Wingstop Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended December 29, 2018 (52 weeks). The filing also reports fourth-quarter results; fiscal Q4 2018 ended December 29, 2018. Unless noted otherwise, financial amounts below are in U.S. dollars.
Business context
Wingstop is a restaurant franchisor and operator specializing in chicken wings. At year-end, it had 1,252 restaurants across 43 U.S. states and nine international countries: 1,223 franchised and 29 company-owned. Approximately 98% of locations were franchised, making royalties and franchise-related revenue central to the business.
Key financial metrics
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Total revenue | $153.2 million | $133.3 million | +14.9% |
| Operating income | $38.5 million | $33.9 million | +13.7% |
| Net income | $21.7 million | $23.9 million | -9.3% |
| Diluted EPS | $0.73 | $0.82 | Down |
| Adjusted EBITDA (non-GAAP) | $49.0 million | $39.1 million | +25.3% |
| Operating cash flow | $38.8 million | $27.4 million | +41.3% |
| Cash capital expenditures | $4.0 million | $2.5 million | Higher |
- Operating margin was 25.2%, compared with 25.4% in FY2017; net margin was 14.2%, compared with 18.0%.
- Revenue growth included royalty revenue, franchise fees and other of $71.9 million (+8.8%); advertising fees and related income of $34.5 million (+14.3%); and company-owned restaurant sales of $46.8 million (+26.4%). The company-sales increase reflected acquired restaurants and 6.2% same-store sales growth.
- Domestic same-store sales increased 6.5%, versus 2.6% in FY2017. System-wide sales rose 16.0% to $1.261 billion; domestic AUV was $1.139 million, versus $1.100 million.
- Operating cash flow less property-and-equipment purchases was approximately $34.8 million; this simple calculation excludes restaurant acquisitions and other investing activity.
- Year-end cash and cash equivalents were $12.5 million, with an additional $4.5 million of restricted cash. Working capital was $3.4 million.
- Debt was $320.0 million gross ($309.4 million long-term debt net of issuance costs, plus $2.4 million current portion). The notes carry a 4.97% fixed rate, 1% annual amortization and an anticipated repayment date in December 2023. The company also had a $20 million variable funding facility, with no borrowings outstanding at year-end; $5.0 million of letters of credit were issued.
Material changes and unusual items
- Net income fell despite higher revenue and operating income, mainly as net interest expense nearly doubled to $10.1 million following increased borrowings; FY2018 also recorded $1.5 million of other expense. FY2017 included a $3.6 million tax benefit related to U.S. tax reform, while FY2018’s effective tax rate was 19.3% versus 16.7%.
- Company-owned restaurant cost of sales declined to 68.5% of sales from 77.5%, primarily reflecting lower bone-in wing costs and improved cost leverage. Management reported bone-in wing prices averaged 21% lower in company restaurants than in FY2017.
- FY2018 included $3.9 million of transaction costs in the company’s non-GAAP Adjusted EBITDA reconciliation, including costs related to debt refinancing and public offerings; SG&A also included nonrecurring refinancing and special-dividend costs. Stock-based compensation rose to $3.7 million from $1.9 million.
- The November 2018 securitized financing replaced the prior credit facility and supported a $89.7 million special dividend. Together with a February special dividend, special dividends totaled $182.8 million; regular FY2018 dividends were $9.4 million. Total dividends paid were $190.7 million.
- The company adopted ASC 606 revenue guidance retrospectively, adjusting comparative periods and recording a $5.1 million cumulative-effect adjustment as of the start of 2016. FY2017 and FY2016 figures presented in the filing reflect the recast guidance.
Outlook, management commentary and risks
- Management stated that liquidity and capital resources were expected to be sufficient for operations and the growth strategy for at least the next 12 months. No specific annual earnings or revenue guidance was provided.
- Management cited long-term potential for approximately 3,000 U.S. and 3,000 international restaurants. The company opened 119 net units in FY2018; 34 international locations opened, while 12 international locations closed.
- Delivery rollout reached 30% of the domestic restaurant base by year-end 2018. Management expected delivery availability to reach 80% of the system by the end of 2019. Test markets reported a high-single-digit to low-double-digit sales lift, with delivery representing 9%–12% of sales mix.
- The national advertising contribution increased from 3% to 4% of gross sales at the start of FY2019. Management also highlighted digital sales at 28% of sales in Q4 2018 and ongoing investment in digital ordering.
- Key risks include chicken-price volatility (the company does not hedge bone-in wing prices), franchisee performance and access to development financing, food safety and supply interruptions, competition and changing consumer preferences, labor and regulatory costs, cybersecurity and digital-service disruptions, international expansion, and uncertainty over potential franchisor “joint employer” liability.
- Debt covenants and securitization provisions can restrict cash movement, dividends and other actions; specified debt-service or sales tests could trigger rapid amortization. The company reported compliance with financial covenants at year-end.
- The filing reported no material pending legal proceedings to the company’s knowledge. Management and the auditor concluded internal control over financial reporting was effective; the financial-statement audit opinion was unqualified.
Fourth-quarter snapshot
Q4 FY2018 revenue was $40.5 million and operating income was $8.7 million, compared with $35.2 million and $8.5 million, respectively, in Q4 FY2017. Net income was $2.4 million, down from $8.1 million; diluted EPS was $0.08 versus $0.27. The filing text does not provide a clear explanation of the quarter-specific net-income decline beyond the annual drivers discussed above.
Important facts for investors to verify
- Review the securitized debt documents, cash-flow restrictions, repayment schedule, covenant tests and refinancing risk around the December 2023 anticipated repayment date.
- Assess whether lower FY2018 chicken costs are sustainable and how wing-price increases could affect company-owned restaurant economics and franchisee health.
- Track delivery rollout economics, sales mix, third-party service quality and any effect on restaurant margins and guest experience.
- Reconcile reported net-income trends with non-GAAP Adjusted EBITDA, including transaction costs, stock compensation and other adjustments.
- Monitor restaurant openings and closures, franchisee development commitments and conversion rates, same-store sales, and progress toward international growth.
- Consider the impact of the $182.8 million special dividends and elevated debt on financial flexibility and future distributions.