What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-07-29 compared with 2020-05-06 · 153 added, 98 removed, 225 unchanged (53% of the section changed)

12 unchanged sentences

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.

Wingstop generates revenues by charging royalties, advertising fees, and franchise fees to our franchisees and by operating a number of our own restaurants.

We report our business in two reporting segments:

Historically, the Company had two reporting segments:

franchise operations and company restaurant operations.

During the thirteen weeks ended March 28, 2020, our franchise segment accounted for 72.5% and our company segment accounted for 27.5% of our consolidated revenues.

Financial data for our reporting segments is included in the unaudited consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report.

In accordance with Accounting Standards Codification 280 “Segment Reporting”, the Company uses the management approach for determining its reportable segments.

The management approach is based upon the way management reviews performance and allocates resources.

Due to changes in how the Company’s chief operating decision maker assesses the Company’s performance and allocates resources, the Company reevaluated its operating segments and has determined it has one operating segment and one reporting segment.

Impact of COVID-19

3 unchanged sentences

Several of our international markets also closed their dining rooms as a result of the outbreak.

As of the end of the first quarter, approximately 15 of our international restaurants and 5 domestic restaurants were temporarily closed.

As of the end of the second quarter, approximately eight of our international restaurants and six domestic restaurants were temporarily closed.

While we cannot predict the extent to which COVID-19 will impact our business or the global economy, we believe our business is well-positioned for the transition to largely off-premise dining that has resulted from the outbreak.

Prior to the COVID-19 outbreak, carry-out and delivery represented approximately 80% of our domestic sales mix and our digital sales mix was just over 40%.

As a result of the required changes to consumer behavior to largely off-premise dining, as well as promotional activities associated with delivery, we have seen an increase in domestic same store sales growth the last two weeks of March 2020 through the first four weeks of our fiscal second quarter.

Our international markets, which have historically had a higher mix of dine-in sales, have seen an overall decline in same store sales growth due to the required closure of dining rooms and in some cases temporary restaurant closures.

We did not experience difficulties with our supply chain as a result of COVID-19 during the first quarter;

however, there can be no assurances that we may not experience supply chain challenges.

Lastly, to further secure our liquidity position and provide financial flexibility in light of uncertain market conditions, we borrowed $16 million under our Variable Funding Notes (as defined below) in the first quarter of 2020, providing the Company with an unrestricted cash balance of approximately $31 million as of March 28, 2020.

We did not experience difficulties with our supply chain as a result of COVID-19 during the first or second quarter of 2020;

however, there can be no assurances that we will not experience supply chain challenges in the future.

See "Liquidity and Capital Resources" below for further details.

3 unchanged sentences

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

2020 March 30,

Thirteen Weeks Ended Twenty-Six Weeks Ended

2020 June 29,

2019 June 27,

2020 June 29,

Domestic Franchised Activity:

2 unchanged sentences

Closures (2) (2) (3) (5)

Acquired by Company — —

Re-franchised by Company 2 — 2 —

Restaurants end of period 1,244 1,139 1,244 1,139

1 unchanged sentence

Beginning of period 32 29 31 29

Acquired from franchisees — —

Openings — — 1 —

Closures — — — —

Re-franchised to franchisees (2) — (2) —

Restaurants end of period 30 29 30 29

2 unchanged sentences

Beginning of period 160 132 154 128

Openings 2 5 8 11

Closures — (2) — (4)

21 unchanged sentences

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 stock-based compensation expense.

We define Adjusted EBITDA as EBITDA further adjusted for transaction costs, costs and fees associated with investments in our strategic initiatives, gains and losses on the disposal of assets, and stock-based compensation expense.

EBITDA and Adjusted EBITDA may not be comparable to other similarly titled measures of other companies due to differences in methods of calculation.

For a reconciliation of net income to EBITDA and Adjusted EBITDA and for further discussion of EBITDA and Adjusted EBITDA as non-GAAP measures and how we utilize them, see footnote 2 below.

