(EDGAR Online via COMTEX) -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of the financial condition and results of operations of Wingstop Inc. (collectively with its direct and indirect subsidiaries on a consolidated basis, "Wingstop," the "Company," "we," "our," or "us") should be read in conjunction with the accompanying unaudited consolidated financial statements and related notes in Part I, Item 1 of this Quarterly Report on Form 10-Q (this "Quarterly Report") and with the audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year ended December 28, 2019 (our "Annual Report"). The statements in this discussion regarding industry outlook, our expectations regarding our future performance, liquidity, and capital resources, and other non-historical statements are forward-looking statements. These forward-looking statements are subject to risks and uncertainties, including, but not limited to, the risks and uncertainties described in "Special Note Regarding Forward-Looking Statements," below and "Risk Factors" on page 10 of our Annual Report and in Part II, Item 1A of this Quarterly Report. Our actual results may differ materially from those contained in or implied by any forward-looking statements. We operate on a 52 or 53 week fiscal year ending on the last Saturday of each calendar year. Our fiscal quarters are comprised of 13 weeks, with the exception of the fourth quarter of a 53 week year, which contains 14 weeks. Fiscal years 2020 and 2019 each contain 52 weeks. Overview Wingstop is the largest fast casual chicken wings-focused restaurant chain in the world, with over 1,400 locations worldwide. We are dedicated to serving the world flavor through an unparalleled guest experience and offering of classic wings, boneless wings and tenders, always cooked to order and hand-sauced-and-tossed in 11 bold, distinctive flavors. The Company is primarily a franchisor, with approximately 98% of Wingstop's restaurants currently owned and operated by independent franchisees. We believe our asset-light, highly-franchised business model generates strong operating margins and requires low capital expenditures, creating stockholder value through strong and consistent free cash flow and capital-efficient growth. Historically, the Company had two reporting segments: franchise operations and company restaurant operations. In accordance with Accounting Standards Codification 280 "Segment Reporting", the Company uses the management approach for determining its reportable segments. The management approach is based upon the way management reviews performance and allocates resources. Due to changes in how the Company's chief operating decision maker assesses the Company's performance and allocates resources, the Company reevaluated its operating segments and has determined it has one operating segment and one reporting segment. Impact of COVID-19 In March 2020, the novel coronavirus ("COVID-19") outbreak was declared a pandemic by the World Health Organization, significantly changing consumer behaviors as individuals are being encouraged to practice social distancing. This has also led to restaurants reducing restaurant seating capacity, and in some cases restaurant closures, due to various restrictions mandated by governments around the world. As of March 16, 2020, we made the decision to close our domestic dining rooms and limit our service to carryout and delivery only. Several of our international markets also closed their dining rooms as a result of the outbreak. As of the end of the second quarter, approximately eight of our international restaurants and six domestic restaurants were temporarily closed. While we cannot predict the extent to which COVID-19 will impact our business or the global economy, we believe our business is well-positioned for the transition to largely off-premise dining that has resulted from the outbreak. Prior to the COVID-19 outbreak, carry-out and delivery represented approximately 80% of our domestic sales mix and our digital sales mix was just over 40%. As a result of the required changes to consumer behavior to largely off-premise dining, as well as promotional activities associated with delivery, we have seen an increase in domestic same store sales growth through the end of the second quarter. Our international markets, which have historically had a higher mix of dine-in sales, have seen an overall decline in same store sales growth due to the required closure of dining rooms and in some cases temporary restaurant closures. We did not experience difficulties with our supply chain as a result of COVID-19 during the first or second quarter of 2020; however, there can be no assurances that we will not experience supply chain challenges in the future. Lastly, to further secure our liquidity position and provide financial flexibility in light of uncertain market conditions, we borrowed $16 million under our Variable Funding Notes (as defined below) in the first quarter of 2020, providing the Company with an unrestricted cash balance of approximately $45.8 million as of June 27, 2020. See "Liquidity and Capital Resources" below for further details.
