Wingstop Inc. — Q1 2022 Form 10-Q
Reporting period: Thirteen weeks ended March 26, 2022; comparison is with the thirteen weeks ended March 27, 2021. Wingstop operated 1,791 restaurants at quarter-end, approximately 98% franchised.
Financial performance and liquidity
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Total revenue | $76.2 million | $70.7 million | +7.8% |
| Operating income | $16.6 million | $19.8 million | -16.1% |
| Net income | $8.7 million | $13.2 million | -34.1% |
| Diluted EPS | $0.29 | $0.44 | Down |
| Adjusted EBITDA | $22.1 million | $23.9 million | Down 7.6% |
| Operating cash flow | $20.4 million | $13.8 million | Increased |
| Capital expenditures | $6.3 million | $2.8 million | Increased |
Revenue growth reflected franchise openings, 1.2% domestic same-store sales growth, and higher system-wide sales. System-wide sales were $630.0 million, up 12.7%; domestic average unit volume was $1.602 million, up from $1.547 million. Domestic same-store sales growth slowed from 20.7% in the prior-year quarter. Company-owned same-store sales rose 2.1%, supported by pricing but partly offset by fewer transactions.
Operating margin declined to approximately 21.8% from 28.0%; net margin declined to approximately 11.4% from 18.6%. Company-owned restaurant cost of sales increased to 84.3% of company-owned sales from 75.6%. Drivers included higher wing and labor costs, Manhattan restaurant expenses, and $0.4 million of pre-opening expenses. Bone-in wing costs rose 14.2% year over year. SG&A rose 31.2%, reflecting higher headcount, professional fees and travel.
Cash, cash equivalents and restricted cash totaled $309.5 million at March 26, 2022. Operating cash flow was partly affected by the timing of advertising-fund payments and working capital. Debt was $727.6 million before unamortized issuance costs; the balance sheet reported $715.8 million of total debt, including $4.9 million current and $710.9 million long-term, net. The company had $250 million of new fixed-rate notes outstanding and a $200 million variable funding facility with no borrowings at quarter-end. It reported compliance with financial covenants.
Material changes, outlook and risks
- On March 9, Wingstop issued $250 million of 3.734% fixed-rate notes and entered a revolving facility allowing up to $200 million of borrowings, subject to conditions. Proceeds supported liquidity and general corporate purposes, including a return of capital. The transaction increased interest expense and resulted in a $0.8 million debt-extinguishment loss; related financing and transaction costs also affected results.
- The board declared a $4.00-per-share special dividend, approximately $119.5 million, on March 9. It was paid April 7, after quarter-end; the March 26 balance sheet included $120.1 million of dividends payable. A regular $0.17-per-share dividend was paid during the quarter, and another $0.17 dividend was declared May 3 for payment June 10.
- After the new financing, the company’s leverage ratio exceeded 5.0x; it expected to resume scheduled principal amortization in Q3 2022. The notes generally provide for 1% annual amortization. Failure to meet specified debt-service coverage or sales conditions, among other events, can trigger rapid amortization.
- Management expected operating cash flows and available securitized-facility borrowings to cover capital expenditures, working capital and debt service for at least the next twelve months. No specific revenue or earnings guidance was provided. Management expected labor and supply-chain challenges to continue in fiscal 2022, while noting some mitigation from recent bone-in chicken cost deflation.
- Management cited ongoing labor availability and wage inflation, food-cost volatility, supply-chain availability, competition, franchisee performance, digital and delivery-platform dependence, cybersecurity, international expansion, and the ability to service securitized debt among key risks. COVID-19 continued to affect operations; dining rooms began reopening in March 2022, while carryout and delivery remained important.
- Ordinary-course legal claims were described as generally insured and not expected to have a material adverse impact; the filing reported no material pending legal proceedings. The company stated disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether system-wide sales growth, new restaurant openings and same-store sales trends can sustain revenue growth as prior-year comparisons become less favorable.
- Whether wing, wage and other restaurant costs remain elevated, and how pricing and any cost deflation affect company-owned restaurant margins.
- The impact of the special dividend and resumed debt amortization on cash, leverage, interest expense and capacity for future dividends.
- The exact conditions and headroom under the securitized debt covenants and the $200 million revolving facility.
- How much reported operating cash flow reflects recurring operations versus timing changes in advertising-fund and working-capital balances.