The following table sets forth our key performance indicators as well as our total revenue and net income, for the thirteen weeks ended March 28, 2020 and March 30, 2019 (dollars in thousands):

Thirteen Weeks Ended

March 28, 2020 March 30, 2019

The following table sets forth our key performance indicators as well as our total revenue and net income, for the thirteen and twenty-six weeks ended June 27, 2020 and June 29, 2019 (dollars in thousands):

Thirteen Weeks Ended Twenty-Six Weeks Ended

June 27, 2020 June 29, 2019 June 27, 2020 June 29, 2019

Number of system-wide restaurants open at end of period 1,436 1,303 1,436 1,303

8 unchanged sentences

$ 20,888 $ 13,549 $ 37,245 $ 27,435

(1) The percentage of system-wide sales attributable to company-owned restaurants was 3.4% and 3.7% for the thirteen weeks ended March 28, 2020 and March 30, 2019, respectively.

(1) The percentage of system-wide sales attributable to company-owned restaurants was 3.3% and 3.7% for the thirteen weeks ended June 27, 2020 and June 29, 2019, respectively, and was 3.2% and 3.7% for the twenty-six weeks ended June 27, 2020 and June 29, 2019, respectively.

The remainder was generated by franchised restaurants, as reported by our franchisees.

1 unchanged sentence

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 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 stock-based compensation expense.

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.

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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 stock-based compensation expense.

As noted in the table below, Adjusted EBITDA includes adjustments for transaction costs, costs and fees associated with investments in our strategic initiatives, gains and losses on the disposal of assets, and stock-based compensation expense.

It is reasonable to expect that this item will occur in future periods.

1 unchanged sentence

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 28, 2020 and March 30, 2019 (in thousands):

Thirteen Weeks Ended

2020 March 30,

The following table reconciles net income to EBITDA and Adjusted EBITDA for the thirteen and twenty-six weeks ended June 27, 2020 and June 29, 2019 (in thousands):

Thirteen Weeks Ended Twenty-Six Weeks Ended

2020 June 29,

2019 June 27,

2020 June 29,

Net income $ 11,539 $ 4,918 $ 19,635 $ 11,524

4 unchanged sentences

Additional adjustments:

Stock-based compensation expense (a)

Gain on disposal of assets (a)

(2,016) — (2,016) —

Stock-based compensation expense (b)

1,969 1,927 3,300 2,766

Adjusted EBITDA $ 20,888 $ 13,549 $ 37,245 $ 27,435

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

(a) Represents a gain resulting from the re-franchise of company-owned restaurants to a franchisee which is included in Selling, general and administrative expense in the Consolidated Statements of Operations.

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

Results of Operations

Thirteen Weeks Ended March 28, 2020 compared to Thirteen Weeks Ended March 30, 2019

The following table sets forth our results of operations for the thirteen weeks ended March 28, 2020 and March 30, 2019 (dollars in thousands):

Thirteen Weeks Ended June 27, 2020 compared to Thirteen Weeks Ended June 29, 2019

The following table sets forth our results of operations for the thirteen weeks ended June 27, 2020 and June 29, 2019 (dollars in thousands):

Thirteen Weeks Ended Increase / (Decrease)

2020 March 30,

2020 June 29,

Royalty revenue, franchise fees and other $ 27,858 $ 21,187 $ 6,671 31.5 %

16 unchanged sentences

Total revenue.

During the thirteen weeks ended March 28, 2020, total revenue was $55.4 million, an increase of $7.4 million, or 15.4%, compared to $48.1 million in the comparable period in 2019.

During the thirteen weeks ended June 27, 2020, total revenue was $66.1 million, an increase of $17.5 million, or 36.1%, compared to $48.6 million in the comparable period in 2019.

Royalty revenue, franchise fees and other.

During the thirteen weeks ended March 28, 2020, royalty revenue, franchise fees and other was $24.2 million, an increase of $2.9 million, or 13.5%, compared to $21.3 million in the comparable period in 2019.

Royalty revenue increased due to 137 net franchise restaurant openings since March 30, 2019 and domestic same store sales growth of 9.9%.

Franchise fees decreased $0.7 million primarily due to higher termination fees recognized in the first thirteen weeks of fiscal year 2019.

