Item 1. Financial Statements
WINGSTOP INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(amounts in thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
December 31,
2016
|
|
(Unaudited)
|
|
|
Assets
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
4,589
|
|
|
$
|
3,750
|
|
Accounts receivable, net
|
4,641
|
|
|
3,199
|
|
Prepaid expenses and other current assets
|
3,305
|
|
|
1,634
|
|
Advertising fund assets, restricted
|
4,674
|
|
|
2,533
|
|
Total current assets
|
17,209
|
|
|
11,116
|
|
Property and equipment, net
|
5,681
|
|
|
4,999
|
|
Goodwill
|
46,557
|
|
|
45,128
|
|
Trademarks
|
32,700
|
|
|
32,700
|
|
Customer relationships, net
|
15,904
|
|
|
16,914
|
|
Other non-current assets
|
3,073
|
|
|
943
|
|
Total assets
|
$
|
121,124
|
|
|
$
|
111,800
|
|
Liabilities and stockholders' deficit
|
|
|
|
Current liabilities
|
|
|
|
Accounts payable
|
$
|
2,149
|
|
|
$
|
1,458
|
|
Other current liabilities
|
9,024
|
|
|
9,241
|
|
Current portion of debt
|
3,500
|
|
|
3,500
|
|
Advertising fund liabilities, restricted
|
4,674
|
|
|
2,533
|
|
Total current liabilities
|
19,347
|
|
|
16,732
|
|
Long-term debt, net
|
136,685
|
|
|
147,217
|
|
Deferred revenues, net of current
|
8,545
|
|
|
7,868
|
|
Deferred income tax liabilities, net
|
12,039
|
|
|
12,304
|
|
Other non-current liabilities
|
2,182
|
|
|
2,307
|
|
Total liabilities
|
178,798
|
|
|
186,428
|
|
Commitments and contingencies (see note 7)
|
|
|
|
|
|
Stockholders' deficit
|
|
|
|
Common stock, $0.01 par value; 100,000,000 shares authorized; 29,093,736 and 28,747,392 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively
|
291
|
|
|
287
|
|
Additional paid-in-capital
|
1,337
|
|
|
1,194
|
|
Accumulated deficit
|
(59,302
|
)
|
|
(76,109
|
)
|
Total stockholders' deficit
|
(57,674
|
)
|
|
(74,628
|
)
|
Total liabilities and stockholders' deficit
|
$
|
121,124
|
|
|
$
|
111,800
|
|
See accompanying notes to consolidated financial statements.
WINGSTOP INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(amounts in thousands, except per share data)
(Unaudited)
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Thirty-Nine Weeks Ended
|
|
September 30,
2017
|
|
September 24,
2016
|
|
September 30,
2017
|
|
September 24,
2016
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Royalty revenue and franchise fees
|
$
|
16,354
|
|
|
$
|
13,660
|
|
|
$
|
50,204
|
|
|
$
|
41,463
|
|
Company-owned restaurant sales
|
9,672
|
|
|
8,150
|
|
|
27,063
|
|
|
25,144
|
|
Total revenue
|
26,026
|
|
|
21,810
|
|
|
77,267
|
|
|
66,607
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
Cost of sales
(1)
|
7,823
|
|
|
6,091
|
|
|
21,290
|
|
|
18,352
|
|
Selling, general and administrative
|
8,144
|
|
|
8,893
|
|
|
26,694
|
|
|
25,120
|
|
Depreciation and amortization
|
881
|
|
|
746
|
|
|
2,407
|
|
|
2,187
|
|
Total costs and expenses
|
16,848
|
|
|
15,730
|
|
|
50,391
|
|
|
45,659
|
|
Operating income
|
9,178
|
|
|
6,080
|
|
|
26,876
|
|
|
20,948
|
|
Interest expense, net
|
1,302
|
|
|
1,390
|
|
|
3,908
|
|
|
2,858
|
|
Other expense, net
|
—
|
|
|
216
|
|
|
—
|
|
|
254
|
|
Income before income tax expense
|
7,876
|
|
|
4,474
|
|
|
22,968
|
|
|
17,836
|
|
Income tax expense
|
2,864
|
|
|
1,721
|
|
|
6,161
|
|
|
6,714
|
|
Net income
|
$
|
5,012
|
|
|
$
|
2,753
|
|
|
$
|
16,807
|
|
|
$
|
11,122
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
|
|
|
|
|
|
Basic
|
$
|
0.17
|
|
|
$
|
0.10
|
|
|
$
|
0.58
|
|
|
$
|
0.39
|
|
Diluted
|
$
|
0.17
|
|
|
$
|
0.09
|
|
|
$
|
0.57
|
|
|
$
|
0.38
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
|
Basic
|
29,081
|
|
|
28,725
|
|
|
29,003
|
|
|
28,652
|
|
Diluted
|
29,384
|
|
|
29,014
|
|
|
29,362
|
|
|
28,991
|
|
|
|
|
|
|
|
|
|
Dividends per share
|
$
|
0.07
|
|
|
$
|
2.90
|
|
|
$
|
0.07
|
|
|
$
|
2.90
|
|
|
|
|
|
|
|
|
|
(1)
exclusive of depreciation and amortization, shown separately
|
|
|
|
|
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|
See accompanying notes to consolidated financial statements.
WINGSTOP INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(amounts in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Thirty-Nine Weeks Ended
|
|
September 30,
2017
|
|
September 24,
2016
|
|
|
|
|
Operating activities
|
|
|
|
|
|
Net income
|
$
|
16,807
|
|
|
$
|
11,122
|
|
Adjustments to reconcile net income to cash provided by operating activities:
|
|
|
|
Depreciation and amortization
|
2,407
|
|
|
2,187
|
|
Deferred income taxes
|
(265
|
)
|
|
(68
|
)
|
Stock-based compensation expense
|
894
|
|
|
392
|
|
Amortization of debt issuance costs
|
219
|
|
|
357
|
|
Changes in operating assets and liabilities:
|
|
|
|
Accounts receivable
|
(1,442
|
)
|
|
875
|
|
Prepaid expenses and other assets
|
(951
|
)
|
|
(98
|
)
|
Accounts payable and other current liabilities
|
(331
|
)
|
|
961
|
|
Deferred revenue
|
769
|
|
|
201
|
|
Other non-current liabilities
|
(127
|
)
|
|
169
|
|
Cash provided by operating activities
|
17,980
|
|
|
16,098
|
|
|
|
|
|
Investing activities
|
|
|
|
Purchases of property and equipment
|
(1,834
|
)
|
|
(1,471
|
)
|
Acquisition of restaurants from franchisees
|
(3,949
|
)
|
|
—
|
|
Cash used in investing activities
|
(5,783
|
)
|
|
(1,471
|
)
|
|
|
|
|
Financing activities
|
|
|
|
Proceeds from exercise of stock options
|
1,301
|
|
|
459
|
|
Borrowings of long-term debt
|
3,500
|
|
|
165,000
|
|
Repayments of long-term debt
|
(14,125
|
)
|
|
(102,500
|
)
|
Payment of deferred financing costs
|
—
|
|
|
(1,180
|
)
|
Dividends paid
|
(2,034
|
)
|
|
(83,268
|
)
|
Cash used in financing activities
|
(11,358
|
)
|
|
(21,489
|
)
|
|
|
|
|
Net change in cash and cash equivalents
|
839
|
|
|
(6,862
|
)
|
Cash and cash equivalents at beginning of period
|
3,750
|
|
|
10,690
|
|
Cash and cash equivalents at end of period
|
$
|
4,589
|
|
|
$
|
3,828
|
|
See accompanying notes to consolidated financial statements.
WINGSTOP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
(1) Basis of Presentation
Basis of Presentation
Wingstop Inc. (“Wingstop” or the “Company”), through its primary operating subsidiary, Wingstop Restaurants Inc. (“WRI”), collectively referred to as the “Company”, is in the business of franchising and operating Wingstop restaurants. As of
September 30, 2017
,
971
franchised restaurants were in operation domestically, and
94
international franchised restaurants were in operation across
seven
countries. As of
September 30, 2017
, the Company owned and operated
23
restaurants.
The accompanying unaudited consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. Consequently, financial information and disclosures normally included in financial statements prepared annually in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted. Balance sheet amounts are as of
September 30, 2017
and
December 31, 2016
and operating results are for the
thirteen and thirty-nine weeks ended
September 30, 2017
and
September 24, 2016
.
In the Company’s opinion, all necessary adjustments have been made for the fair presentation of the results of the interim periods presented. The results of operations for such interim periods are not necessarily indicative of the results to be expected for the full year. The accompanying interim unaudited consolidated financial statements should be read in conjunction with the audited financial statements and the related notes thereto included in the Company’s annual report on Form 10-K for the fiscal year ended
December 31, 2016
.
