Bulletin
Investor Alert

New York Markets Open in:

May 4, 2022, 4:20 p.m. EDT

10-Q: WINGSTOP INC.

new
Watchlist Relevance
LEARN MORE

Want to see how this story relates to your watchlist?

Just add items to create a watchlist now:

or Cancel Already have a watchlist? Log In

(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 25, 2021 (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" beginning on page 11 of our Annual 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 year 2022 contains 53 weeks, while fiscal year 2021 contains 52 weeks.

Overview

Wingstop is the largest fast casual chicken wings-focused restaurant chain in the world, with over 1,700 locations worldwide. We are dedicated to serving the world flavor through an unparalleled guest experience and offering of classic wings and thighs, 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.

The COVID-19 pandemic has continued to have varying degrees of disruption on our business. Throughout the pandemic, substantially all of our domestic restaurants operated in an off-premise capacity, leveraging our carryout and delivery capabilities. In March of 2022, we began reopening our dining rooms to dine-in guests.

Our carryout and delivery capabilities positioned us to achieve domestic same store sales growth of 21.9% in the two-year period ended March 26, 2022. However, our business has been challenged by COVID-19-related labor availability and wage inflation, and while we have not had significant disruptions in our supply chain, we have experienced higher product costs and inflationary pressures, which have been mitigated to some extent by recent deflation in bone-in chicken costs. While we do not know the future impact COVID-19 and inflationary pressures will have on our business, we expect labor and supply chain challenges to continue in fiscal year 2022.







        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
                                                       March 26,               March 27,
                                                         2022                    2021
                 Domestic Franchised Activity:
                 Beginning of period                   1,498                      1,327
                 Openings                                 56                         44
                 Closures                                 (3)                         -
                 Restaurants end of period             1,551                      1,371
                 Domestic Company-Owned Activity:
                 Beginning of period                      36                         32
                 Openings                                  1                          1
                 Closures                                  -                          -
                 Restaurants end of period                37                         33
                 Total Domestic Restaurants            1,588                      1,404
                 International Franchised Activity:
                 Beginning of period                     197                        179
                 Openings                                  7                          2
                 Closures                                 (1)                        (6)
                 Restaurants end of period               203                        175
                 Total System-wide Restaurants         1,791                      1,579
        


System-wide sales. System-wide sales represents net sales for all of our company-owned and franchised restaurants. 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.

Domestic average unit volume ("AUV"). Domestic AUV consists of the average annual sales of all restaurants that have been open for a trailing 52-week period or longer. This measure is calculated by dividing sales during the applicable period for all restaurants being measured by the number of restaurants being measured. Domestic AUV includes revenue from both company-owned and franchised restaurants. Domestic AUV allows management to assess our company-owned and franchised restaurant economics. Our domestic AUV growth is primarily driven by increases in same store sales and is also influenced by opening new restaurants.

Domestic same store sales. Domestic same store sales reflects the change in year-over-year sales for the same store base. We define the same store base to include those restaurants open for at least 52 full weeks. This measure highlights the performance of existing restaurants, while excluding the impact of new restaurant openings and closures. We review same store sales for domestic company-owned restaurants as well as system-wide domestic restaurants. Domestic same store sales growth is driven by increases in transactions and average transaction size. Transaction size increases are driven by price increases or favorable mix shift from either an increase in items purchased or shifts into higher priced items.

EBITDA and Adjusted EBITDA. We define EBITDA as net income before interest expense, net, income tax expense (benefit), and depreciation and amortization. We define Adjusted EBITDA as net income before interest expense, net, income tax expense (benefit), and depreciation and amortization, with further adjustments for losses on debt extinguishment and

refinancing transactions, 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. Adjusted EBITDA may not be comparable to other similarly titled captions 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.

Adjusted Net Income and Adjusted Earnings Per Diluted Share. We define Adjusted net income as net income adjusted for losses on debt extinguishment and refinancing transactions, transaction costs, costs and fees associated with investments in our strategic initiatives, gains and losses on the disposal of assets, and related tax adjustments. We define Adjusted earnings per diluted share as Adjusted net income divided by weighted average diluted share count. For a reconciliation of net income to Adjusted net income and for further discussion of Adjusted net income and Adjusted earnings per diluted share as non-GAAP measures and how we utilize them, see footnote 3 below.

