payment, and how the related advertising contribution affects ongoing results.
- Whether the declines in same-store sales stabilize, especially at company-operated restaurants, and how new openings affect existing locations.
- Whether chicken-wing inflation and higher labor costs persist, and whether pricing or operating improvements can offset them.
- Debt levels, variable interest-rate exposure, covenant compliance, and liquidity available under the revolving facility.
- The eventual effects of the new revenue-recognition standard on franchise-fee timing and financial-statement presentation.