The Company uses a 52/53-week fiscal year that ends on the last Saturday of the calendar year. Fiscal years
2017
and
2016
have 52 weeks and 53 weeks, respectively.
Advertising Fund
The Company administers the Wingstop Restaurants Advertising Fund (“Ad Fund”), which is used for various forms of advertising for the Wingstop brand. The revenues, expenses and cash flows of the Ad Fund are not included in the Consolidated Statements of Operations or Consolidated Statements of Cash Flows because the Company does not have complete discretion over the usage of the funds. Beginning in fiscal year 2017, in conjunction with the launch of national advertising, the advertising fund contribution collected from Wingstop restaurant franchisees and WRI-owned restaurants increased from
2%
to
3%
of gross sales. This change is not an increase to the existing
4%
of the restaurants’ gross sales that has historically been required to be spent on advertising according to our franchise agreement, but rather a reallocation of the types of advertising on which the
4%
advertising fee will be spent. For the
thirty-nine weeks ended
September 30, 2017
and
September 24, 2016
the Company made discretionary contributions to the Ad Fund totaling
$4.8 million
and
$1.7 million
, respectively, for the purpose of supplementing the national advertising campaign, which were included in Selling, general & administrative (“SG&A”) expenses in the Consolidated Statements of Operations.
Recent Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606)
. This update provides a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. This update is effective for annual and interim periods beginning after December 15, 2017 with early adoption permitted in fiscal year 2017. The Company will adopt this new guidance in fiscal year 2018 and expects to use the full retrospective transition method, which will result in restating each prior reporting period presented, fiscal years 2016 and 2017, in the year of adoption, as well as a cumulative effect adjustment to the opening balance of Accumulated Deficit as of the first day of fiscal year 2016.
Based on a preliminary assessment, the Company believes the recognition of the majority of its revenues, including ongoing royalty fee revenues, which are based on a percentage of franchise sales, and revenues from Company-owned stores, will not be affected by the new guidance. The Company expects the adoption of the new guidance to change the timing of recognition of initial franchise fees, including development and territory fees for our international business, and renewal fees. Currently, these fees are generally
WINGSTOP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
recognized upfront upon either opening of the respective restaurant or when a renewal agreement becomes effective. The new guidance will generally require these fees to be recognized over the term of the related franchise license for the respective restaurant.
The Company also expects the adoption of this new guidance to change the reporting of advertising fund contributions from franchisees and the related advertising fund expenditures, which are not currently included in the consolidated statements of operations. Under the new guidance, the Company expects advertising fund contributions and expenditures to be reported on a gross basis in the consolidated statements of operations. Although we expect this change to have a material impact to our total revenues and expenses, we expect such contributions and expenditures to be largely offsetting and not to materially impact our reported net income.
Although the majority of the assessment phase is complete, the Company continues to evaluate the impact the adoption of this new guidance will have on these and other revenue transactions, in addition to the impact on accounting policies and related disclosures.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
. ASU 2016-02 amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. ASU 2016-02 will be effective beginning in the first quarter of 2019. Early adoption of ASU 2016-02 as of its issuance is permitted. This new guidance requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. The Company is currently evaluating the impact of adopting this new guidance on the consolidated financial statements.
In March 2016, the FASB issued Accounting Standards Update 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,
which was issued to simplify accounting for several aspects of share-based payment transactions, including the income tax impact, classification on the statement of cash flows and forfeitures.
The Company adopted this new standard on January 1, 2017.
As a result, the recognition of excess tax benefits are reflected in our provision for income taxes in the Consolidated Statements of Operations rather than Stockholders’ deficit in the Consolidated Balance Sheet for all periods after fiscal year 2016. This provision was required to be applied prospectively. For the
thirteen and thirty-nine weeks ended
September 30, 2017
, we recognized
$0.1 million
and
$2.5 million
, respectively, of excess tax benefits in income tax expense in the Consolidated Statements of Operations.
Excess tax benefits are now reported in cash flows from operating activities rather than cash flows from financing activities in the Consolidated Statement of Cash Flows. We elected to apply this change in presentation retrospectively, and thus, prior periods have been adjusted, resulting in an increase to cash provided by operating activities and cash used in financing activities of
$1.0 million
for the
thirty-nine weeks ended
September 24, 2016
.
This new standard allows entities to make an accounting policy election to either estimate the number of equity awards that are expected to vest, as previously required, or account for forfeitures when they occur. We have elected to recognize forfeitures in the period they occur. This change in accounting policy did not result in a material impact to the Consolidated Statements of Operations.
(2) Earnings per Share
Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the reporting period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. For the calculation of diluted earnings per share, the basic weighted average number of shares is increased by the dilutive effect of stock options and restricted stock units, determined using the treasury stock method.
Basic weighted average shares outstanding is reconciled to diluted weighted average shares outstanding as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Thirty-Nine Weeks Ended
|
|
September 30,
2017
|
|
September 24,
2016
|
|
September 30,
2017
|
|
September 24,
2016
|
Basic weighted average shares outstanding
|
29,081
|
|
|
28,725
|
|
|
29,003
|
|
|
28,652
|
|
Dilutive shares
|
303
|
|
|
289
|
|
|
359
|
|
|
339
|
|
Diluted weighted average shares outstanding
|
29,384
|
|
|
29,014
|
|
|
29,362
|
|
|
28,991
|
|
WINGSTOP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
For the
thirteen weeks ended
September 30, 2017
and
September 24, 2016
, respectively, approximately
3,000
and
5,000
equity awards were excluded from the dilutive earnings per share calculation because the effect would have been anti-dilutive.
For the
thirty-nine weeks ended
September 30, 2017
and
September 24, 2016
, respectively, approximately
11,000
and
5,000
equity awards were excluded from the dilutive earnings per share calculation because the effect would have been anti-dilutive.
(3) Dividends
On
August 3, 2017
, the Company’s Board of Directors declared a quarterly dividend of
$0.07
per share of common stock for shareholders of record as of
September 3, 2017
, which was paid on
September 18, 2017
, totaling
$2.0 million
.
Subsequent to the third quarter, on
November 2, 2017
, the Company’s Board of Directors declared a quarterly dividend of
$0.07
per share of common stock for shareholders of record as of
December 4, 2017
, to be paid on
December 19, 2017
, totaling approximately
$2.0 million
.
(4) Fair Value Measurements
Fair value is the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. Assets and liabilities are classified using a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value as follows:
Level 1 — Unadjusted quoted prices for identical instruments traded in active markets.
Level 2 — Observable market-based inputs or unobservable inputs corroborated by market data.
Level 3 — Unobservable inputs reflecting management’s estimates and assumptions.
The carrying values of cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to their short-term nature. Fair value of debt is determined on a non-recurring basis, which results are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
Hierarchy
|
|
September 30, 2017
|
|
December 31, 2016
|
|
|
Carrying
Value
(2)
|
|
Fair Value
|
|
Carrying
Value
(2)
|
|
Fair Value
|
Senior Secured Credit Facility:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term loan facility
(1)
|
Level 2
|
|
$
|
65,625
|
|
|
$
|
65,625
|
|
|
$
|
68,250
|
|
|
$
|
68,250
|
|
Revolving credit facility
(1)
|
Level 2
|
|
$
|
75,000
|
|
|
$
|
75,000
|
|
|
$
|
83,000
|
|
|
$
|
83,000
|
|
(1)
The fair value of long-term debt was estimated using available market information.
(2)
Excluding issuance costs netted on the Balance Sheet.
The Company also measures certain non-financial assets at fair value on a non-recurring basis, primarily long-lived assets, intangible assets and goodwill, in connection with our periodic evaluations of such assets for potential impairment.
(5)
Income Taxes
Income tax expense and the effective tax rate were
$2.9 million
and
36.4%
, respectively, for the
thirteen weeks ended
September 30, 2017
, and
$1.7 million
and
38.5%
, respectively, for the
thirteen weeks ended
September 24, 2016
. Income tax expense and the effective tax rate were
$6.2 million
and
26.8%
, respectively, for the
thirty-nine weeks ended
September 30, 2017
, and
$6.7 million
and
37.6%
, respectively, for the
thirty-nine weeks ended
September 24, 2016
.
Income tax expense for the
thirteen and thirty-nine weeks ended
September 30, 2017
includes
$0.1 million
and
$2.5 million
in tax benefits, respectively, resulting from the recognition of excess tax benefits from share-based compensation in income tax expense rather than paid-in capital due to the adoption of ASU 2016-09, which resulted in a lower effective tax rate for the
thirteen and thirty-nine weeks ended
September 30, 2017
compared to the prior year period.