Key Performance Indicators Key measures that we use in evaluating our restaurants and assessing our business include the following: Number of restaurants. Management reviews the number of new restaurants, the number of closed restaurants, and the number of acquisitions and divestitures of restaurants to assess net new restaurant growth. Thirteen Weeks Ended Twenty-Six Weeks Ended June 27, June 29, June 27, June 29, 2020 2019 2020 2019 Domestic Franchised Activity: Beginning of period 1,221 1,112 1,200 1,095 Openings 23 29 45 49 Closures (2) (2) (3) (5) Re-franchised by Company 2 - 2 - Restaurants end of period 1,244 1,139 1,244 1,139 Domestic Company-Owned Activity: Beginning of period 32 29 31 29 Openings - - 1 - Closures - - - - Re-franchised to franchisees (2) - (2) - Restaurants end of period 30 29 30 29 Total Domestic Restaurants 1,274 1,168 1,274 1,168 International Franchised Activity: Beginning of period 160 132 154 128 Openings 2 5 8 11 Closures - (2) - (4) Restaurants end of period 162 135 162 135 Total System-wide Restaurants 1,436 1,303 1,436 1,303
System-wide sales. System-wide sales represents net sales for all of our company-owned and franchised restaurants, with franchised restaurant sales reported by franchisees. While we do not record franchised restaurant sales as revenue, our royalty revenue is calculated based on a percentage of franchised restaurant sales, which generally ranges from 5.0% to 6.0% of gross sales, net of discounts. This measure allows management to better assess changes in our royalty revenue, our overall store performance, the health of our brand, and the strength of our market position relative to competitors. Our system-wide sales growth is driven by new restaurant openings as well as increases in same store sales.
EBITDA and Adjusted EBITDA. We define EBITDA as net income before interest expense, net, income tax expense, and depreciation and amortization. We define Adjusted EBITDA as EBITDA further adjusted for transaction costs, costs and fees associated with investments in our strategic initiatives, gains and losses on the disposal of assets, and stock-based compensation expense. EBITDA and Adjusted EBITDA may not be comparable to other similarly titled measures of other companies due to differences in methods of calculation. For a reconciliation of net income to EBITDA and Adjusted EBITDA and for further discussion of EBITDA and Adjusted EBITDA as non-GAAP measures and how we utilize them, see footnote 2 below.
Twenty-Six Weeks Thirteen Weeks Ended Ended June 27, 2020 June 29, 2019 June 27, 2020 June 29, 2019 Number of system-wide restaurants open at end of period 1,436 1,303 1,436 1,303 System-wide sales (1) $ 509,045 $ 371,505 $ 938,952 $ 733,865 Domestic restaurant AUV $ 1,366 $ 1,189 $ 1,366 $ 1,189 Domestic same store sales growth 31.9 % 12.8 % 21.0 % 9.9 % Company-owned domestic same store sales growth 24.7 % 13.8 % 15.7 % 9.1 % Total revenue $ 66,105 $ 48,562 $ 121,541 $ 96,615 Net income $ 11,539 $ 4,918 $ 19,635 $ 11,524 Adjusted EBITDA (2) $ 20,888 $ 13,549 $ 37,245 $ 27,435
(1) The percentage of system-wide sales attributable to company-owned restaurants was 3.3% and 3.7% for the thirteen weeks ended June 27, 2020 and June 29, 2019, respectively, and was 3.2% and 3.7% for the twenty-six weeks ended June 27, 2020 and June 29, 2019, respectively. The remainder was generated by franchised restaurants, as reported by our franchisees.
indebtedness use EBITDA (with additional adjustments) to measure our compliance with covenants, such as our fixed charge coverage, lease adjusted leverage, and debt incurrence. EBITDA and Adjusted EBITDA have limitations as analytical tools and should not be considered in isolation, or as an alternative to, or a substitute for net income or other financial statement data presented in our consolidated financial statements as indicators of financial performance. Some of the limitations are:
Twenty-Six Weeks Thirteen Weeks Ended Ended June 27, June 29, June 27, June 29, 2020 2019 2020 2019 Net income $ 11,539 $ 4,918 $ 19,635 $ 11,524 Interest expense, net 4,214 4,299 8,359 8,709 Income tax expense 3,784 1,070 5,014 1,825 Depreciation and amortization 1,398 1,335 2,953 2,611 EBITDA $ 20,935 $ 11,622 $ 35,961 $ 24,669 Additional adjustments: Gain on disposal of assets (a) (2,016) - (2,016) - Stock-based compensation expense (b) 1,969 1,927 3,300 2,766 Adjusted EBITDA $ 20,888 $ 13,549 $ 37,245 $ 27,435
(a) Represents a gain resulting from the re-franchise of company-owned restaurants to a franchisee which is included in Selling, general and administrative expense in the Consolidated Statements of Operations.