The following table sets forth our key performance indicators for the thirteen weeks ended March 26, 2022 and March 27, 2021 (in thousands, except unit data):







                                                                             Thirteen Weeks Ended
                                                                    March 26, 2022          March 27, 2021
        Number of system-wide restaurants open at end of period             1,791                   1,579
        System-wide sales (1)                                      $      630,007          $      558,869
        Domestic restaurant AUV                                    $        1,602          $        1,547
        Domestic same store sales growth                                      1.2  %                 20.7  %
        Company-owned domestic same store sales growth                        2.1  %                 13.4  %
        Total revenue                                              $       76,205          $       70,690
        Net income                                                 $        8,676          $       13,160
        Adjusted EBITDA (2)                                        $       22,089          $       23,914
        Adjusted net income (3)                                    $       10,153          $       13,160
        


(1) The percentage of system-wide sales attributable to company-owned restaurants was 3.0% and 3.1% for the thirteen weeks ended March 26, 2022 and March 27, 2021, respectively. The remainder was generated by franchised restaurants, as reported by our franchisees.

(2) EBITDA and Adjusted EBITDA are supplemental measures of our performance that are not required by, or presented in accordance with, GAAP. EBITDA and Adjusted EBITDA should not be considered as an alternative to net income or any other performance measure derived in accordance with GAAP, or as an alternative to cash flow from operating activities as a measure of our liquidity.

We caution investors that amounts presented in accordance with our definitions of EBITDA and Adjusted EBITDA may not be comparable to similar measures disclosed by our competitors, because not all companies and analysts calculate EBITDA and Adjusted EBITDA in the same manner. We present EBITDA and Adjusted EBITDA because we consider them to be important supplemental measures of our performance and believe they are frequently used by securities analysts, investors, and other interested parties in the evaluation of companies in our industry. Management believes that investors' understanding of our performance is enhanced by including these non-GAAP financial measures as a reasonable basis for comparing our ongoing results of operations. Many investors are interested in understanding the performance of our business by comparing our results from ongoing operations on a period-over-period basis and would ordinarily add back non-cash expenses such as depreciation and amortization, as well as items that are not part of normal day-to-day operations of our business.

Management uses EBITDA and Adjusted EBITDA:

as a measurement of operating performance because they assist us in comparing the operating performance of our restaurants on a consistent basis, as they remove the impact of items not directly resulting from our core operations;

for planning purposes, including the preparation of our internal annual operating budget and financial projections;

to evaluate the performance and effectiveness of our operational strategies;

to evaluate our capacity to fund capital expenditures and expand our business; and

to calculate incentive compensation payments for our employees, including assessing performance under our annual incentive compensation plan and determining the vesting of performance-based equity awards.

By providing these non-GAAP financial measures, together with a reconciliation to the most comparable GAAP measure, we believe we are enhancing investors' understanding of our business and our results of operations, as well as assisting investors in evaluating how well we are executing our strategic initiatives. In addition, the instruments governing our 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:

such measures do not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;

such measures do not reflect changes in, or cash requirements for, our working capital needs;

such measures do not reflect the interest expense or the cash requirements necessary to service interest or principal payments on our debt;

such measures do not reflect our tax expense or the cash requirements to pay our taxes;

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future and such measures do not reflect any cash requirements for such replacements; and

other companies in our industry may calculate such measures differently than we do, limiting their usefulness as comparative measures.

Due to these limitations, EBITDA and Adjusted EBITDA should not be considered as measures of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and using these non-GAAP measures only supplementally. As noted in the table below, Adjusted EBITDA includes adjustments for losses on debt extinguishment and refinancing transactions, 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. It is reasonable to expect that this item will occur in future periods. However, we believe these adjustments are appropriate because the amounts recognized can vary significantly from period to period, do not directly relate to the ongoing operations of our restaurants, and complicate comparisons of our internal operating results and operating results of other restaurant companies over time. Each of the normal recurring adjustments and other adjustments described in this paragraph and in the reconciliation table below help management measure our core operating performance over time by removing items that are not related to day-to-day operations.