(6)
Debt Obligations
The senior secured credit facility consists of a term loan facility in an aggregate amount of
$70.0 million
and a revolving credit facility up to an aggregate amount of
$110.0 million
. As of
September 30, 2017
, the term loan facility and the revolving credit facility had outstanding balances of
$65.6 million
and
$75.0 million
, respectively, bearing interest at
3.33%
.
WINGSTOP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
In
2017
, the Company made payments of
$11.5 million
and
$2.6 million
on the outstanding principal balance of its revolving credit facility and term loan facility, respectively, and borrowings on its revolving credit facility of
$3.5 million
.
The senior secured credit facility is secured by substantially all assets of the Company and requires compliance with certain financial and non-financial covenants. As of
September 30, 2017
, the Company was in compliance with all covenants.
As of
September 30, 2017
, the scheduled principal payments on debt were as follows (in thousands):
|
|
|
|
|
Remainder of fiscal year 2017
|
$
|
875
|
|
Fiscal year 2018
|
3,500
|
|
Fiscal year 2019
|
2,625
|
|
Fiscal year 2020
|
3,500
|
|
Fiscal year 2021
|
130,125
|
|
Total
|
$
|
140,625
|
|
(7) Commitments and Contingencies
WRI leases certain office and retail space and equipment under non-cancelable operating leases with terms expiring at various dates through
July 2032
.
A schedule of future minimum rental payments required under our operating leases, excluding contingent rent, that have initial or remaining non-cancelable lease terms in excess of one year, as of
September 30, 2017
, is as follows (in thousands):
|
|
|
|
|
Remainder of fiscal year 2017
|
$
|
446
|
|
Fiscal year 2018
|
1,783
|
|
Fiscal year 2019
|
1,561
|
|
Fiscal year 2020
|
1,436
|
|
Fiscal year 2021
|
1,282
|
|
Fiscal year 2022
|
1,226
|
|
Thereafter
|
4,038
|
|
Total
|
$
|
11,772
|
|
Rent expense under cancelable and non-cancelable leases was
$508,000
and
$479,000
for the
thirteen weeks ended
September 30, 2017
and
September 24, 2016
, respectively, and
$1.5 million
and
$1.4 million
for the
thirty-nine weeks ended
September 30, 2017
and
September 24, 2016
, respectively.
The Company is subject to legal proceedings, claims and liabilities, such as employment-related claims and premises-liability cases, which arise in the ordinary course of business and are generally covered by insurance. In the opinion of management, the amount of ultimate liability with respect to those actions should not have a material adverse impact on the Company’s financial position, results of operations or cash flows.
WINGSTOP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
(8)
Stock-Based Compensation
Stock-based compensation is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the requisite employee service period (generally the vesting period of the grant). The Company recognized
$0.9 million
in stock compensation expense for the
thirty-nine weeks ended
September 30, 2017
, with a corresponding increase to additional paid-in-capital. Stock compensation expense is included in SG&A in the Consolidated Statements of Operations.
Stock Options
The following table summarizes stock option activity (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
Weighted Average Exercise Price
|
|
Aggregate Intrinsic Value
|
|
Weighted Average Remaining Term
|
Outstanding - December 31, 2016
|
855
|
|
|
$
|
5.14
|
|
|
$
|
20,905
|
|
|
6.8
|
Granted
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Exercised
|
(325
|
)
|
|
$
|
4.00
|
|
|
|
|
|
Canceled
|
(109
|
)
|
|
$
|
7.12
|
|
|
|
|
|
Outstanding - September 30, 2017
|
421
|
|
|
$
|
5.52
|
|
|
$
|
11,679
|
|
|
5.9
|
The total grant-date fair value of stock options vested during the
thirty-nine weeks ended
September 30, 2017
was
$1.0 million
. The total intrinsic value of stock options exercised during the
thirty-nine weeks ended
September 30, 2017
was
$8.1 million
. As of
September 30, 2017
, total unrecognized compensation expense related to unvested stock options was
$1.1 million
, which is expected to be recognized over a weighted-average period of
1.7
years.
Restricted Stock Units and Performance Stock Units
The following table summarizes activity related to restricted stock units and performance stock units (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Units
|
|
Weighted Average Grant Date Fair Value
|
|
Performance Stock Units
|
|
Weighted Average Grant Date Fair Value
|
Outstanding - December 31, 2016
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
Granted
|
105
|
|
|
27.02
|
|
|
94
|
|
|
27.52
|
|
Released
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Canceled
|
(11
|
)
|
|
26.30
|
|
|
(8
|
)
|
|
26.30
|
|
Outstanding - September 30, 2017
|
94
|
|
|
$
|
27.10
|
|
|
86
|
|
|
$
|
27.63
|
|
The fair value of restricted stock units and performance stock units are based on the closing market price of the stock on the date of grant. The restricted stock units granted during the
thirty-nine weeks ended
September 30, 2017
vest over a three year service period. As of
September 30, 2017
, total unrecognized compensation expense related to unvested restricted stock units was
$2.1 million
, which is expected to be recognized over a weighted-average period of
2.4
years.
The performance stock units vest based on the outcome of certain performance criteria. For performance stock units granted during the
thirty-nine weeks ended
September 30, 2017
, the amount of units that can be earned range from
0%
to
100%
of the number of performance awards granted, based on the achievement of certain adjusted EBITDA targets, as defined by the plan, over a performance period of
one
to
three
years. The compensation expense related to the performance stock units is recognized over the vesting period when the achievement of the performance conditions become probable. As of
September 30, 2017
, total unrecognized compensation expense related to unvested performance stock units was
$1.8 million
, which is expected to be recognized over a weighted-average period of
2.4
years.
Restricted Stock Awards
The Company granted
9,000
shares of restricted stock awards during the
thirty-nine weeks ended
September 30, 2017
with a weighted average grant date fair value of
$29.12
. The fair value of the non-vested restricted stock awards is based on the closing price on the date of grant. As of
September 30, 2017
, total unrecognized compensation expense related to unvested restricted stock awards was
$0.4 million
, which will be recognized over a weighted average period of approximately
2.4 years
.
WINGSTOP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
(9)
Business Segments
The Franchise segment consists of domestic and international franchise restaurants, which represent the majority of our system-wide restaurants. As of
September 30, 2017
, the franchise operations segment consisted of
1,065
restaurants operated by Wingstop franchisees in the United States and
seven
countries outside of the United States as compared to
929
franchised restaurants in operation as of
September 24, 2016
. Franchise operations revenue consists primarily of franchise royalty revenue, sales of franchise and development fees, international territory fees, and other revenue.
As of
September 30, 2017
, the Company segment consisted of
23
company-owned restaurants, located in the United States, as compared to
20
company-owned restaurants as of
September 24, 2016
. Company restaurant sales are comprised of food and beverage sales at company-owned restaurants. Company restaurant expenses are operating expenses at company-owned restaurants and include food, beverage, labor, benefits, utilities, rent and other operating costs.
Information on segments and a reconciliation to income before taxes are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Thirty-Nine Weeks Ended
|
|
September 30,
2017
|
|
September 24,
2016
|
|
September 30,
2017
|
|
September 24,
2016
|
Revenue:
|
|
|
|
|
|
|
|
Franchise segment
|
$
|
16,354
|
|
|
$
|
13,660
|
|
|
$
|
50,204
|
|
|
$
|
41,463
|
|
Company segment
|
9,672
|
|
|
8,150
|
|
|
27,063
|
|
|
25,144
|
|
Total segment revenue
|
$
|
26,026
|
|
|
$
|
21,810
|
|
|
$
|
77,267
|
|
|
$
|
66,607
|
|
|
|
|
|
|
|
|
|
Segment Profit:
|
|
|
|
|
|
|
|
Franchise segment
|
$
|
8,251
|
|
|
$
|
6,199
|
|
|
$
|
23,792
|
|
|
$
|
18,794
|
|
Company segment
|
927
|
|
|
1,236
|
|
|
3,084
|
|
|
4,211
|
|
Total segment profit
|
9,178
|
|
|
7,435
|
|
|
26,876
|
|
|
23,005
|
|
Corporate and other
(1)
|
—
|
|
|
1,355
|
|
|
—
|
|
|
2,057
|
|
Interest expense, net
|
1,302
|
|
|
1,390
|
|
|
3,908
|
|
|
2,858
|
|
Other (income) expense, net
|
—
|
|
|
216
|
|
|
—
|
|
|
254
|
|
Income before taxes
|
$
|
7,876
|
|
|
$
|
4,474
|
|
|
$
|
22,968
|
|
|
$
|
17,836
|
|
(1)
Corporate and other includes corporate related items not allocated to reportable segments and consists primarily of expenses associated with the refinancing of our credit agreement and our public offerings.
