What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-02 compared with 2020-07-29 · 124 added, 106 removed, 272 unchanged (46% of the section changed)

3 unchanged sentences

The statements in this discussion regarding industry outlook, our expectations regarding our future performance, liquidity and capital resources, and other non-historical statements are forward-looking statements.

These forward-looking statements are subject to risks and uncertainties, including, but not limited to, the risks and uncertainties described in “Special Note Regarding Forward-Looking Statements,” below and “Risk Factors” on page 10 of our Annual Report and in Part II, Item 1A of this Quarterly Report.

of this Quarterly Report.

Our actual results may differ materially from those contained in or implied by any forward-looking statements.

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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.

During the second fiscal quarter of 2020, the Company reevaluated its operating segments and determined it has one operating segment and one reporting segment due to changes in how the Company’s chief operating decision maker assesses the Company’s performance and allocates resources.

Impact of COVID-19

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

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

As of the end of the third quarter of 2020, approximately four of our international restaurants and one domestic restaurant were temporarily closed.

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

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

As a result of the required changes to consumer behavior to largely off-premise dining, as well as promotional activities associated with delivery, we have seen an increase in domestic same store sales growth through the end of the second quarter.

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

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

In the third quarter of 2020, the decline in same store sales lessened due to the reopening and resumption of normal store hours at the majority of our international franchised stores that had been temporarily closed for portions of the prior quarter.

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

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

Lastly, to further secure our liquidity position and provide financial flexibility in light of uncertain market conditions, we borrowed $16 million under our Variable Funding Notes (as defined below) in the first quarter of 2020, providing the Company with an unrestricted cash balance of approximately $45.8 million as of June 27, 2020.

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

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Management reviews the number of new restaurants, the number of closed restaurants, and the number of acquisitions and divestitures of restaurants to assess net new restaurant growth.

Thirteen Weeks Ended Twenty-Six Weeks Ended

2020 June 29,

2019 June 27,

2020 June 29,

Thirteen Weeks Ended Thirty-Nine Weeks Ended

September 26,

2020 September 28,

2019 September 26,

2020 September 28,

Domestic Franchised Activity:

2 unchanged sentences

Closures (1) — (4) (5)

Acquired by Company (5) (1) (5) (1)

Re-franchised by Company 5 — 7 —

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Closures — — — —

Acquired by Company 5 1 5 1

Re-franchised to franchisees (5) — (7) —

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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 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

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 26, 2020 and September 28, 2019 (dollars in thousands):

Thirteen Weeks Ended Thirty-Nine Weeks Ended

September 26, 2020 September 28, 2019 September 26, 2020 September 28, 2019

Number of system-wide restaurants open at end of period 1,479 1,340 1,479 1,340

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$ 18,409 $ 15,400 $ 55,654 $ 42,835

(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.

(1) The percentage of system-wide sales attributable to company-owned restaurants was 3.2% and 3.7% for the thirteen weeks ended September 26, 2020 and September 28, 2019, respectively, and was 3.4% and 3.8% for the thirty-nine weeks ended September 26, 2020 and September 28, 2019, respectively.

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

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

In addition, the instruments governing our

indebtedness use EBITDA (with additional adjustments) to measure our compliance with covenants, such as our fixed charge coverage, lease adjusted leverage, and debt incurrence.

In addition, the instruments governing our indebtedness use EBITDA (with additional adjustments) to measure our compliance with covenants, such as our fixed charge coverage, lease adjusted leverage, and debt incurrence.

EBITDA and Adjusted EBITDA have limitations as analytical tools and should not be considered in isolation, or as an alternative to, or a substitute for net income or other financial statement data presented in our consolidated financial statements as indicators of financial performance.

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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 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,

The following table reconciles net income to EBITDA and Adjusted EBITDA for the thirteen and thirty-nine weeks ended September 26, 2020 and September 28, 2019 (in thousands):

Thirteen Weeks Ended Thirty-Nine Weeks Ended

September 26,

2020 September 28,

2019 September 26,

2020 September 28,

Net income $ 10,081 $ 5,905 $ 29,716 $ 17,429

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Adjusted EBITDA $ 18,409 $ 15,400 $ 55,654 $ 42,835

(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.

