July 29, 2020, 4:15 p.m. EDT

10-Q: WINGSTOP INC.

(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

COMTEX_368608698/2041/2020-07-29T16:15:16

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