(10) Restaurant Acquisition
On
July 16, 2017
, the Company acquired
two
existing restaurants from a franchisee. The total purchase price was
$3.9 million
and was paid in cash funded by operations and proceeds from our revolving credit facility. The results of operations of these locations are included in our Consolidated Statements of Operations as of the date of acquisition. The acquisition is accounted for as a business combination.
The following table summarizes the final allocation of the purchase price to the estimated fair values of assets acquired and liabilities assumed at the date of the acquisition, inclusive of adjustments made during the measurement period (in thousands):
|
|
|
|
|
|
Final Purchase Price Allocation
|
Inventory
|
$
|
16
|
|
Property and equipment
|
183
|
|
Reacquired franchise rights
|
2,323
|
|
Goodwill
|
1,429
|
|
Gift card liability
|
(2
|
)
|
Total purchase price
|
$
|
3,949
|
|
WINGSTOP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
The excess of the purchase price over the aggregate fair value of assets acquired was allocated to goodwill and is attributable to the benefits expected as a result of the acquisition, including sales and unit growth opportunities. As of
September 30, 2017
,
$1.4 million
of the goodwill from the acquisition is expected to be deductible for federal income tax purposes.
Pro-forma financial information of the combined entities is not presented due to the immaterial impact of the financial results of the acquired restaurants on our consolidated financial statements.
The fair value measurement of tangible and intangible assets and liabilities as of the acquisition date is based on significant inputs not observed in the market and thus represents a Level 3 fair value measurement. Fair value measurements for reacquired franchise rights were determined using the income approach. Fair value measurements for property and equipment were determined using the cost approach.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying unaudited consolidated financial statements and related notes in Item 1 and with the audited consolidated financial statements and the related notes included in our annual report on Form 10-K. The statements in this discussion regarding industry outlook, our expectations regarding our future performance, liquidity and capital resources and other non-historical statements in this discussion 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 15 of our annual report on Form 10-K. 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
2017
and
2016
contain 52 weeks and 53 weeks, respectively.
Overview
Wingstop is a high-growth franchisor and operator of restaurants that offer cooked-to-order, hand-sauced and tossed chicken wings.
We believe we pioneered the concept of wings as a “center-of-the-plate” item for all of our meal occasions. While other concepts include wings as add-on menu items or focus on wings in a bar or sports-centric setting, we are singularly focused on wings, fries and sides, which generate approximately
92%
of our system-wide sales.
We offer 11 bold, distinctive and craveable flavors on our bone-in and boneless chicken wings paired with fresh-cut, seasoned fries and sides made fresh daily. Our menu is highly-customizable for different dining occasions, and we believe it delivers a compelling value proposition for groups, families, and individuals. We have broad and growing consumer appeal anchored by a sought after core demographic of 18-34 year old Millennials, which we believe is a loyal consumer group that dines at fast casual restaurants more frequently.
Founded in 1994 in Garland, Texas, we have sold approximately 4 billion wings since our inception. Today, Wingstop is the largest fast casual chicken wings-focused restaurant chain in the world and has demonstrated strong, consistent growth. As of
September 30, 2017
, we had a total
1,088
restaurants across
42
states and
eight
countries in our system. Our restaurant base is
98%
franchised, with
1,065
franchised locations (including
94
international locations) and
23
company-owned restaurants.
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, system-wide sales, royalty and franchise fee revenue and company-owned restaurant sales.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Thirty-Nine Weeks Ended
|
|
September 30,
2017
|
|
September 24,
2016
|
|
September 30,
2017
|
|
September 24,
2016
|
Domestic Franchised Activity:
|
|
|
|
|
|
|
|
Beginning of period
|
946
|
|
|
831
|
|
|
901
|
|
|
767
|
|
Openings
|
28
|
|
|
31
|
|
|
79
|
|
|
96
|
|
Closures
|
(1
|
)
|
|
—
|
|
|
(7
|
)
|
|
(1
|
)
|
Acquired by Company
|
(2
|
)
|
|
—
|
|
|
(2
|
)
|
|
—
|
|
Restaurants end of period
|
971
|
|
|
862
|
|
|
971
|
|
|
862
|
|
|
|
|
|
|
|
|
|
Domestic Company-Owned Activity:
|
|
|
|
|
|
|
|
Beginning of period
|
21
|
|
|
20
|
|
|
21
|
|
|
19
|
|
Openings
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Closures
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Acquired from franchisees
|
2
|
|
|
—
|
|
|
2
|
|
|
—
|
|
Restaurants end of period
|
23
|
|
|
20
|
|
|
23
|
|
|
20
|
|
|
|
|
|
|
|
|
|
Total Domestic Restaurants
|
994
|
|
|
882
|
|
|
994
|
|
|
882
|
|
|
|
|
|
|
|
|
|
International Franchised Activity:
|
|
|
|
|
|
|
|
Beginning of period
|
89
|
|
|
63
|
|
|
76
|
|
|
59
|
|
Openings
|
5
|
|
|
4
|
|
|
20
|
|
|
11
|
|
Closures
|
—
|
|
|
—
|
|
|
(2
|
)
|
|
(3
|
)
|
Restaurants end of period
|
94
|
|
|
67
|
|
|
94
|
|
|
67
|
|
|
|
|
|
|
|
|
|
Total System-wide Restaurants
|
1,088
|
|
|
949
|
|
|
1,088
|
|
|
949
|
|
System-wide sales.
System-wide sales represents net sales for all of our company-owned and franchised restaurants, as 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 range 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.
Average unit volume (AUV).
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. AUV allows management to assess our company-owned and franchised restaurant economics. Changes in AUV are primarily driven by increases in same store sales and are also influenced by opening new restaurants.
Same store sales.
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 company-owned restaurants as well as system-wide restaurants. Same store sales are
driven by changes in transactions and average transaction size. Transaction size changes are driven by price changes or mix shifts from either a change in the number of items purchased or shifts into higher/lower priced categories of items.
Adjusted EBITDA.
We define Adjusted EBITDA as net income before interest expense, net, income tax expense, and depreciation and amortization, with further adjustments for transaction costs, 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 see the table below. For further discussion of EBITDA and Adjusted EBITDA as non-GAAP measures and how we utilize them see footnote 2 below.
The following table sets forth our key performance indicators as well as our total revenue and net income for the
thirteen and thirty-nine weeks ended
September 30, 2017
and
September 24, 2016
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Thirty-Nine Weeks Ended
|
|
September 30, 2017
|
|
September 24, 2016
|
|
September 30, 2017
|
|
September 24, 2016
|
Number of system-wide restaurants open at end of period
|
1,088
|
|
|
949
|
|
|
1,088
|
|
|
949
|
|
System-wide sales
(1)
|
$
|
274,021
|
|
|
$
|
235,975
|
|
|
$
|
802,420
|
|
|
$
|
707,077
|
|
Domestic restaurant AUV
|
$
|
1,102
|
|
|
$
|
1,126
|
|
|
$
|
1,102
|
|
|
$
|
1,126
|
|
System-wide domestic same store sales growth
|
4.1
|
%
|
|
4.1
|
%
|
|
1.7
|
%
|
|
3.9
|
%
|
Company-owned domestic same store sales growth
|
5.5
|
%
|
|
4.8
|
%
|
|
0.5
|
%
|
|
6.9
|
%
|
Total revenue
|
$
|
26,026
|
|
|
$
|
21,810
|
|
|
$
|
77,267
|
|
|
$
|
66,607
|
|
Net income
|
$
|
5,012
|
|
|
$
|
2,753
|
|
|
$
|
16,807
|
|
|
$
|
11,122
|
|
Adjusted EBITDA
(2)
|
$
|
10,412
|
|
|
$
|
8,319
|
|
|
$
|
30,177
|
|
|
$
|
25,545
|
|
(1) The percentage of system-wide sales attributable to company-owned restaurants was
3.5%
for both the
thirteen weeks ended
September 30, 2017
and
September 24, 2016
, and was
3.4%
and
3.6%
for the
thirty-nine weeks ended
September 30, 2017
and
September 24, 2016
, 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, U.S. GAAP. EBITDA and Adjusted EBITDA are not measurements of our financial performance under U.S. GAAP and should not be considered as an alternative to net income or any other performance measure derived in accordance with U.S. GAAP, or as an alternative to cash flows from operating activities as a measure of our liquidity.