The following table reconciles net income to EBITDA and Adjusted EBITDA for the thirteen weeks ended March 26, 2022 and March 27, 2021 (in thousands):







                                                                               Thirteen Weeks Ended
                                                                        March 26,                 March 27,
                                                                           2022                     2021
        Net income                                                 $        8,676             $       13,160
        Interest expense, net                                               4,192                      3,782
        Income tax expense (benefit)                                        2,860                      2,861
        Depreciation and amortization                                       2,227                      1,795
        EBITDA                                                     $       17,955             $       21,598
        Additional adjustments:
        Loss on debt extinguishment and financing transaction
        costs (a)                                                           1,124                          -
        Loss on disposal of assets (b)                                        444                          -
        Consulting fees (c)                                                   375                          -
        Stock-based compensation expense (d)                                2,191                      2,316
        Adjusted EBITDA                                            $       22,089             $       23,914
        


(a) Represents costs and expenses related to our 2022 securitized financing facility and payment of a special dividend, as well as the extinguishment of our 2020 variable funding note facility; all transaction costs are included in Loss on debt extinguishment during the thirteen weeks ended March 26, 2022, with the exception of $310,000 that is included in Selling, general and administrative on the Consolidated Statements of Comprehensive Income.

(b) Represents a loss resulting from the sale of assets to a franchisee pursuant to a multi-unit development agreement executed in the prior fiscal year. This loss is included in Loss on disposal of assets in the Consolidated Statements of Comprehensive Income.

(c) Represents costs and expenses related to a consulting project to support the Company's strategic initiatives, which are included in Selling, general and administrative on the Consolidated Statements of Comprehensive Income.

(d) Includes non-cash, stock-based compensation.

(3) Adjusted net income and adjusted earnings per diluted share are supplemental measures of operating performance that do not represent and should not be considered alternatives to net income and earnings per share, as determined by GAAP. These measures have not been prepared in accordance with Article 11 of Regulation S-X promulgated under the Securities Act. Management believes adjusted net income and adjusted earnings per diluted share supplement GAAP measures and enable management to more effectively evaluate the Company's performance period-over-period and relative to competitors.

The following table reconciles net income to Adjusted net income and calculates adjusted earnings per diluted share for the thirteen weeks ended March 26, 2022 and March 27, 2021 (in thousands):







                                                                                  Thirteen Weeks Ended
                                                                            March 26,               March 27,
                                                                               2022                   2021
        Numerator:
        Net income                                                      $      8,676             $     13,160
        Adjustments:
        Loss on debt extinguishment and financing transactions (a)             1,124                        -
        Loss on disposal of assets (b)                                           444                        -
        Consulting fees (c)                                                      375                        -
        Tax effect of adjustments (d)                                           (466)                       -
        Adjusted net income                                             $     10,153             $     13,160
        Denominator:
        Weighted-average shares outstanding - diluted                         29,974                   29,844
        Adjusted earnings per diluted share                             $       0.34             $       0.44
        


(a) Represents costs and expenses related to our 2022 securitized financing facility and payment of a special dividend, as well as the extinguishment of our 2020 variable funding note facility; all transaction costs are included in Loss on debt extinguishment during the thirteen weeks ended March 26, 2022, with the exception of $310,000 that is included in Selling, general and administrative on the Consolidated Statements of Comprehensive Income.

(b) Represents a loss resulting from the sale of assets to a franchisee pursuant to a multi-unit development agreement executed in the prior fiscal year. This loss is included in Loss on disposal of assets in the Consolidated Statements of Comprehensive Income.

(c) Represents costs and expenses related to a consulting project to support the Company's strategic initiatives, which are included in Selling, general and administrative on the Consolidated Statements of Comprehensive Income.

(d) Represents the tax effect of the aforementioned adjustments to reflect corporate income taxes at an assumed effective tax rate of 24% for the thirteen weeks ended March 26, 2022, which includes provisions for U.S. federal income taxes, and assumes the respective statutory rates for applicable state and local jurisdictions.







        Results of Operations
        Thirteen Weeks Ended March 26, 2022 compared to Thirteen Weeks Ended March 27,
        2021
        The following table sets forth our results of operations for the thirteen weeks
        ended March 26, 2022 and March 27, 2021 (dollars in thousands):
                                                            Thirteen Weeks Ended                       Increase / (Decrease)
                                                        March 26,             March 27,
                                                          2022                  2021                  $                    %
        Revenue:
        Royalty revenue, franchise fees and other   $    35,070             $   31,606          $     3,464                 11.0  %
        Advertising fees                                 22,539                 21,520                1,019                  4.7  %
        Company-owned restaurant sales                   18,596                 17,564                1,032                  5.9  %
        Total revenue                                    76,205                 70,690                5,515                  7.8  %
        Costs and expenses:
        Cost of sales (1)                                15,674                 13,279                2,395                 18.0  %
        Advertising expenses                             23,167                 22,027                1,140                  5.2  %
        Selling, general and administrative              18,086                 13,786                4,300                 31.2  %
        Depreciation and amortization                     2,227                  1,795                  432                 24.1  %
        Loss on disposal of assets                          444                      -                  444                100.0  %
        Total costs and expenses                         59,598                 50,887                8,711                 17.1  %
        Operating income                                 16,607                 19,803               (3,196)               (16.1) %
        Interest expense, net                             4,192                  3,782                  410                 10.8  %
        Loss on debt extinguishment                         814                      -                  814                100.0  %
        Other expense                                        65                      -                   65                100.0  %
        Income before income tax expense                 11,536                 16,021               (4,485)               (28.0) %
        Income tax expense                                2,860                  2,861                   (1)                   -  %
        Net income                                  $     8,676             $   13,160          $    (4,484)               (34.1) %
        


(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 March 26, 2022, total revenue was $76.2 million, an increase of $5.5 million, or 7.8%, compared to $70.7 million in the comparable period in 2021. Royalty revenue, franchise fees and other increased $3.5 million primarily due to 208 net franchise restaurant openings since March 27, 2021, as well as domestic same store sales growth of 1.2%. Advertising fees increased $1.0 million due to the 12.7% increase in system-wide sales in the thirteen weeks ended March 26, 2022 compared to the thirteen weeks ended March 27, 2021. Company-owned restaurant sales increased $1.0 million due to an increase of $0.7 million related to the addition of four net new company-owned restaurants since the prior year comparable period, and $0.3 million, or 2.1%, company-owned same store sales growth, which was driven by an increase in menu prices, partially offset by a decline in transactions.

Cost of sales. During the thirteen weeks ended March 26, 2022, cost of sales was $15.7 million, an increase of $2.4 million, or 18.0%, compared to $13.3 million in the comparable period in 2021. Cost of sales as a percentage of company-owned restaurant sales was 84.3% in the thirteen weeks ended March 26, 2022, compared to 75.6% in the comparable period in 2021.

The table below presents the major components of cost of sales (dollars in thousands):







                                                                                          Thirteen Weeks Ended
                                                                 March 26, 2022                                           March 27, 2021
                                                                         As a % of company-owned                                  As a % of company-owned
                                                   In dollars                restaurant sales               In dollars                restaurant sales
        Cost of sales:
        Food, beverage and packaging costs                7,967                           42.8  %                  7,304                           41.6  %
        Labor costs                                       4,807                           25.8  %                  3,728                           21.2  %
        Other restaurant operating expenses               2,862                           15.4  %                  2,627                           15.0  %
        Vendor rebates                                     (407)                          (2.2) %                   (380)                          (2.2) %
        Cost of sales (excluding pre-opening
        expenses)                                        15,229                           81.9  %                 13,279                           75.6  %
        Pre-opening expenses                                445                            2.4  %                      -                              -  %
        Total cost of sales                              15,674                           84.3  %                 13,279                           75.6  %
        


Food, beverage and packaging costs as a percentage of company-owned restaurant sales were 42.8% in the thirteen weeks ended March 26, 2022, compared to 41.6% in the comparable period in 2021. The increase was primarily due to a 14.2% increase in the cost of bone-in chicken wings as compared to the prior year period.

Labor costs as a percentage of company-owned restaurant sales were 25.8% for the thirteen weeks ended March 26, 2022, compared to 21.2% in the comparable period in 2021. The increase as a percentage of company-owned restaurant sales was primarily due to increases in company-owned restaurant wages and hiring and training costs as a result of the ongoing COVID-19 pandemic and a competitive labor market during the thirteen weeks ended March 26, 2022.

Other restaurant operating expenses as a percentage of company-owned restaurant . . .

May 04, 2022

COMTEX_406700207/2041/2022-05-04T16:20:11

Is there a problem with this press release? Contact the source provider Comtex at editorial@comtex.com. You can also contact MarketWatch Customer Service via our Customer Center.

(c) 1995-2022 Cybernet Data Systems, Inc. All Rights Reserved

This Story has 0 Comments
Be the first to comment

Story Conversation

Commenting FAQs »

Partner Center

Link to MarketWatch's Slice.