Wingstop Inc. — Q2 2018 Form 10-Q
Business context and period. The filing covers the 13 and 26 weeks ended June 30, 2018, compared with periods ended July 1, 2017. Wingstop franchises and operates chicken-wing restaurants. At quarter-end, it had 1,188 restaurants: 1,162 franchised and 26 company-operated. The business is approximately 98% franchised.
Financial performance
- Q2 revenue: $37.0 million, up 17.3%. Franchise royalties, fees and other revenue were $17.2 million (+12.7%); advertising revenue was $8.4 million (+11.9%); company-restaurant sales were $11.5 million (+29.8%). System-wide sales, including franchisee sales not recorded as company revenue, were $304.9 million (+13.5%).
- Q2 profit: Operating income was $9.9 million (+21.3%), net income $6.8 million (+39.4%), and diluted EPS $0.23 versus $0.17. Operating margin was approximately 26.8%, versus 25.9%; net margin was approximately 18.5%, versus 15.5%.
- First half: Revenue was $74.4 million (+14.5%), operating income $19.5 million (+16.6%), and net income $13.0 million (+16.5%). Diluted EPS was $0.44 versus $0.38. Adjusted EBITDA, a non-GAAP measure, was $24.2 million versus $18.8 million.
- Sales indicators: Q2 domestic system-wide same-store sales increased 4.3% and company-owned same-store sales increased 3.5%. For the first half, the respective increases were 6.8% and 7.7%. Domestic AUV was $1.124 million, compared with $1.095 million.
- Cash flow: First-half operating cash flow was $17.5 million, versus $10.6 million. Investing used $7.3 million, including $6.0 million for three acquired restaurants; financing used $11.0 million. Cash, cash equivalents and restricted cash ended at $5.7 million.
- Debt and liquidity: Debt was $220.1 million at quarter-end, comprising $97.5 million of term loans and $122.6 million drawn on the revolver, at 4.59% interest. Cash and cash equivalents were $3.1 million; current assets were $14.4 million against current liabilities of $21.0 million. Management said available liquidity was sufficient for operations and its growth strategy over the next 12 months. The company was in compliance with debt covenants.
Changes, outlook and risks
- Revenue and earnings grew, supported by restaurant openings, same-store sales and acquired franchise locations. Company-owned restaurant cost of sales fell to 67.5% of sales in Q2 from 77.6%, primarily reflecting a 22.9% decline in bone-in wing costs and operating leverage. The lower wing costs are a notable period-specific benefit.
- Interest expense rose 79.2% in Q2 to $2.3 million, mainly due to higher debt and applicable rates after refinancing. In January 2018, the company replaced its prior facility with a $250 million secured facility maturing in January 2023 and used proceeds to refinance debt and fund a $92.7 million special dividend.
- The special dividend was $3.17 per share; quarterly dividends of $0.07 per share were also paid in each of the first two quarters. After quarter-end, the board declared a $0.09 quarterly dividend for September 2018.
- The first-half effective tax rate was 15.6%, versus 20.9%, reflecting the lower federal statutory rate and stock-based compensation tax benefits. Q2’s 9.8% rate also reflected such benefits and should be considered in assessing earnings comparability.
- No numerical revenue, earnings or same-store-sales guidance was provided in the supplied filing text. Management stated it expected liquidity to support operations and growth over the next 12 months. It anticipates lease-accounting adoption in 2019 will materially increase balance-sheet assets and liabilities; the impact assessment was ongoing.
- Key risks include volatility in fresh chicken-wing prices, labor and other cost inflation, variable-rate debt, franchisee performance, supply-chain and food-safety disruptions, competition, geographic concentration, litigation, regulation, and compliance with credit-facility covenants. A hypothetical 10% increase in wing costs would have raised first-half cost of sales by approximately $0.4 million; a one-percentage-point rate change would affect annual interest expense by approximately $2.2 million.
- Ordinary-course legal claims were reported; management did not expect them to have a material adverse effect, and the filing reported no material pending legal proceedings. No material risk-factor changes were reported.
Key facts for investors to verify
- Whether same-store sales, openings and franchisee health sustain growth beyond the periods reported.
- How much the earnings improvement depended on unusually lower chicken-wing costs and favorable tax benefits.
- Debt service, interest-rate exposure, covenant headroom and the effect of the special dividend on the balance sheet; stockholders’ deficit was $140.7 million at quarter-end.
- The full balance-sheet effect of lease-accounting adoption and continuing operating lease commitments, reported at $12.9 million in minimum payments.
- Whether management’s liquidity and growth expectations remain supportable given low unrestricted cash and ongoing dividend payments.