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, gains and losses on the disposal of assets and stock-based compensation expense. There were no gains and losses on disposal of assets during the
thirteen and thirty-nine weeks ended
September 30, 2017
and
September 24, 2016
. 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 period over period 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 shares.
|
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. Items excluded from these non-GAAP measures are significant components in understanding and assessing financial performance. In addition, the instruments governing our indebtedness use EBITDA (with additional adjustments) to measure our compliance with covenants such as 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 U.S. GAAP results and using these non-GAAP measures only supplementally. As noted in the table below, Adjusted EBITDA includes adjustments for transaction costs, gains and losses on disposal of assets and stock-based compensation, among other items. It is reasonable to expect that these items 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 with a measure of 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 and thirty-nine weeks ended
September 30, 2017
and
September 24, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Thirty-Nine Weeks Ended
|
|
September 30,
2017
|
|
September 24,
2016
|
|
September 30,
2017
|
|
September 24,
2016
|
Net income
|
$
|
5,012
|
|
|
$
|
2,753
|
|
|
$
|
16,807
|
|
|
$
|
11,122
|
|
Interest expense, net
|
1,302
|
|
|
1,390
|
|
|
3,908
|
|
|
2,858
|
|
Income tax expense
|
2,864
|
|
|
1,721
|
|
|
6,161
|
|
|
6,714
|
|
Depreciation and amortization
|
881
|
|
|
746
|
|
|
2,407
|
|
|
2,187
|
|
EBITDA
|
$
|
10,059
|
|
|
$
|
6,610
|
|
|
$
|
29,283
|
|
|
$
|
22,881
|
|
Additional adjustments:
|
|
|
|
|
|
|
|
Transaction costs
(a)
|
—
|
|
|
1,570
|
|
|
—
|
|
|
2,272
|
|
Stock-based compensation expense
(b)
|
353
|
|
|
139
|
|
|
894
|
|
|
392
|
|
Adjusted EBITDA
|
$
|
10,412
|
|
|
$
|
8,319
|
|
|
$
|
30,177
|
|
|
$
|
25,545
|
|
(a) Represents costs and expenses related to the refinancings of our credit agreement and our public offerings; all transaction costs are included in SG&A with the exception of
$215,000
that is included in Other expense, net during the
thirteen and thirty-nine weeks ended
September 24, 2016
.
(b) Includes non-cash, stock-based compensation.
Results of Operations
Thirteen Weeks Ended September 30, 2017
compared to
Thirteen Weeks Ended September 24, 2016
The following table sets forth our results of operations for the
thirteen weeks ended
September 30, 2017
and
September 24, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Increase / (Decrease)
|
|
September 30,
2017
|
|
September 24,
2016
|
|
$
|
|
%
|
Revenue:
|
|
|
|
|
|
|
|
Royalty revenue and franchise fees
|
$
|
16,354
|
|
|
$
|
13,660
|
|
|
$
|
2,694
|
|
|
19.7
|
%
|
Company-owned restaurant sales
|
9,672
|
|
|
8,150
|
|
|
1,522
|
|
|
18.7
|
%
|
Total revenue
|
26,026
|
|
|
21,810
|
|
|
4,216
|
|
|
19.3
|
%
|
Costs and expenses:
|
|
|
|
|
|
|
|
Cost of sales
(1)
|
7,823
|
|
|
6,091
|
|
|
1,732
|
|
|
28.4
|
%
|
Selling, general and administrative
|
8,144
|
|
|
8,893
|
|
|
(749
|
)
|
|
(8.4
|
)%
|
Depreciation and amortization
|
881
|
|
|
746
|
|
|
135
|
|
|
18.1
|
%
|
Total costs and expenses
|
16,848
|
|
|
15,730
|
|
|
1,118
|
|
|
7.1
|
%
|
Operating income
|
9,178
|
|
|
6,080
|
|
|
3,098
|
|
|
51.0
|
%
|
Interest expense, net
|
1,302
|
|
|
1,390
|
|
|
(88
|
)
|
|
(6.3
|
)%
|
Other expense, net
|
—
|
|
|
216
|
|
|
(216
|
)
|
|
(100.0
|
)%
|
Income before income tax expense
|
7,876
|
|
|
4,474
|
|
|
3,402
|
|
|
76.0
|
%
|
Income tax expense
|
2,864
|
|
|
1,721
|
|
|
1,143
|
|
|
66.4
|
%
|
Net income
|
$
|
5,012
|
|
|
$
|
2,753
|
|
|
$
|
2,259
|
|
|
82.1
|
%
|
(1)
Exclusive of depreciation and amortization, shown separately.
Total revenue.
During the
thirteen weeks ended
September 30, 2017
, total revenue was
$26.0 million
,
an increase
of
$4.2 million
, or
19.3%
, compared to
$21.8 million
in the comparable period in
2016
.
Royalty revenue and franchise fees.
During the
thirteen weeks ended
September 30, 2017
, royalty revenue and franchise fees were
$16.4 million
,
an increase
of
$2.7 million
, or
19.7%
, compared to
$13.7 million
in the comparable period in
2016
. Royalty revenue
increased
$2.0 million
due to
an increase
in the number of franchised restaurants from
929
at
September 24, 2016
to
1,065
at
September 30, 2017
and domestic same store sales growth of
4.1%
.
Other revenue
increased
$0.7 million
,
primarily due to an increase in vendor rebates compared to the prior year period.
Company-owned restaurant sales.
During the
thirteen weeks ended
September 30, 2017
, company-owned restaurant sales were
$9.7 million
,
an increase
of
$1.5 million
, or
18.7%
, compared to
$8.2 million
in the comparable period in
2016
.
The increase
is the result of the acquisition of two restaurants from a franchisee in the third quarter 2017 resulting in sales of
$0.8 million
, company-owned domestic same store sales growth of
5.5%
, primarily due to an increase in transaction counts, and the opening of one company-owned restaurant during December 2016.
Cost of sales.
During the
thirteen weeks ended
September 30, 2017
, cost of sales was
$7.8 million
,
an increase
of
$1.7 million
, or
28.4%
, compared to
$6.1 million
in the comparable period in
2016
. Cost of sales as a percentage of company-owned restaurant sales was
80.9%
in the quarter ended
September 30, 2017
compared to
74.7%
in the prior year.
The table below presents the major components of cost of sales (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
September 30,
2017
|
|
As a % of company-owned restaurant sales
|
|
September 24,
2016
|
|
As a % of company-owned restaurant sales
|
|
|
Cost of sales:
|
|
|
|
|
|
|
|
|
Food, beverage and packaging costs
|
$
|
4,136
|
|
|
42.8
|
%
|
|
$
|
2,932
|
|
|
36.0
|
%
|
|
Labor costs
|
2,295
|
|
|
23.7
|
%
|
|
1,934
|
|
|
23.7
|
%
|
|
Other restaurant operating expenses
|
1,634
|
|
|
16.9
|
%
|
|
1,438
|
|
|
17.6
|
%
|
|
Vendor rebates
|
(242
|
)
|
|
(2.5
|
)%
|
|
(213
|
)
|
|
(2.6
|
)%
|
|
Total cost of sales
|
$
|
7,823
|
|
|
80.9
|
%
|
|
$
|
6,091
|
|
|
74.7
|
%
|
Food, beverage and packaging costs as a percentage of company-owned restaurant sales were
42.8%
in the
thirteen weeks ended
September 30, 2017
compared to
36.0%
in the comparable period in
2016
. The
increase
is primarily due to a
41.3%
increase
in commodities rates for bone-in chicken wings as compared to the prior year period.
Labor costs as a percentage of company-owned restaurant sales were
23.7%
for the
thirteen weeks ended
September 30, 2017
, comparable to the prior year period.
Other restaurant operating expenses as a percentage of company-owned restaurant sales were
16.9%
for the
thirteen weeks ended
September 30, 2017
compared to
17.6%
in the comparable period in
2016
. The decrease as a percentage of company-owned restaurant sales is primarily due to our ability to leverage costs due to the company-owned domestic same store sales increase of
5.5%
.
Selling, general and administrative.
During the
thirteen weeks ended
September 30, 2017
, SG&A expense was
$8.1 million
,
a decrease
of
$0.7 million
compared to
$8.9 million
in the comparable period in
2016
. The
decrease
in SG&A expense is due to a decrease in nonrecurring costs of
$1.4 million
related to the refinancing of our credit agreement and subsequent dividend payout, which occurred in the third quarter of
2016
. This decrease is partially offset by an increase in voluntary contributions made to the Company’s advertising fund of
$0.3 million
, as well as planned headcount additions and an increase in stock based compensation, as compared to the prior year period.
Depreciation and amortization.
During the
thirteen weeks ended
September 30, 2017
, depreciation expense was
$0.9 million
,
an increase
of
$0.1 million
, compared to
$0.7 million
in the comparable period in
2016
.
Interest expense, net.
During the
thirteen weeks ended
September 30, 2017
, interest expense was
$1.3 million
,
a decrease
of
$0.1 million
compared to
$1.4 million
in the comparable period in
2016
. The decrease is primarily due to a decrease in the principal amount of indebtedness as compared to the prior year period.
Income tax expense.
Income tax expense was
$2.9 million
in the
thirteen weeks ended
September 30, 2017
, yielding an effective tax rate of
36.4%
, compared to an effective tax rate of
38.5%
in the prior year. The decrease in the effective tax rate is due to tax benefits of
$0.1 million
resulting from the recognition of excess tax benefits from share-based compensation in income tax expense rather than paid-in capital as a result of the adoption of a new accounting standard.