During the thirteen weeks ended June 27, 2020, royalty revenue, franchise fees and other was $27.9 million, an increase of $6.7 million, or 31.5%, compared to $21.2 million in the comparable period in 2019.

Royalty revenue increased primarily due to domestic same store sales growth of 31.9% as well as 132 net franchise restaurant openings since June 29, 2019.

Advertising fees and related income.

During the thirteen weeks ended March 28, 2020, advertising fees and related income was $16.0 million, an increase of $2.8 million, or 21.2%, compared to $13.2 million in the comparable period in 2019.

Advertising fees increased primarily due to the 18.6% increase in system-wide sales in the thirteen weeks ended March 28, 2020 compared to the thirteen weeks ended March 30, 2019.

During the thirteen weeks ended June 27, 2020, advertising fees and related income was $19.9 million, an increase of $6.4 million, compared to $13.5 million in the comparable period in 2019.

Advertising fees increased primarily due the 37.0% increase in system-wide sales in the thirteen weeks ended June 27, 2020 compared to the thirteen weeks ended June 29, 2019.

Company-owned restaurant sales.

During the thirteen weeks ended March 28, 2020, company-owned restaurant sales were $15.2 million, an increase of $1.7 million, or 12.6%, compared to $13.5 million in the comparable period in 2019.

The increase was primarily due an increase in company-owned same store sales of 6.2%, which was primarily driven by an increase in transactions, as well as the acquisition of one franchised restaurant and the opening of two company-owned restaurant since the prior year comparable period, resulting in additional sales of $0.9 million.

During the thirteen weeks ended June 27, 2020, company-owned restaurant sales were $18.3 million, an increase of $4.4 million, or 31.9%, compared to $13.9 million in the comparable period in 2019.

The increase was primarily due to company-owned same store sales growth of 24.7%, which was driven by both an increase in transactions and transaction size.

Also contributing to the increase was the acquisition of one franchised restaurant and the opening of two company-owned restaurants since the prior year comparable period, resulting in additional company-owned restaurant sales of $1.1 million.

Cost of sales.

During the thirteen weeks ended March 28, 2020, cost of sales was $11.2 million, an increase of $1.4 million, or 14.9%, compared to $9.7 million in the comparable period in 2019.

Cost of sales as a percentage of company-owned restaurant sales was 73.4% in the thirteen weeks ended March 28, 2020 compared to 72.0% in the prior year period.

During the thirteen weeks ended June 27, 2020, cost of sales was $13.4 million, an increase of $2.8 million, or 26.6%, compared to $10.6 million in the comparable period in 2019.

Cost of sales as a percentage of company-owned restaurant sales was 73.1% in the thirteen weeks ended June 27, 2020, compared to 76.1% in the comparable period in 2019.

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

Thirteen Weeks Ended

March 28, 2020 March 30, 2019

June 27, 2020 June 29, 2019

In dollars As a % of company-owned restaurant sales In dollars As a % of company-owned restaurant sales

5 unchanged sentences

Total cost of sales $ 13,387 73.1 % $ 10,573 76.1 %

Food, beverage and packaging costs as a percentage of company-owned restaurant sales were 36.0% in the thirteen weeks ended March 28, 2020, compared to 35.6% in the comparable period in 2019.

The increase was primarily due to an increase in packaging costs associated with the increase in delivery and take-out orders at the end of the first quarter.

Labor costs as a percentage of company-owned restaurant sales were 23.1% for the thirteen weeks ended March 28, 2020, compared to 22.4% in the comparable period in 2019.

The increase was primarily due to wage inflation as well as incentive pay associated with COVID-19, which provided as much as an additional $150 per week to full-time team members.

These increases were slightly offset by the increase in company-owned domestic same store sales of 6.2%.

Other restaurant operating expenses as a percentage of company-owned restaurant sales were 16.9% for the thirteen weeks ended March 28, 2020, compared to 16.8% in the comparable period in 2019.

The increase as a percentage of company-owned restaurant sales was due to a slight increase in delivery fees due to the growth in delivery mix as a percent of total sales.

This increase was offset by the increase in company-owned domestic same store sales of 6.2%.