(a) Represents a gain resulting from the re-franchise of company-owned restaurants to franchisees 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 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 September 26, 2020 compared to Thirteen Weeks Ended September 28, 2019

The following table sets forth our results of operations for the thirteen weeks ended September 26, 2020 and September 28, 2019 (dollars in thousands):

Thirteen Weeks Ended Increase / (Decrease)

2020 June 29,

September 26,

2020 September 28,

Royalty revenue, franchise fees and other $ 28,806 $ 21,876 $ 6,930 31.7 %

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Income before income tax expense 9,896 7,706 2,190 28.4 %

Income tax expense 3,784 1,070 2,714 253.6 %

Income tax expense (benefit) (185) 1,801 (1,986) (110.3) %

Net income $ 10,081 $ 5,905 $ 4,176 70.7 %

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Total revenue.

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

During the thirteen weeks ended September 26, 2020, total revenue was $64.0 million, an increase of $14.1 million, or 28.3%, compared to $49.9 million in the comparable period in 2019.

Royalty revenue, franchise fees and other.

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

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

During the thirteen weeks ended September 26, 2020, royalty revenue, franchise fees and other was $28.8 million, an increase of $6.9 million, or 31.7%, compared to $21.9 million in the comparable period in 2019.

Royalty revenue increased primarily due to domestic same store sales growth of 25.4% as well as 138 net franchise restaurant openings since September 28, 2019.

Advertising fees and related income.

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

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

During the thirteen weeks ended September 26, 2020, advertising fees and related income was $19.7 million, an increase of $5.6 million, compared to $14.1 million in the comparable period in 2019.

Advertising fees increased primarily due the 32.8% increase in system-wide sales in the thirteen weeks ended September 26, 2020 compared to the thirteen weeks ended September 28, 2019.

Company-owned restaurant sales.

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

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

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

During the thirteen weeks ended September 26, 2020, company-owned restaurant sales were $15.5 million, an increase of $1.6 million, or 11.4%, compared to $13.9 million in the comparable period in 2019.

The increase was primarily due to company-owned same store sales growth of 15.2%, which was driven by both an increase in transaction size and an increase in transactions.

Also contributing to the increase was the acquisition of five corporate restaurants and the opening of three corporate restaurants since the prior year comparable period, resulting in additional sales of $1.1 million.

These increases were partially offset by the re-franchising of seven corporate restaurants since the prior year comparable period, resulting in a decline in sales of $1.4 million.

Cost of sales.

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

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

During the thirteen weeks ended September 26, 2020, cost of sales was $11.8 million, an increase of $1.5 million, or 14.2%, compared to $10.3 million in the comparable period in 2019.

Cost of sales as a percentage of company-owned

restaurant sales was 76.0% in the thirteen weeks ended September 26, 2020, compared to 74.2% in the comparable period in 2019.

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

Thirteen Weeks Ended

June 27, 2020 June 29, 2019

September 26, 2020 September 28, 2019

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

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Total cost of sales $ 11,804 76.0 % $ 10,339 74.2 %

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.

Food, beverage and packaging costs as a percentage of company-owned restaurant sales were 36.4% in the thirteen weeks ended September 26, 2020, compared to 37.0% in the comparable period in 2019.

The decrease was primarily due to a 1.4% 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%.

Labor costs as a percentage of company-owned restaurant sales were 25.4% for the thirteen weeks ended September 26, 2020, compared to 22.2% in the comparable period in 2019.

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

This was partially offset by our ability to leverage costs due to the increase in company-owned same store sales of 15.2%.

Other restaurant operating expenses as a percentage of company-owned restaurant sales were 16.2% for the thirteen weeks ended September 26, 2020, compared to 17.6% in the comparable period in 2019.

The decrease as a percentage of company-owned restaurant sales was a result of our ability to leverage costs due to the increase in company-owned same store sales of 15.2%.

Advertising expenses.

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.