Segment results.
The following table sets forth our revenue and operating profit for each of our segments for the period presented (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Increase / (Decrease)
|
|
September 30,
2017
|
|
September 24,
2016
|
|
$
|
|
%
|
Revenue:
|
|
|
|
|
|
|
|
Franchise segment
|
$
|
16,354
|
|
|
$
|
13,660
|
|
|
$
|
2,694
|
|
|
19.7
|
%
|
Company segment
|
9,672
|
|
|
8,150
|
|
|
1,522
|
|
|
18.7
|
%
|
Total segment revenue
|
$
|
26,026
|
|
|
$
|
21,810
|
|
|
$
|
4,216
|
|
|
19.3
|
%
|
|
|
|
|
|
|
|
|
Segment Profit:
|
|
|
|
|
|
|
|
Franchise segment
|
$
|
8,251
|
|
|
$
|
6,199
|
|
|
$
|
2,052
|
|
|
33.1
|
%
|
Company segment
|
927
|
|
|
1,236
|
|
|
(309
|
)
|
|
(25.0
|
)%
|
Total segment profit
|
$
|
9,178
|
|
|
$
|
7,435
|
|
|
$
|
1,743
|
|
|
23.4
|
%
|
Franchise segment.
During the
thirteen weeks ended
September 30, 2017
, franchise segment revenue was
$16.4 million
,
an increase
of
$2.7 million
, or
19.7%
, compared to
$13.7 million
in the comparable period in
2016
. Royalty revenue
increased
$2.0 million
due to
136
net franchise restaurant openings since
September 24, 2016
and domestic same store sales growth of
4.1%
.
Other revenue
increased
$0.7 million
, primarily due to
an increase in vendor rebates compared to the prior year period.
During the
thirteen weeks ended
September 30, 2017
, franchise segment profit was
$8.3 million
,
an increase
of
$2.1 million
, or
33.1%
, compared to
$6.2 million
in the comparable period in
2016
primarily due to the growth in revenue.
Company segment.
During the
thirteen weeks ended
September 30, 2017
, company-owned restaurant sales were
$9.7 million
,
an increase
of
$1.5 million
, or
18.7%
, compared to
$8.2 million
in the comparable period in
2016
.
The increase
is the result of the acquisition of two restaurants from a franchisee in the third quarter 2017 resulting in sales of
$0.8 million
, company-owned domestic same store sales growth of
5.5%
, primarily due to an increase in transaction counts, and the opening of one company-owned restaurant during December 2016.
During the
thirteen weeks ended
September 30, 2017
, company segment profit was
$0.9 million
,
a decrease
of
$0.3 million
, or
25.0%
, compared to
$1.2 million
in the comparable period in
2016
. The
decrease
is primarily due to a
41.3%
increase
in the commodities rates for bone-in chicken wings, offset by leveraging of fixed costs due to the company-owned same store sales growth of
5.5%
.
Thirty-Nine Weeks Ended September 30, 2017
compared to
Thirty-Nine Weeks Ended September 24, 2016
The following table sets forth our results of operations for the
thirty-nine weeks ended
September 30, 2017
and
September 24, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirty-Nine Weeks Ended
|
|
Increase / (Decrease)
|
|
September 30,
2017
|
|
September 24,
2016
|
|
$
|
|
%
|
Revenue:
|
|
|
|
|
|
|
|
Royalty revenue and franchise fees
|
$
|
50,204
|
|
|
$
|
41,463
|
|
|
$
|
8,741
|
|
|
21.1
|
%
|
Company-owned restaurant sales
|
27,063
|
|
|
25,144
|
|
|
1,919
|
|
|
7.6
|
%
|
Total revenue
|
77,267
|
|
|
66,607
|
|
|
10,660
|
|
|
16.0
|
%
|
Costs and expenses:
|
|
|
|
|
|
|
|
Cost of sales
(1)
|
21,290
|
|
|
18,352
|
|
|
2,938
|
|
|
16.0
|
%
|
Selling, general and administrative
|
26,694
|
|
|
25,120
|
|
|
1,574
|
|
|
6.3
|
%
|
Depreciation and amortization
|
2,407
|
|
|
2,187
|
|
|
220
|
|
|
10.1
|
%
|
Total costs and expenses
|
50,391
|
|
|
45,659
|
|
|
4,732
|
|
|
10.4
|
%
|
Operating income
|
26,876
|
|
|
20,948
|
|
|
5,928
|
|
|
28.3
|
%
|
Interest expense, net
|
3,908
|
|
|
2,858
|
|
|
1,050
|
|
|
36.7
|
%
|
Other expense, net
|
—
|
|
|
254
|
|
|
(254
|
)
|
|
(100.0
|
)%
|
Income before income tax expense
|
22,968
|
|
|
17,836
|
|
|
5,132
|
|
|
28.8
|
%
|
Income tax expense
|
6,161
|
|
|
6,714
|
|
|
(553
|
)
|
|
(8.2
|
)%
|
Net income
|
$
|
16,807
|
|
|
$
|
11,122
|
|
|
$
|
5,685
|
|
|
51.1
|
%
|
(1)
Exclusive of depreciation and amortization, shown separately.
Total revenue.
During the
thirty-nine weeks ended
September 30, 2017
, total revenue was
$77.3 million
,
an increase
of
$10.7 million
, or
16.0%
, compared to
$66.6 million
in the comparable period in
2016
.
Royalty revenue and franchise fees.
During the
thirty-nine weeks ended
September 30, 2017
, royalty revenue and franchise fees were
$50.2 million
,
an increase
of
$8.7 million
, or
21.1%
, compared to
$41.5 million
in the comparable period in
2016
. Royalty revenue
increased
$5.3 million
primarily due to
an increase
in the number of franchised restaurants from
929
at
September 24, 2016
to
1,065
at
September 30, 2017
and domestic same store sales growth of
1.7%
. Other revenue
increased
$3.4 million
, primarily due to an increase in vendor rebates, including a one-time payment, based on system-wide volumes purchased in the prior year, received in conjunction with a new vendor agreement that was executed during the first quarter of 2017. The funding from this agreement will primarily be used to support our national advertising campaign. This increase was offset by
$1.1 million
in vendor contributions received in the prior year period for the franchisee convention.
Company-owned restaurant sales.
During the
thirty-nine weeks ended
September 30, 2017
, company-owned restaurant sales were
$27.1 million
,
an increase
of
$1.9 million
, compared to
$25.1 million
in the comparable period in
2016
.
The increase
is primarily due to the acquisition of two restaurants from a franchisee during the third quarter 2017 resulting in sales of
$0.8 million
, the opening of two company-owned restaurants during June and December 2016, and an increase in company-owned domestic same store sales of
0.5%
, primarily due to an increase in transaction counts.
Cost of sales.
During the
thirty-nine weeks ended
September 30, 2017
, cost of sales was
$21.3 million
,
an increase
of
$2.9 million
, or
16.0%
, compared to
$18.4 million
in the comparable period in
2016
. Cost of sales as a percentage of company-owned restaurant sales was
78.7%
in the
thirty-nine weeks ended
September 30, 2017
compared to
73.0%
in the prior year.
The table below presents the major components of cost of sales (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirty-Nine Weeks Ended
|
|
|
September 30,
2017
|
|
As a % of company-owned restaurant sales
|
|
September 24,
2016
|
|
As a % of company-owned restaurant sales
|
|
|
Cost of sales:
|
|
|
|
|
|
|
|
|
Food, beverage and packaging costs
|
$
|
11,002
|
|
|
40.7
|
%
|
|
$
|
9,357
|
|
|
37.2
|
%
|
|
Labor costs
|
6,535
|
|
|
24.1
|
%
|
|
5,541
|
|
|
22.0
|
%
|
|
Other restaurant operating expenses
|
4,431
|
|
|
16.4
|
%
|
|
4,194
|
|
|
16.7
|
%
|
|
Vendor rebates
|
(678
|
)
|
|
(2.5
|
)%
|
|
(740
|
)
|
|
(2.9
|
)%
|
|
Total cost of sales
|
$
|
21,290
|
|
|
78.7
|
%
|
|
$
|
18,352
|
|
|
73.0
|
%
|
Food, beverage and packaging costs as a percentage of company-owned restaurant sales were
40.7%
in the
thirty-nine weeks ended
September 30, 2017
compared to
37.2%
in the comparable period in
2016
. The
increase
is primarily due to a
20.5%
increase
in commodities rates for bone-in chicken wings.