Food, beverage and packaging costs as a percentage of company-owned restaurant sales were 32.5% in the thirteen weeks ended June 27, 2020, compared to 37.5% in the comparable period in 2019.

The decrease was primarily due to a 22.7% decrease in the cost of bone-in chicken wings as compared to the prior year period.

Labor costs as a percentage of company-owned restaurant sales were 25.6% for the thirteen weeks ended June 27, 2020, compared to 23.0% in the comparable period in 2019.

The increase percentage of company-owned restaurant sales was primarily due to additional incentive pay provided to team members during the COVID-19 pandemic.

This increase was partially offset by our ability to leverage costs due to the increase in company-owned same store sales of 24.7%.

Other restaurant operating expenses as a percentage of company-owned restaurant sales were 16.8% for the thirteen weeks ended June 27, 2020, compared to 18.4% in the comparable period in 2019.

The decrease as a percentage of company-owned restaurant sales was due to our ability to leverage costs due to the increase in company-owned same store sales of 24.7%.

Advertising expenses.

During the thirteen weeks ended March 28, 2020, advertising expenses were $14.9 million, an increase of $2.2 million, or 17.2%, compared to $12.7 million in the comparable period in 2019.

During the thirteen weeks ended June 27, 2020, advertising expenses were $18.6 million, an increase of $5.6 million compared to $13.0 million in the comparable period in 2019.

Advertising expenses are recognized at the same time the related revenue is recognized, which does not necessarily correlate to the actual timing of the related advertising spend.

Selling, general and administrative ("SG&A").

During the thirteen weeks ended March 28, 2020, SG&A expense was $14.3 million, an increase of $1.8 million, or 14.1%, compared to $12.5 million in the comparable period in 2019.

The increase in SG&A expense was due to an increase of $0.6 million of charges associated with certain organizational changes, $0.5 million associated with additional expenses to support our national advertising campaign which has an equal and offsetting contribution in revenue, and an increase of $0.5 million in stock-based compensation expense.

During the thirteen weeks ended June 27, 2020, SG&A expense was $13.2 million, a decrease of $0.2 million compared to $13.4 million in the comparable period in 2019.

The decrease in SG&A expense was primarily due to a gain of $2.0 million recognized due to the re-franchising of two company-owned restaurants, which was offset by a one-time donation to the National Restaurant Employee Relief Fund of $1.0 million to support restaurant workers in times of need, $0.6 million in COVID-19 related expenses and support provided to international franchisees, and $0.3 million associated with additional expenses to support our national advertising campaign which has an equal and offsetting contribution in revenue.

Depreciation and amortization.

During the thirteen weeks ended March 28, 2020, depreciation and amortization expense was $1.6 million, an increase of $0.3 million, or 21.9%, compared to $1.3 million in the comparable period in 2019.

During the thirteen weeks ended June 27, 2020, depreciation expense was $1.4 million, an increase of $0.1 million compared to $1.3 million in the comparable period in 2019.

The increase in depreciation and amortization was primarily due to additional capital expenditures related to investments in technology.

Interest expense, net.

During the thirteen weeks ended June 27, 2020, interest expense was $4.2 million, which was comparable to the $4.3 million of interest expense in the comparable period in 2019.

Income tax expense.

Income tax expense was $3.8 million in the thirteen weeks ended June 27, 2020, yielding an effective tax rate of 24.7%, compared to an effective tax rate of 17.9% in the prior year period.

The increase in the effective tax rate was primarily due to the impact of excess tax benefits associated with stock options on the effective rate.

Twenty-Six Weeks Ended June 27, 2020 compared to Twenty-Six Weeks Ended June 29, 2019

The following table sets forth our results of operations for the twenty-six weeks ended June 27, 2020 and June 29, 2019 (dollars in thousands):

Twenty-Six Weeks Ended Increase / (Decrease)

2020 June 29,

Royalty revenue, franchise fees and other $ 52,057 $ 42,515 $ 9,542 22.4 %

Advertising fees and related income 35,937 26,697 9,240 34.6 %

Company-owned restaurant sales 33,547 27,403 6,144 22.4 %

Total revenue 121,541 96,615 24,926 25.8 %

Costs and expenses:

Cost of sales (1)

24,563 20,303 4,260 21.0 %

Advertising expenses 33,513 25,707 7,806 30.4 %

Selling, general and administrative 27,504 25,936 1,568 6.0 %

Depreciation and amortization 2,953 2,611 342 13.1 %

Total costs and expenses 88,533 74,557 13,976 18.7 %

Operating income 33,008 22,058 10,950 49.6 %

Interest expense, net 8,359 8,709 (350) (4.0) %

Income before income tax expense 24,649 13,349 11,300 84.7 %

Income tax expense 5,014 1,825 3,189 174.7 %

Net income $ 19,635 $ 11,524 $ 8,111 70.4 %

(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 twenty-six weeks ended June 27, 2020, total revenue was $121.5 million, an increase of $24.9 million, or 25.8%, compared to $96.6 million in the comparable period in 2019.

Royalty revenue, franchise fees and other.

During the twenty-six weeks ended June 27, 2020, royalty revenue, franchise fees and other was $52.1 million, an increase of $9.5 million, or 22.4%, compared to $42.5 million in the comparable period in 2019.

Royalty revenue increased due to 132 net franchise restaurant openings since June 29, 2019 and domestic same store sales growth of 21.0%.

Advertising fees and related income.

During the twenty-six weeks ended June 27, 2020, advertising fees and related income was $35.9 million, an increase of $9.2 million, or 34.6%, compared to $26.7 million in the comparable period in 2019.

Advertising fees increased primarily due to the 27.9% increase in system-wide sales in the twenty-six weeks ended June 27, 2020 compared to the twenty-six weeks ended June 29, 2019.

Company-owned restaurant sales.

During the twenty-six weeks ended June 27, 2020, company-owned restaurant sales were $33.5 million, an increase of $6.1 million, or 22.4%, compared to $27.4 million in the comparable period in 2019.

The increase was primarily due an increase in company-owned same store sales of 15.7%, which was driven by both an increase in transactions and transaction size.

Cost of sales.

During the twenty-six weeks ended June 27, 2020, cost of sales was $24.6 million, an increase of $4.3 million, or 21.0%, compared to $20.3 million in the comparable period in 2019.

Cost of sales as a percentage of company-owned restaurant sales was 73.2% in the twenty-six weeks ended June 27, 2020 compared to 74.1% in the prior year period.

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

Twenty-Six Weeks Ended

June 27, 2020 June 29, 2019

In dollars As a % of company-owned restaurant sales In dollars As a % of company-owned restaurant sales

Cost of sales:

Food, beverage and packaging costs $ 11,431 34.1 % $ 10,022 36.6 %

Labor costs 8,211 24.5 % 6,217 22.7 %

Other restaurant operating expenses 5,652 16.8 % 4,833 17.6 %

Vendor rebates (731) (2.2) % (769) (2.8) %

Total cost of sales $ 24,563 73.2 % $ 20,303 74.1 %

Food, beverage and packaging costs as a percentage of company-owned restaurant sales were 34.1% in the twenty-six weeks ended June 27, 2020, compared to 36.6% in the comparable period in 2019.

The decrease was primarily due to a 14.5% decrease 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 24.5% for the twenty-six weeks ended June 27, 2020, compared to 22.7% in the comparable period in 2019.

The increase was primarily due to additional incentive pay provided to team members during the COVID-19 pandemic.

These increases were partially offset by our ability to leverage costs due to the increase in company-owned same store sales of 15.7%.

Other restaurant operating expenses as a percentage of company-owned restaurant sales were 16.8% for the twenty-six weeks ended June 27, 2020, compared to 17.6% in the comparable period in 2019.

The decrease as a percentage of company-owned restaurant sales was due to sales leverage achieved as a result of the increase in company-owned same store sales of 15.7%.

This decrease was slightly offset by an increase in delivery fees payable to third-party delivery providers due to the growth in delivery mix as a percent of total sales during the twenty-six weeks ended June 27, 2020.

Advertising expenses.