Results of Operations Thirteen Weeks Ended June 27, 2020 compared to Thirteen Weeks Ended June 29, 2019 The following table sets forth our results of operations for the thirteen weeks ended June 27, 2020 and June 29, 2019 (dollars in thousands): Thirteen Weeks Ended Increase / (Decrease) June 27, June 29, 2020 2019 $ % Revenue: Royalty revenue, franchise fees and other $ 27,858 $ 21,187 $ 6,671 31.5 % Advertising fees and related income 19,923 13,487 6,436 47.7 % Company-owned restaurant sales 18,324 13,888 4,436 31.9 % Total revenue 66,105 48,562 17,543 36.1 % Costs and expenses: Cost of sales (1) 13,387 10,573 2,814 26.6 % Advertising expenses 18,589 12,973 5,616 43.3 % Selling, general and administrative 13,194 13,394 (200) (1.5) % Depreciation and amortization 1,398 1,335 63 4.7 % Total costs and expenses 46,568 38,275 8,293 21.7 % Operating income 19,537 10,287 9,250 89.9 % Interest expense, net 4,214 4,299 (85) (2.0) % Income before income tax expense 15,323 5,988 9,335 155.9 % Income tax expense 3,784 1,070 2,714 253.6 % Net income $ 11,539 $ 4,918 $ 6,621 134.6 %
(1) Cost of sales includes all operating expenses of company-owned restaurants, including advertising expenses, and excludes depreciation and amortization, which are presented separately. Total revenue. During the thirteen weeks ended June 27, 2020, total revenue was $66.1 million, an increase of $17.5 million, or 36.1%, compared to $48.6 million in the comparable period in 2019. Royalty revenue, franchise fees and other. During the thirteen weeks ended June 27, 2020, royalty revenue, franchise fees and other was $27.9 million, an increase of $6.7 million, or 31.5%, compared to $21.2 million in the comparable period in 2019. Royalty revenue increased primarily due to domestic same store sales growth of 31.9% as well as 132 net franchise restaurant openings since June 29, 2019. Advertising fees and related income. During the thirteen weeks ended June 27, 2020, advertising fees and related income was $19.9 million, an increase of $6.4 million, compared to $13.5 million in the comparable period in 2019. Advertising fees increased primarily due the 37.0% increase in system-wide sales in the thirteen weeks ended June 27, 2020 compared to the thirteen weeks ended June 29, 2019. Company-owned restaurant sales. During the thirteen weeks ended June 27, 2020, company-owned restaurant sales were $18.3 million, an increase of $4.4 million, or 31.9%, compared to $13.9 million in the comparable period in 2019. The increase was primarily due to company-owned same store sales growth of 24.7%, which was driven by both an increase in transactions and transaction size. Also contributing to the increase was the acquisition of one franchised restaurant and the opening of two company-owned restaurants since the prior year comparable period, resulting in additional company-owned restaurant sales of $1.1 million. Cost of sales. During the thirteen weeks ended June 27, 2020, cost of sales was $13.4 million, an increase of $2.8 million, or 26.6%, compared to $10.6 million in the comparable period in 2019. Cost of sales as a percentage of company-owned restaurant sales was 73.1% in the thirteen weeks ended June 27, 2020, compared to 76.1% in the comparable period in 2019.
The table below presents the major components of cost of sales (dollars in thousands):
Thirteen Weeks Ended June 27, 2020 June 29, 2019 As a % of As a % of company-owned company-owned In dollars restaurant sales In dollars restaurant sales Cost of sales: Food, beverage and packaging costs $ 5,954 32.5 % $ 5,205 37.5 % Labor costs 4,687 25.6 % 3,193 23.0 % Other restaurant operating expenses 3,086 16.8 % 2,556 18.4 % Vendor rebates (340) (1.9) % (381) (2.7) % Total cost of sales $ 13,387 73.1 % $ 10,573 76.1 %
Food, beverage and packaging costs as a percentage of company-owned restaurant sales were 32.5% in the thirteen weeks ended June 27, 2020, compared to 37.5% in the comparable period in 2019. The decrease was primarily due to a 22.7% decrease in the cost of bone-in chicken wings as compared to the prior year period.
Jul 29, 2020
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