Labor costs as a percentage of company-owned restaurant sales were
24.1%
for the
thirty-nine weeks ended
September 30, 2017
compared to
22.0%
in the comparable period in
2016
. The increase as a percentage of company-owned restaurant sales is primarily due to an increase in wage rates and labor due to the investments in roster sizes and staffing we made in the third and fourth quarters of fiscal year 2016 and the impact of our two 2016 openings which perform at lower volumes than our average AUV.
Other restaurant operating expenses as a percentage of company-owned restaurant sales were
16.4%
for the
thirty-nine weeks ended
September 30, 2017
compared to
16.7%
in the comparable period in
2016
. The decrease as a percentage of company-owned restaurant sales is primarily due to a decrease repairs and maintenance, as well as a decrease in pre-opening expenses associated with the opening of a new company-owned restaurant during June
2016
.
Vendor rebates
decreased
$0.1 million
primarily due to a vendor rebate received during the
thirty-nine weeks ended
September 24, 2016
related to the franchisee convention.
Selling, general and administrative.
During the
thirty-nine weeks ended
September 30, 2017
, SG&A expense was
$26.7 million
, an increase of
$1.6 million
compared to
$25.1 million
in the comparable period in
2016
. The increase in SG&A expense is primarily due to an increase in voluntary contributions the Company made to its advertising fund, including a one-time payment in the first quarter in conjunction with a new vendor agreement executed during the thirteen weeks ended April 1, 2017, which was intended to provide support for the Company’s national advertising campaign. SG&A expense also increased due to planned headcount additions and an increase in stock based compensation and travel expenses. These increases are partially offset by a decrease of
$1.1 million
of expenses related to the 2016 franchisee convention, as well as a decrease in nonrecurring expenses of
$2.1 million
related to the follow on offering and refinancing of our credit agreement, which occurred in the prior year period.
Depreciation and amortization.
During the
thirty-nine weeks ended
September 30, 2017
, depreciation expense was
$2.4 million
,
an increase
of
$0.2 million
, compared to
$2.2 million
in the comparable period in
2016
.
Interest expense, net.
During the
thirty-nine weeks ended
September 30, 2017
, interest expense was
$3.9 million
,
an increase
of
$1.1 million
compared to
$2.9 million
in the comparable period in
2016
. The increase is primarily due to an increase in the principal amount of indebtedness related to the refinancing of our credit agreement, which occurred in the third quarter of
2016
.
Income tax expense.
Income tax expense was
$6.2 million
in the
thirty-nine weeks ended
September 30, 2017
, yielding an annual effective tax rate of
26.8%
, compared to an annual effective tax rate of
37.6%
in the prior year. The decrease in the effective tax rate is due to tax benefits of
$2.5 million
resulting from the recognition of excess tax benefits from share-based compensation in income tax expense rather than paid-in capital as a result of the adoption of a new accounting standard.
Segment results.
The following table sets forth our revenue and operating profit for each of our segments for the period presented (dollars in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirty-Nine Weeks Ended
|
|
Increase / (Decrease)
|
|
September 30,
2017
|
|
September 24,
2016
|
|
$
|
|
%
|
Revenue:
|
|
|
|
|
|
|
|
Franchise segment
|
$
|
50,204
|
|
|
$
|
41,463
|
|
|
$
|
8,741
|
|
|
21.1
|
%
|
Company segment
|
27,063
|
|
|
25,144
|
|
|
1,919
|
|
|
7.6
|
%
|
Total segment revenue
|
$
|
77,267
|
|
|
$
|
66,607
|
|
|
$
|
10,660
|
|
|
16.0
|
%
|
|
|
|
|
|
|
|
|
Segment Profit:
|
|
|
|
|
|
|
|
Franchise segment
|
$
|
23,792
|
|
|
$
|
18,794
|
|
|
$
|
4,998
|
|
|
26.6
|
%
|
Company segment
|
3,084
|
|
|
4,211
|
|
|
(1,127
|
)
|
|
(26.8
|
)%
|
Total segment profit
|
$
|
26,876
|
|
|
$
|
23,005
|
|
|
$
|
3,871
|
|
|
16.8
|
%
|
Franchise segment.
During the
thirty-nine weeks ended
September 30, 2017
, franchise segment revenue was
$50.2 million
,
an increase
of
$8.7 million
, or
21.1%
, compared to
$41.5 million
in the comparable period in
2016
. Royalty revenue
increased
$5.3 million
primarily due to
136
net franchise restaurant openings since
September 24, 2016
and domestic same store sales growth of
1.7%
. Other revenue
increased
$3.4 million
primarily due to an increase in vendor rebates, including a one-time payment, based on system-wide volumes purchased in the prior year, received under a new vendor agreement executed during the first quarter of 2017. The funding from this agreement will primarily be used to support our national advertising campaign. This increase was offset by
$1.1 million
in vendor contributions received in the prior year period for the franchisee convention.
During the
thirty-nine weeks ended
September 30, 2017
, franchise segment profit was
$23.8 million
,
an increase
of
$5.0 million
, or
26.6%
, compared to
$18.8 million
in the comparable period in
2016
primarily due to the growth in revenue.
Company segment.
During the
thirty-nine weeks ended
September 30, 2017
, company-owned restaurant sales were
$27.1 million
,
an increase
of
$1.9 million
, compared to
$25.1 million
in the comparable period in
2016
. The
increase
is primarily due to the acquisition of two restaurants from a franchisee during the third quarter 2017 resulting in sales of
$0.8 million
, the opening of two company-owned restaurants during June and December 2016, and an increase in company-owned domestic same store sales of
0.5%
, primarily due to an increase in transaction counts.
During the
thirty-nine weeks ended
September 30, 2017
, company segment profit was
$3.1 million
,
a decrease
of
$1.1 million
, or
26.8%
, compared to
$4.2 million
in the comparable period in
2016
. The decrease is primarily due to a
20.5%
increase
in commodities rates for bone-in chicken wings and an increase in wage rates and labor due to the investments in roster sizes and staffing we made in the third and fourth quarters of fiscal year 2016.
Liquidity and Capital Resources
General.
Our primary sources of liquidity and capital resources are cash provided from operating activities, cash and cash equivalents on hand, and proceeds from the incurrence of debt. Our primary requirements for liquidity and capital are working capital and general corporate needs. Historically, we have operated with minimal positive working capital or negative working capital. We believe that our sources of liquidity and capital will be sufficient to finance our continued operations and growth strategy.
The following table shows summary cash flows information for the
thirty-nine weeks ended
September 30, 2017
and
September 24, 2016
(in thousands):
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|
|
|
|
|
|
|
Thirty-Nine Weeks Ended
|
|
September 30,
2017
|
|
September 24,
2016
|
Net cash provided by (used in):
|
|
|
|
Operating activities
|
$
|
17,980
|
|
|
$
|
16,098
|
|
Investing activities
|
(5,783
|
)
|
|
(1,471
|
)
|
Financing activities
|
(11,358
|
)
|
|
(21,489
|
)
|
Net change in cash and cash equivalents
|
$
|
839
|
|
|
$
|
(6,862
|
)
|
Operating activities
. Our cash flows from operating activities are principally driven by sales at both franchise restaurants and company-owned restaurants, as well as franchise and development fees. We collect franchise royalties from our franchise owners on a weekly basis. Restaurant-level operating costs at our company-owned restaurants, unearned franchise and development fees and corporate overhead costs also impact our cash flows from operating activities.
Net cash
provided by
operating activities was
$18.0 million
in the
thirty-nine weeks ended
September 30, 2017
,
an increase
of
$1.9 million
from
$16.1 million
in
2016
. The increase was primarily due to the increase in net income, offset by timing of changes in working capital, specifically the timing of interest payments.
Investing activities
. Our net cash
used in
investing activities was
$5.8 million
in the
thirty-nine weeks ended
September 30, 2017
,
an increase
of
$4.3 million
from
$1.5 million
used in
investing activities in
2016
. The
increase
was due to the acquisition of two restaurants from a franchisee during the third quarter 2017, as well as an increase in capital expenditures over the comparable period.
Financing activities
. Our net cash
used in
financing activities was
$11.4 million
in the
thirty-nine weeks ended
September 30, 2017
,
a decrease
of
$10.1 million
from cash
used in
financing activities of
$21.5 million
in
2016
. The decrease was due to the initiation of a regular dividend of
$2.0 million
paid to stockholders, compared to a special dividend of
$83.3 million
paid in connection with the refinancing of our credit agreement in the prior period. This was partially offset by net repayments of long-term debt of
$10.6 million
in the
thirty-nine weeks ended
September 30, 2017
, compared to net borrowings of
$62.5 million
in the comparable period in
2016
.