During the thirteen weeks ended September 26, 2020, advertising expenses were $18.3 million, an increase of $5.6 million compared to $12.7 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 ("SG&A").

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.

During the thirteen weeks ended September 26, 2020, SG&A expense was $17.3 million, an increase of $3.8 million compared to $13.5 million in the comparable period in 2019.

The increase in SG&A expense was primarily due to approximately $3.4 million in higher variable-based compensation expense, inclusive of stock-based compensation expense, and $1.0 million in headcount-related expenses to support the growth in our business.

We also incurred expenses of $0.5 million related to COVID-19 and support provided to international franchisees.

These increases were partially offset by a gain of $1.2 million recognized due to the re-franchising of five company-owned restaurants.

Depreciation and amortization.

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.

During the thirteen weeks ended September 26, 2020, depreciation expense was $2.3 million, an increase of $0.9 million compared to $1.4 million in the comparable period in 2019.

The increase in depreciation and amortization was primarily due to accelerated depreciation on certain assets.

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,

During the thirteen weeks ended September 26, 2020, interest expense, net was $4.4 million, an increase of $0.2 million compared to $4.2 million of interest expense, net in the comparable period in 2019.

The increase in interest expense, net was primarily due to a higher average outstanding debt balance from the prior year comparable period.

Income tax expense (benefit).

During the thirteen weeks ended September 26, 2020, we recognized an income tax benefit of $0.2 million yielding an effective tax rate of (1.9)%, compared to an effective tax rate of 23.4% in the prior year period.

The decrease in the effective tax rate was due to the impact of excess tax benefits associated with stock options exercised.

Thirty-Nine Weeks Ended September 26, 2020 compared to Thirty-Nine Weeks Ended September 28, 2019

The following table sets forth our results of operations for the thirty-nine weeks ended September 26, 2020 and September 28, 2019 (dollars in thousands):

Thirty-Nine Weeks Ended Increase / (Decrease)

September 26,

2020 September 28,

Royalty revenue, franchise fees and other $ 80,863 $ 64,391 $ 16,472 25.6 %

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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.

During the thirty-nine weeks ended September 26, 2020, total revenue was $185.5 million, an increase of $39.0 million, or 26.6%, compared to $146.5 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%.

During the thirty-nine weeks ended September 26, 2020, royalty revenue, franchise fees and other was $80.9 million, an increase of $16.5 million, or 25.6%, compared to $64.4 million in the comparable period in 2019.

Royalty revenue increased due to 138 net franchise restaurant openings since September 28, 2019 and domestic same store sales growth of 22.5%.

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.

During the thirty-nine weeks ended September 26, 2020, advertising fees and related income was $55.6 million, an increase of $14.8 million, or 36.4%, compared to $40.8 million in the comparable period in 2019.

Advertising fees increased primarily due to the 29.6% increase in system-wide sales in the thirty-nine weeks ended September 26, 2020 compared to the thirty-nine weeks ended September 28, 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.

During the thirty-nine weeks ended September 26, 2020, company-owned restaurant sales were $49.1 million, an increase of $7.7 million, or 18.7%, compared to $41.3 million in the comparable period in 2019.

The increase was primarily due an increase in company-owned same store sales of 15.3%, which was driven by both an increase in transaction size and transactions.

These increases were partially offset by the re-franchising of seven corporate restaurants since the prior year comparable period, resulting in a decline in sales of $0.8 million.

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.

During the thirty-nine weeks ended September 26, 2020, cost of sales was $36.4 million, an increase of $5.7 million, or 18.7%, compared to $30.6 million in the comparable period in 2019.

Cost of sales as a percentage of company-owned restaurant sales was 74.1% in the thirty-nine weeks ended September 26, 2020 and September 28, 2019.

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

Twenty-Six Weeks Ended

June 27, 2020 June 29, 2019

Thirty-Nine Weeks Ended

September 26, 2020 September 28, 2019

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

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Total cost of sales $ 36,367 74.1 % $ 30,642 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.

Food, beverage and packaging costs as a percentage of company-owned restaurant sales were 34.8% in the thirty-nine weeks ended September 26, 2020, compared to 36.7% in the comparable period in 2019.

The decrease was primarily due to a 10.4% 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.

Labor costs as a percentage of company-owned restaurant sales were 24.8% for the thirty-nine weeks ended September 26, 2020, compared to 22.5% 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 15.3%.

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.

Other restaurant operating expenses as a percentage of company-owned restaurant sales were 16.6% for the thirty-nine weeks ended September 26, 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 15.3%.

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.

During the thirty-nine weeks ended September 26, 2020, advertising expenses were $51.8 million, an increase of $13.4 million, or 35.0%, compared to $38.4 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.

During the thirty-nine weeks ended September 26, 2020, SG&A expense was $44.8 million, an increase of $5.3 million, or 13.5%, compared to $39.5 million in the comparable period in 2019.

The increase in SG&A expense was primarily due to approximately $4.3 million in higher variable performance-based compensation expense, inclusive of stock-based compensation expense, and $1.9 million in headcount-related expenses to support the growth in our business.

We also incurred expenses of $1.1 million related to COVID-19 and support provided to international franchisees and a one-time donation to the National Restaurant Employee Relief Fund of $1.0 million to support restaurant workers in times of need.

These increases were partially offset by a gain of $3.2 million recognized due to the re-franchising of seven 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.

During the thirty-nine weeks ended September 26, 2020, depreciation and amortization expense was $5.3 million, an increase of $1.3 million, or 31.6%, compared to $4.0 million in the comparable period in 2019.

The increase in depreciation and amortization expense was primarily due to accelerated depreciation on certain assets.

Interest expense, net.

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.

During the thirty-nine weeks ended September 26, 2020, interest expense, net was $12.8 million, a decrease of $0.2 million, or 1.5%, compared to $13.0 million in the comparable period in 2019.

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

Income tax expense.

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.

Income tax expense was $4.8 million in the thirty-nine weeks ended September 26, 2020, yielding an effective tax rate of 14.0%, compared to an effective tax rate of 17.2% in the prior year period.

The decrease in the effective tax rate was primarily due to the impact of excess tax benefits associated with stock options exercised during the period.

Liquidity and Capital Resources

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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,

The following table shows summary cash flows information for the thirty-nine weeks ended September 26, 2020 and September 28, 2019 (in thousands):

Thirty-Nine Weeks Ended

September 26,

2020 September 28,

Net cash provided by (used in):

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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 $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.

Net cash provided by operating activities was $46.8 million in the thirty-nine weeks ended September 26, 2020, an increase of $18.2 million from cash provided by operating activities of $28.6 million in the thirty-nine weeks ended September 28, 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.

Investing activities .

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.

Our net cash used in investing activities was $4.6 million in the thirty-nine weeks ended September 26, 2020, a decrease of $17.7 million from cash used in investing activities of $22.3 million in the thirty-nine weeks ended September 28, 2019.

The decrease in cash used in investing activities was primarily due to the purchase of a new corporate headquarters building for $18.3 million during the thirty-nine weeks ended September 28, 2019.

Financing activities .

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.

Our net cash provided by financing activities was $5.1 million in the thirty-nine weeks ended September 26, 2020, an increase of $10.8 million from cash used in financing activities of $5.8 million in 2019.

The increase was primarily due to additional borrowings under our 2018 Variable Funding Notes (as defined below) of $16.0 million in the thirty-nine weeks ended September 26, 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, 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.

On October 30, 2020, the Company completed a transaction to refinance its existing securitized financing facility with a new securitized financing facility, pursuant to which Wingstop Funding LLC (the “Issuer”), a limited-purpose, bankruptcy-remote, wholly-owned indirect subsidiary of the Company, issued $480.0 million of its Series 2020-1 2.84% Fixed Rate Senior Notes, Class A-2 (the "2020 Class A-2 Notes").

The Issuer also entered into a revolving financing facility of Series 2020-1 Variable Funding Senior Notes, Class A-1 which permits borrowings of up to a maximum principal amount of $50.0 million, which may be used to issue letters of credit (the “2020 Variable Funding Notes” and, together with the 2020 Class A-2 Notes, the “2020 Notes”).