During the twenty-six weeks ended June 27, 2020, advertising expenses were $33.5 million, an increase of $7.8 million, or 30.4%, compared to $25.7 million in the comparable period in 2019.

Advertising expenses are recognized at the same time the related revenue is recognized, which does not necessarily correlate to the actual timing of the related advertising spend.

Selling, general and administrative.

During the twenty-six weeks ended June 27, 2020, SG&A expense was $27.5 million, an increase of $1.6 million, or 6.0%, compared to $25.9 million in the comparable period in 2019.

The increase in SG&A expense was primarily due to a one-time donation to the National Restaurant Employee Relief Fund of $1.0 million to support restaurant workers in times of need.

Also contributing to the increase was an increase of $0.7 million associated with additional expenses to support our national advertising campaign which has an equal and offsetting contribution in revenue, an increase of $0.7 million of charges associated with certain organizational changes, expenses of $0.7 million related to COVID-19 and support provided to international franchisees, and an increase of $0.5 million in stock-based compensation expense.

These increases were partially offset by a gain of $2.0 million recognized due to the re-franchising of two company-owned restaurants.

Depreciation and amortization.

During the twenty-six weeks ended June 27, 2020, depreciation and amortization expense was $3.0 million, an increase of $0.3 million, or 13.1%, compared to $2.6 million in the comparable period in 2019.

The increase in depreciation and amortization expense was primarily due to additional capital expenditures related to investments in technology.

Interest expense, net.

During the thirteen weeks ended March 28, 2020, interest expense was $4.1 million, a decrease of $0.3 million, or 6.0%, compared to $4.4 million in the comparable period in 2019.

During the twenty-six weeks ended June 27, 2020, interest expense was $8.4 million, a decrease of $0.4 million, or 4.0%, compared to $8.7 million in the comparable period in 2019.

The decrease in interest expense was primarily due to a lower average outstanding debt balance from the prior year comparable period.

Income tax expense.

Income tax expense was $1.2 million in the thirteen weeks ended March 28, 2020, yielding an effective tax rate of 13.2%, compared to an effective tax rate of 10.3% in the prior year period.

The slight increase in the effective tax rate was primarily due to the impact of excess tax benefits associated with stock options on the effective rate.

Segment results.

The following table sets forth our revenue and operating profit for each of our segments for the periods presented (dollars in thousands):

Thirteen Weeks Ended Increase

2020 March 30,

Franchise segment $ 40,213 $ 34,538 $ 5,675 16.4 %

Company segment 15,223 13,515 1,708 12.6 %

Total segment revenue $ 55,436 $ 48,053 $ 7,383 15.4 %

Segment Profit:

Franchise segment $ 10,793 $ 9,255 $ 1,538 16.6 %

Company segment 2,678 2,516 162 6.4 %

Total segment profit $ 13,471 $ 11,771 $ 1,700 14.4 %

Franchise segment.

During the thirteen weeks ended March 28, 2020, franchise segment revenue was $40.2 million, an increase of $5.7 million, or 16.4%, compared to $34.5 million in the comparable period in 2019.

Royalty revenue increased $3.4 million, primarily due to 137 net franchise restaurant openings since March 30, 2019 and domestic same store sales growth of 9.9%.

Advertising fees and related income increased $2.8 million primarily due to the 18.6% increase in system-wide sales in the thirteen weeks ended March 28, 2020 compared to the comparable period in 2019.

These increases were slightly offset by a decrease in franchise fees of $0.7 million primarily due to higher termination fees recognized in the first thirteen weeks of fiscal year 2019.

During the thirteen weeks ended March 28, 2020, franchise segment profit was $10.8 million, an increase of $1.5 million, or 16.6%, compared to $9.3 million in the comparable period in 2019, primarily due to the growth in franchise segment revenue, which was offset by an increase of $2.2 million in advertising expenses and an increase of $1.8 million in SG&A expenses related to increased expenses associated with organizational changes, stock-based compensation, and our national advertising campaign.

Company segment.

During the thirteen weeks ended March 28, 2020, company-owned restaurant sales were $15.2 million, an increase of $1.7 million, or 12.6%, compared to $13.5 million in the comparable period in 2019.