Senior secured credit facility
. On June 30, 2016, we entered into a
$180.0 million
new senior secured credit facility, which replaced the second amended and restated credit facility dated March 18, 2015. In connection with the new senior secured credit facility, the facility size was increased to
$180.0 million
and is comprised of a
$70.0 million
term loan and a
$110.0 million
revolving credit facility. The previous credit facility included a term loan of
$132.5 million
and a revolving credit facility of
$5.0 million
. We used the proceeds from the new senior secured credit facility and cash on hand to refinance
$85.5 million
of indebtedness under the Company’s
March 2015
credit facility and to pay a dividend of
$83.3 million
to our stockholders. Borrowings under the new senior secured credit facility bear interest, payable quarterly, at the base rate plus a margin (
1.00%
to
2.00%
, dependent on our reported leverage ratio) or LIBOR plus a margin (
2.00%
to
3.00%
, dependent on our reported leverage ratio), at the Company’s discretion. The new senior secured credit facility also extended the maturity date from
March 2020
to
June 2021
. Subject to certain conditions, the Company has the ability to increase the size of the new senior secured credit facility by an additional
$30.0 million
.
In the current year, we made principal payments of
$14.1 million
and borrowed
$3.5 million
on our new senior secured credit facility. Under the new senior secured credit facility, principal installments for the term loan of
$875,000
are due quarterly with all unpaid amounts due at maturity in
June 2021
.
The new senior secured credit facility is secured by substantially all of our assets and requires compliance with certain financial and non-financial covenants, including fixed charge coverage and leverage. We were in compliance with these covenants as of
September 30, 2017
. Failure to comply with these covenants in the future could cause an acceleration of outstanding amounts under the term loan and restrict us from borrowing under the revolving credit facility to fund our liquidity requirements.
Contractual Obligations
In connection with our new senior secured credit facility, principal payments of
$875,000
are due quarterly with all unpaid amounts due at maturity in
June 2021
.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements or obligations, except for leases, as of
September 30, 2017
.
Critical Accounting Policies and Estimates
Our consolidated financial statements and accompanying notes are prepared in accordance with GAAP. Preparing consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. These estimates and assumptions are affected by the application of our accounting policies. Critical accounting estimates are those that require application of management’s most difficult, subjective or complex judgments, often as a result of matters that are inherently uncertain and may change in subsequent periods. While we apply our judgment based on assumptions believed to be reasonable under the circumstances, actual results could vary from these assumptions. It is possible that materially different amounts would be reported using different assumptions. Our critical accounting policies and estimates are identified and described in our annual consolidated financial statements and the related notes included in our Form 10-K, and there have been no material changes since the filing of our annual report on Form 10-K.
Recent Accounting Pronouncements
JOBS Act.
We currently qualify as an “emerging growth company” pursuant to the provisions of the JOBS Act. For as long as we are an “emerging growth company,” we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies,” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, reduced disclosure obligations relating to the presentation of financial statements in Management’s Discussion and Analysis of Financial Condition and Results of Operations, exemptions from the requirements of holding advisory “say-on-pay” votes on executive compensation and shareholder advisory votes on golden parachute compensation.
In addition, an emerging growth company can delay its adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we are choosing to “opt out” of this extended transition period, and as a result, we plan to comply with any new or revised accounting standards on the relevant dates on which non-emerging growth companies must adopt the standards. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.
As of the last business day of our second quarter of fiscal 2017, our market capitalization held by non-affiliates exceeded $700 million. On this basis, we anticipate that we will qualify as a “large accelerated filer” as of the end of our fiscal year 2017, at which time we will cease to qualify as an emerging growth company and for the various reporting requirement exemptions described above. Among other things, our independent registered public accounting firm will be required to formally attest to the effectiveness of our internal controls over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act. If we are unable to comply with the requirements of Section 404 in a timely manner, the market price of our stock could decline and we could be subject to sanctions or investigations by the NASDAQ Stock Market, the SEC or other regulatory authorities, which could require additional financial and management resources. We anticipate incurring additional professional service fees and other operating expenses as a result of this and other public company reporting requirements that will apply to us in future fiscal periods.
Special Note Regarding Forward-Looking Statements
This document contains statements about future events and expectations that constitute forward-looking statements. Forward-looking statements are based on our beliefs, assumptions and expectations of our future financial and operating performance and growth plans, taking into account the information currently available to us. Such statements include, in particular, statements about our plans, strategies and prospects. Words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate,” “could,” “would,” “will” and variations of such words and similar expressions are intended to identify such forward-looking statements. Examples of forward-looking statements in this Quarterly Report on Form 10-Q include, but are not limited to, our expectations
with respect to our future liquidity, expenses and consumer appeal. These statements are based on beliefs and assumptions of Wingstop’s management, which in turn are based on currently available information. These statements are not guarantees of future performance and involve assumptions and risks and uncertainties that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed, implied or forecasted in such forward-looking statements.
Factors that could cause actual results or outcomes to differ from the results expressed or implied by forward-looking statements include, among other things:
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•
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overall macroeconomic conditions may impact our ability to successfully execute our growth strategy and franchise and open new restaurants that are profitable and to increase our revenue and operating profits;
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•
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the impact of the operating results of our and our franchisees’ existing restaurants on our financial performance;
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•
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the impact of new restaurant openings on our financial performance;
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•
|
our ability to recruit and contract with qualified franchisees and to open new franchise restaurants;
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•
|
our ability to develop and maintain the Wingstop brand, including through effective advertising and marketing and the support of our franchisees’ and the negative impact of actions of a franchisee, acting as an independent third party, could have on our financial performance or brand;
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•
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concerns regarding food safety and food-borne illness and other health concerns;
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•
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our and our franchisees’ reliance on vendors, suppliers and distributors or changes in food and supply costs, including any increase in the prices of the ingredients most critical to our menu, particularly bone-in chicken wings;
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•
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our and our franchisees’ ability to compete with many other restaurants and to increase domestic same store sales and average weekly sales;
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•
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our ability to successfully meet or exceed the expectations of securities analysts or investors concerning our annual or quarterly operating results, domestic same store sales or average weekly sales;
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•
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our expansion into new markets may present increased risks due to our unfamiliarity with those areas;
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•
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the reliability of our, our franchisees’ and our licensees’ information technology systems and network security, including costs resulting from breaches of security of confidential guest, franchisee or employee information;
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•
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legal complaints, litigation or regulatory compliance, including changes in laws impacting the franchise business model;
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•
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our and our franchisees’ ability to attract and retain qualified employees while also controlling labor costs;
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•
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potential fluctuations in our annual or quarterly operating results and the impact of significant adverse weather conditions and other disasters;
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•
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disruptions in our and our franchisees’ ability to utilize computer systems to process transactions and manage our business;
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•
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health concerns arising from outbreaks of viruses, including the impact of a pandemic spread of avian flu on our and our franchisees’ supply of chicken;
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•
|
our and our franchisees’ ability to obtain and maintain required licenses and permits or to comply with alcoholic beverage or food control regulations;
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•
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our ability to maintain insurance that provides adequate levels of coverage against claims;
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•
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our and our franchisees’ ability to successfully operate in unfamiliar markets and markets where there may be limited or no market recognition of our brand, including the impact that our expansion into international markets has on our exposure to risk factors over which neither we nor our franchisees have control;
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•
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the potential impact opening new restaurants in existing markets could have on sales at existing restaurants;
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•
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the effectiveness of our advertising and marketing campaigns, which may not be successful;
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•
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food safety issues, which may adversely impact our or our franchisees’ business;
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•
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changes in consumer preferences, including changes caused by diet and health concerns or government regulation;
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•
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the continued service of our executive officers;
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•
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our ability to successfully open new franchised Wingstop restaurants for which we have signed commitments;
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•
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our stated sales to investment ratio and average unlevered cash-on-cash return may not be indicative of future results of any new franchised restaurant;
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•
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our ability to protect our intellectual property;
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•
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our ability to generate or raise capital on acceptable terms in the future, including our ability to incur additional debt and other restrictions under the terms of our existing senior secured credit facility;
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•
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the JOBS Act allowing us to postpone the date by which we must comply with certain laws and regulations intended to protect investors and to reduce the amount of information we provide in our reports filed with the SEC until the end of our fiscal year 2017, at which time we expect to no longer qualify as an emerging growth company;
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•
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the costs and time requirements as a result of operating as a public company, including our ability to maintain adequate internal control over financial reporting in order to comply with applicable reporting obligations;
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•
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fluctuations in exchange rates on our revenue;
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•
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future impairment charges; and
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•
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the impact of anti-takeover provisions in our charter documents and under Delaware law, which could make an acquisition of us more difficult, limit attempts by our stockholders to replace or remove our current management and limit the market price of our common stock.
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The above list of factors is not exhaustive. Some of these and other factors are discussed in more detail under “Risk Factors” in our annual report on Form 10-K. We assume no obligation to update or revise any forward-looking statements for any reason, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available in the future.