A portion of the proceeds of the 2020 Class A-2 Notes was used to repay the $332.8 million of principal outstanding on the existing 2018 Class A-2 Notes and 2018 Variable Funding Notes”), together with accrued and unpaid interest and make-whole prepayment consideration due thereon, and to pay related transaction fees.

The Company intends to use the additional net proceeds to strengthen its liquidity position and for general corporate purposes, including a return of capital to the Company’s stockholders.

The 2020 Class A-2 Notes are generally subject to 1% annual amortization, bear interest at a fixed rate of 2.84% per annum, and have an anticipated repayment date of December 2027.

During the first fiscal quarter of 2020, the Company had a leverage ratio under the Class A-2 Notes of less than 5.0x.

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 making principal payments beginning in the second quarter of 2020.

Borrowings under the 2020 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.

Dollars or (iv) with respect to advances made by conduit investors, the weighted average cost of, or related to, the issuance of commercial paper allocated to fund or maintain such advances, in each case plus any applicable margin, as more fully set forth in the Variable Funding Note Purchase Agreement, dated November 14, 2018.

Interest payments on the 2020 Notes are payable on a quarterly basis.

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.

As of September 26, 2020, we had $16.0 million outstanding borrowings under the 2018 Variable Funding Notes, with $4.0 million letters of credit outstanding, and $316.8 million outstanding under the 2018 Class A-2 Notes.

There were no amounts drawn down on the letters of credit as of September 26, 2020.

We paid a quarterly cash dividend of $0.11 per share of common stock in each of the first two quarters of 2020, and a quarterly cash dividend of $0.14 per share of common stock in the third quarter of 2020, resulting in aggregate dividend payments of $10.7 million, or $0.36 per share of common stock, during the thirty-nine weeks ended September 26, 2020.

On November 2, 2020, the Company’s Board of Directors announced a quarterly dividend of $0.14 per share of common stock, payable to stockholders of record as of November 20, 2020.

The regular quarterly dividend is to be paid on December 10, 2020, totaling approximately $4.2 million.

On October 30, 2020, in conjunction with the completion of a transaction to refinance the Company's existing securitized financing facility, the Company’s Board of Directors declared a special dividend of $5.00 per share of common stock, payable to stockholders of record as of November 20, 2020.

The special dividend is to be paid on December 3, 2020, totaling approximately $149 million.

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

However, any future declarations of dividends, as well as the amount and timing of such dividends, are subject to capital availability and the discretion of our Board of Directors, which must evaluate, among other things, whether cash dividends are in the best interest of our stockholders.

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 our Annual Report.

During the thirteen weeks ended September 26, 2020, there were 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 our 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 our Annual Report and the corresponding Notes 6 and 8 in the notes to our unaudited consolidated financial statements included elsewhere in this Quarterly Report.

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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 June 27, 2020.

Outstanding letters of credit totaled $4.0 million at September 26, 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.

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These forward-looking statements are made based on expectations and beliefs concerning future events affecting us and are subject to uncertainties, risks, and factors relating to our operations and business environments, all of which are difficult to predict and many of which are beyond our control, that could cause our actual results to differ materially from those matters expressed or implied by these forward-looking statements.

Such risks and other factors include those listed in Item 1A., “Risk Factors,” and elsewhere in this report, including the following factors that could cause actual results or outcomes to differ from the results expressed or implied by forward-looking statements:

Such risks and other factors include those listed in Part II, Item 1A., “Risk Factors,” and elsewhere in this report, including the following factors that could cause actual results or outcomes to differ from the results expressed or implied by forward-looking statements:

• the impacts of the novel coronavirus (COVID-19) pandemic on our business;

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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 and Part II, Item 1A in this Quarterly Report.

Some of these and other factors are discussed in more detail under “Risk Factors” in our Annual Report and Part II, Item 1A.

in this Quarterly Report.

When considering forward-looking statements in this report or that we make in other reports or statements, you should keep in mind the cautionary statements in this report and future reports we file with the SEC.

2 unchanged sentences

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