The increase was primarily due an increase in company-owned same store sales of 6.2%, which was primarily driven by an increase in transactions as well as the acquisition of one franchised restaurant and the opening of two company-owned restaurants since the prior year comparable period, resulting in additional sales of $0.9 million.

During the thirteen weeks ended March 28, 2020, company segment profit was $2.7 million, an increase of $0.2 million, or 6.4%, compared to $2.5 million in the comparable period in 2019.

The increase was primarily due to an increase in company-owned same store sales of 6.2%.

Income tax expense was $5.0 million in the twenty-six weeks ended June 27, 2020, yielding an effective tax rate of 20.3%, compared to an effective tax rate of 13.7% in the prior year period.

The increase in the effective tax rate was primarily due to the impact of excess tax benefits associated with stock options on the effective rate.

Liquidity and Capital Resources

3 unchanged sentences

We have in the past, and may in the future, refinance our existing indebtedness with new debt arrangements and/or equity issuances and utilize a portion of funds to return capital to our stockholders.

We believe that our sources of liquidity and capital will be sufficient to finance our continued operations and growth strategy for at least the next twelve months.

The following table shows summary cash flows information for the thirteen weeks ended March 28, 2020 and March 30, 2019 (in thousands):

Thirteen Weeks Ended

2020 March 30,

We believe our sources of liquidity and capital will be sufficient to finance our continued operations and growth strategy for at least the next twelve months.

The following table shows summary cash flows information for the twenty-six weeks ended June 27, 2020 and June 29, 2019 (in thousands):

Twenty-Six Weeks Ended

2020 June 29,

Net cash provided by (used in):

7 unchanged sentences

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 $12.5 million in the thirteen weeks ended March 28, 2020, an increase of $2.9 million from cash provided by operations of $9.6 million in the thirteen weeks ended March 30, 2019.

The increase was primarily due to an increase in net income as a result of an increase in sales.

This increase was offset slightly by the timing of changes in working capital.

Net cash provided by operating activities was $25.6 million in the twenty-six weeks ended June 27, 2020, an increase of $15.1 million from cash provided by operating activities of $10.5 million in the twenty-six weeks ended June 29, 2019.

The increase is the result of increased operating income associated with the increased sales over the prior period coupled with the increase in working capital due to timing of payments associated with our national advertising campaign and taxes.

Investing activities .

Our net cash used in investing activities was $1.6 million in the thirteen weeks ended March 28, 2020, an increase of $0.9 million from cash used in investing activities of $0.6 million in the thirteen weeks ended March 30, 2019.

The increase was due to capital expenditures incurred in the opening of a new company-owned restaurant.

Our net cash used in investing activities was $0.4 million in the twenty-six weeks ended June 27, 2020, a decrease of $1.1 million from cash used in investing activities of $1.4 million in the twenty-six weeks ended June 29, 2019.

The decrease in cash used in investing activities was due to proceeds received from the sale of two company-owned restaurants during the fiscal quarter ended June 27, 2020, which offset increased capital expenditures associated with the opening of a new company-owned restaurant.

Financing activities .

Our net cash provided by financing activities was $12.3 million in the thirteen weeks ended March 28, 2020, an increase of $15.5 million from cash used in financing activities of $3.2 million in 2019.

The increase was primarily due to additional borrowings under our Variable Funding Notes (as defined below) of $16.0 million in the thirteen weeks ended March 28, 2020, partially offset by an increase in the amount of our regular dividend and a principal payment made in the thirteen weeks ended March 28, 2020.

Our net cash provided by financing activities was $9.0 million in the twenty-six weeks ended June 27, 2020, an increase of $15.8 million from cash used in financing activities of $6.8 million in 2019.

The increase was primarily due to additional borrowings under our Variable Funding Notes (as defined below) of $16.0 million in the twenty-six weeks ended June 27, 2020, partially offset by an increase in the amount of our regular dividend.

Securitized financing facility .

On November 14, 2018, we entered into a securitized financing facility comprised of $320 million of Series 2018-1 4.97% Fixed Rate Senior Secured Notes, Class A-2 (the “Class A-2 Notes”) as well as a variable funding note facility of Series 2018-1 Variable Funding Senior Notes, Class A-1 (the “Variable Funding Notes” and, together with the Class A-2 Notes, the “Notes”), which allow us to borrow up to $20 million as needed on a revolving basis and to issue letters of credit.

As of March 28, 2020, we had $16.0 million outstanding borrowings under the Variable Funding Notes, with $4.0 million letters of credit outstanding, and $316.8 million outstanding under the Class A-2 Notes.

There were no amounts drawn down on the letters of credit as of March 28, 2020.

On November 14, 2018, we entered into a securitized financing facility comprised of $320 million of Series 2018-1 4.97% Fixed Rate Senior Secured Notes, Class A-2 (the “Class A-2 Notes”) as well as a variable funding note facility of Series 2018-1 Variable Funding Senior Notes, Class A-1, which allow us to borrow up to $20 million as needed on a revolving basis and to issue letters of credit (the “Variable Funding Notes” and, together with the Class A-2 Notes, the “Notes”).

As of June 27, 2020, we had $16.0 million outstanding borrowings under the Variable Funding Notes, with $4.0 million letters of credit outstanding, and $316.8 million outstanding under the Class A-2 Notes.

There were no amounts drawn down on the letters of credit as of June 27, 2020.

The Class A-2 Notes are generally subject to 1% annual amortization, bear interest at a fixed rate of 4.97% per annum, and have an anticipated repayment date of December 2023.

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Per the terms of the Company’s debt agreements, principal payments are not due until the repayment date as long as the Company maintains a leverage ratio of less than 5.0x.

As such, the Company ceased principal payments beginning in the second quarter of 2020.

As such, the Company ceased making principal payments beginning in the second quarter of 2020.

Borrowings under the Variable Funding Notes accrue interest at a variable rate based on (i) the prime rate, (ii) overnight federal funds rates, (iii) the London interbank offered rate for U.S.

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Interest payments on the Notes are payable on a quarterly basis.

We paid a quarterly cash dividend of $0.11 per share of common stock, aggregating $3.2 million, during the first quarter of 2020.

On May 5, 2020, the Company’s Board of Directors approved a dividend of $0.11 per share, to be paid on June 25, 2020 to stockholders of record as of June 18, 2020, totaling approximately $3.2 million.

We paid a quarterly cash dividend of $0.11 per share of common stock in each of the first two quarters of 2020, resulting in aggregate dividend payments of $6.5 million during the twenty-six weeks ended June 27, 2020.

On July 28, 2020, the Company’s Board of Directors approved a dividend of $0.14 per share, to be paid on September 11, 2020 to stockholders of record as of August 28, 2020, totaling approximately $4.1 million.

We do not currently expect the restrictions in our debt instruments to impact our ability to make regularly quarterly dividends pursuant to our quarterly dividend program.

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Contractual Obligations

There have been no material changes to our contractual obligations disclosed in the contractual obligations section of Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Annual Report.

For additional information regarding our long-term debt and our commitments and contingencies, see Note 10, Debt Obligations and Note 12, Commitments and Contingencies in the Annual Report and the corresponding Notes 6 and 7 in the notes to our unaudited consolidated financial statements included elsewhere in this Quarterly Report.

For additional information regarding our long-term debt and our commitments and contingencies, see Note 10, Debt Obligations and Note 12, Commitments and Contingencies in our Annual Report and the corresponding Notes 6 and 7 in the notes to our unaudited consolidated financial statements included elsewhere in this Quarterly Report.

Off-Balance Sheet Arrangements

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Although the letters of credit are off-balance sheet, the obligations to which they relate are reflected as liabilities in the Consolidated Balance Sheet.

Outstanding letters of credit totaled $4.0 million at March 28, 2020.

We do not believe that these arrangements have or are likely to have a material effect on our results of operations, financial condition, revenues or expenses, capital expenditures or liquidity.

Outstanding letters of credit totaled $4.0 million at June 27, 2020.

We do not believe these arrangements have or are likely to have a material effect on our results of operations, financial condition, revenues or expenses, capital expenditures or liquidity.

Critical Accounting Policies and Estimates

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis