Wingstop Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of the financial condition and results of operations of Wingstop Inc. (collectively with its direct and indirect subsidiaries on a consolidated basis, “Wingstop,” the “Company,” “we,” “our,” or “us”) should be read in conjunction with the accompanying unaudited consolidated financial statements and related notes in Part I, Item 1 of this Quarterly Report on Form 10-Q (this “Quarterly Report”) and with the audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year ended December 28, 2019 (our “Annual Report”). The statements in this discussion regarding industry outlook, our expectations regarding our future performance, liquidity and capital resources, and other non-historical statements are forward-looking statements. These forward-looking statements are subject to risks and uncertainties, including, but not limited to, the risks and uncertainties described in “Special Note Regarding Forward-Looking Statements,” below and “Risk Factors” on page 10 of our Annual Report and in Part II, Item 1A. of this Quarterly Report. Our actual results may differ materially from those contained in or implied by any forward-looking statements. We operate on a 52 or 53-week fiscal year ending on the last Saturday of each calendar year. Our fiscal quarters are comprised of 13 weeks, with the exception of the fourth quarter of a 53-week year, which contains 14 weeks. Fiscal years 2020 and 2019 each contain 52 weeks. Overview Wingstop is the largest fast casual chicken wings-focused restaurant chain in the world, with over 1,400 locations worldwide. We are dedicated to serving the world flavor through an unparalleled guest experience and offering of classic wings, boneless wings and tenders, always cooked to order and hand-sauced-and-tossed in 11 bold, distinctive flavors. The Company is primarily a franchisor, with approximately 98% of Wingstop’s restaurants currently owned and operated by independent franchisees. We believe our asset-light, highly-franchised business model generates strong operating margins and requires low capital expenditures, creating stockholder value through strong and consistent free cash flow and capital-efficient growth. Historically, the Company had two reporting segments: franchise operations and company restaurant operations. In accordance with Accounting Standards Codification 280 “Segment Reporting”, the Company uses the management approach for determining its reportable segments. The management approach is based upon the way management reviews performance and allocates resources. 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 In March 2020, the novel coronavirus ("COVID-19") outbreak was declared a pandemic by the World Health Organization, significantly changing consumer behaviors as individuals are being encouraged to practice social distancing. This has also led to restaurants reducing restaurant seating capacity, and in some cases restaurant closures, due to various restrictions mandated by governments around the world. As of March 16, 2020, we made the decision to close our domestic dining rooms and limit our service to carryout and delivery only. Several of our international markets also closed their dining rooms as a result of the outbreak. As of the end of the 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 third quarter of 2020. 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. 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 $48.2 million as of September 26, 2020. See "Liquidity and Capital Resources" below for further details. 15 Key Performance Indicators Key measures that we use in evaluating our restaurants and assessing our business include the following: Number of restaurants. Management reviews the number of new restaurants, the number of closed restaurants, and the number of acquisitions and divestitures of restaurants to assess net new restaurant growth. Thirteen Weeks Ended Thirty-Nine Weeks Ended September 26, 2020 September 28, 2019 September 26, 2020 September 28, 2019 Domestic Franchised Activity: Beginning of period 1,244 1,139 1,200 1,095 Openings 34 31 79 80 Closures (1) — (4) (5) Acquired by Company (5) (1) (5) (1) Re-franchised by Company 5 — 7 — Restaurants end of period 1,277 1,169 1,277 1,169 Domestic Company-Owned Activity: Beginning of period 30 29 31 29 Openings 1 — 2 — Closures — — — — Acquired by Company 5 1 5 1 Re-franchised to franchisees (5) — (7) — Restaurants end of period 31 30 31 30 Total Domestic Restaurants 1,308 1,199 1,308 1,199 International Franchised Activity: Beginning of period 162 135 154 128 Openings 10 7 18 18 Closures (1) (1) (1) (5) Restaurants end of period 171 141 171 141 Total System-wide Restaurants 1,479 1,340 1,479 1,340 System-wide sales. System-wide sales represents net sales for all of our company-owned and franchised restaurants, with franchised restaurant sales reported by franchisees. While we do not record franchised restaurant sales as revenue, our royalty revenue is calculated based on a percentage of franchised restaurant sales, which generally ranges from 5.0% to 6.0% of gross sales, net of discounts. This measure allows management to better assess changes in our royalty revenue, our overall store performance, the health of our brand, and the strength of our market position relative to competitors. Our system-wide sales growth is driven by new restaurant openings as well as increases in same store sales. 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. 16 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 permanent closures. We review same store sales for company-owned restaurants as well as franchised restaurants. Same store sales are driven by changes in transactions and average transaction size. Transaction size changes are driven by price changes or product mix shifts from either a change in the number of items purchased or shifts into higher or lower priced categories of items. EBITDA and Adjusted EBITDA. We define EBITDA as net income before interest expense, net, income tax expense, and depreciation and amortization. We define Adjusted EBITDA as EBITDA further adjusted for transaction costs, costs and fees associated with investments in our strategic initiatives, gains and losses on the disposal of assets, and stock-based compensation expense. EBITDA and Adjusted EBITDA may not be comparable to other similarly titled measures of other companies due to differences in methods of calculation. For a reconciliation of net income to EBITDA and Adjusted EBITDA and for further discussion of EBITDA and Adjusted EBITDA as non-GAAP measures and how we utilize them, see footnote 2 below. 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 System-wide sales (1) $ 509,155 $ 383,469 $ 1,448,108 $ 1,117,341 Domestic restaurant AUV $ 1,435 $ 1,219 $ 1,435 $ 1,219 Domestic same store sales growth 25.4 % 12.3 % 22.5 % 10.7 % Company-owned domestic same store sales growth 15.2 % 11.9 % 15.3 % 10.1 % Total revenue $ 63,988 $ 49,875 $ 185,529 $ 146,490 Net income $ 10,081 $ 5,905 $ 29,716 $ 17,429 Adjusted EBITDA (2) $ 18,409 $ 15,400 $ 55,654 $ 42,835 (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. (2) EBITDA and Adjusted EBITDA are supplemental measures of our performance that are not required by, or presented in accordance with, accounting principles generally accepted in the United States (“GAAP”). EBITDA and Adjusted EBITDA should not be considered as an alternative to net income or any other performance measure derived in accordance with GAAP, or as an alternative to cash flows from operating activities as a measure of our liquidity. We caution investors that amounts presented in accordance with our definitions of EBITDA and Adjusted EBITDA may not be comparable to similar measures disclosed by our competitors, because not all companies and analysts calculate EBITDA and Adjusted EBITDA in the same manner. We present EBITDA and Adjusted EBITDA because we consider them to be important supplemental measures of our performance and believe they are frequently used by securities analysts, investors, and other interested parties in the evaluation of companies in our industry. Management believes that investors’ understanding of our performance is enhanced by including these non-GAAP financial measures as a reasonable basis for comparing our ongoing results of operations. Many investors are interested in understanding the performance of our business by comparing our results from ongoing operations on a period-over-period basis and would ordinarily add back non-cash expenses such as depreciation and amortization, as well as items that are not part of normal day-to-day operations of our business. Management uses EBITDA and Adjusted EBITDA: • as a measurement of operating performance because they assist us in comparing the operating performance of our restaurants on a consistent basis, as they remove the impact of items not directly resulting from our core operations; • for planning purposes, including the preparation of our internal annual operating budget and financial projections; 17 • to evaluate the performance and effectiveness of our operational strategies; • to evaluate our capacity to fund capital expenditures and expand our business; and • to calculate incentive compensation payments for our employees, including assessing performance under our annual incentive compensation plan and determining the vesting of performance-based equity awards. By providing these non-GAAP financial measures, together with a reconciliation to the most comparable GAAP measure, we believe we are enhancing investors’ understanding of our business and our results of operations, as well as assisting investors in evaluating how well we are executing our strategic initiatives. In addition, the instruments governing our indebtedness use EBITDA (with additional adjustments) to measure our compliance with covenants, such as our fixed charge coverage, lease adjusted leverage, and debt incurrence. EBITDA and Adjusted EBITDA have limitations as analytical tools and should not be considered in isolation, or as an alternative to, or a substitute for net income or other financial statement data presented in our consolidated financial statements as indicators of financial performance. Some of the limitations are: • such measures do not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments; • such measures do not reflect changes in, or cash requirements for, our working capital needs; • such measures do not reflect the interest expense or the cash requirements necessary to service interest or principal payments on our debt; • such measures do not reflect our tax expense or the cash requirements to pay our taxes; • although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future and such measures do not reflect any cash requirements for such replacements; and • other companies in our industry may calculate such measures differently than we do, limiting their usefulness as comparative measures. Due to these limitations, EBITDA and Adjusted EBITDA should not be considered as measures of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and using these non-GAAP measures only supplementally. As noted in the table below, Adjusted EBITDA includes adjustments for transaction costs, costs and fees associated with investments in our strategic initiatives, gains and losses on the disposal of assets, and stock-based compensation expense. It is reasonable to expect that this item will occur in future periods. However, we believe these adjustments are appropriate because the amounts recognized can vary significantly from period to period, do not directly relate to the ongoing operations of our restaurants, and complicate comparisons of our internal operating results and operating results of other restaurant companies over time. Each of the normal recurring adjustments and other adjustments described in this paragraph and in the reconciliation table below help management measure our core operating performance over time by removing items that are not related to day-to-day operations. 18 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, 2019 Net income $ 10,081 $ 5,905 $ 29,716 $ 17,429 Interest expense, net 4,405 4,243 12,764 12,952 Income tax expense (185) 1,801 4,829 3,626 Depreciation and amortization 2,334 1,408 5,287 4,019 EBITDA $ 16,635 $ 13,357 $ 52,596 $ 38,026 Additional adjustments: Gain on disposal of assets (a) (1,233) — (3,249) — Stock-based compensation expense (b) 3,007 2,043 6,307 4,809 Adjusted EBITDA $ 18,409 $ 15,400 $ 55,654 $ 42,835 (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. 19 Results of Operations 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) September 26, 2020 September 28, 2019 $ % Revenue: Royalty revenue, franchise fees and other $ 28,806 $ 21,876 $ 6,930 31.7 % Advertising fees and related income 19,653 14,056 5,597 39.8 % Company-owned restaurant sales 15,529 13,943 1,586 11.4 % Total revenue 63,988 49,875 14,113 28.3 % Costs and expenses: Cost of sales (1) 11,804 10,339 1,465 14.2 % Advertising expenses 18,267 12,652 5,615 44.4 % Selling, general and administrative 17,282 13,527 3,755 27.8 % Depreciation and amortization 2,334 1,408 926 65.8 % Total costs and expenses 49,687 37,926 11,761 31.0 % Operating income 14,301 11,949 2,352 19.7 % Interest expense, net 4,405 4,243 162 3.8 % Income before income tax expense 9,896 7,706 2,190 28.4 % Income tax expense (benefit) (185) 1,801 (1,986) (110.3) % Net income $ 10,081 $ 5,905 $ 4,176 70.7 % (1) Cost of sales includes all operating expenses of company-owned restaurants, including advertising expenses, and excludes depreciation and amortization, which are presented separately. Total revenue. During the thirteen weeks ended 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 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 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 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 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 20 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 September 26, 2020 September 28, 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 $ 5,655 36.4 % $ 5,162 37.0 % Labor costs 3,944 25.4 % 3,098 22.2 % Other restaurant operating expenses 2,512 16.2 % 2,456 17.6 % Vendor rebates (307) (2.0) % (377) (2.7) % 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 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 25.4% 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 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 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 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 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. 21 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, 2019 $ % Revenue: Royalty revenue, franchise fees and other $ 80,863 $ 64,391 $ 16,472 25.6 % Advertising fees and related income 55,590 40,753 14,837 36.4 % Company-owned restaurant sales 49,076 41,346 7,730 18.7 % Total revenue 185,529 146,490 39,039 26.6 % Costs and expenses: Cost of sales (1) 36,367 30,642 5,725 18.7 % Advertising expenses 51,780 38,359 13,421 35.0 % Selling, general and administrative 44,786 39,463 5,323 13.5 % Depreciation and amortization 5,287 4,019 1,268 31.6 % Total costs and expenses 138,220 112,483 25,737 22.9 % Operating income 47,309 34,007 13,302 39.1 % Interest expense, net 12,764 12,952 (188) (1.5) % Income before income tax expense 34,545 21,055 13,490 64.1 % Income tax expense 4,829 3,626 1,203 33.2 % Net income $ 29,716 $ 17,429 $ 12,287 70.5 % (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 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 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 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 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. 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 $3.1 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 $0.8 million. Cost of sales. 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. 22 The table below presents the major components of cost of sales (dollars in thousands): 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 Cost of sales: Food, beverage and packaging costs $ 17,085 34.8 % $ 15,184 36.7 % Labor costs 12,156 24.8 % 9,314 22.5 % Other restaurant operating expenses 8,164 16.6 % 7,289 17.6 % Vendor rebates (1,038) (2.1) % (1,145) (2.8) % 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 34.8% 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 24.8% 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 16.6% 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 thirty-nine weeks ended September 26, 2020. Advertising expenses. 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 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 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 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 $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. 23 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 with negative working capital. 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 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 thirty-nine weeks ended September 26, 2020 and September 28, 2019 (in thousands): Thirty-Nine Weeks Ended September 26, 2020 September 28, 2019 Net cash provided by (used in): Operating activities $ 46,779 $ 28,586 Investing activities (4,564) (22,311) Financing activities 5,068 (5,752) Net change in cash and cash equivalents $ 47,283 $ 523 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 $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 $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 $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 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. 24 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 October 30, 2020. Interest payments on the 2020 Notes are payable on a quarterly basis. 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. Dividends. 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 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. Off-Balance Sheet Arrangements The Company is required to provide standby letters of credit related to our securitized financing facility. 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 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. 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 Annual Report, and there have been no material changes since the filing of our Annual Report. 25 Recent Accounting Pronouncements The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and does not believe the future adoption of any such pronouncements may be expected to cause a material impact on its financial condition or the results of its operations. Special Note Regarding Forward-Looking Statements This report includes statements of our expectations, intentions, plans and beliefs that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and are intended to come within the safe harbor protection provided by those sections. These statements, which involve risks and uncertainties, relate to the discussion of our business strategies and our expectations concerning future operations, margins, profitability, trends, liquidity and capital resources and to analyses and other information that are based on forecasts of future results and estimates of amounts not yet determinable. These forward-looking statements can generally by identified by the use of forward-looking terminology, including the terms “may,” “will,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “think,” “estimate,” “seek,” “expect,” “predict,” “could,” “project,” “potential” or, in each case, their negative or other variations or comparable terminology, although not all forward-looking statements are accompanied by such terms. 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 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; • the response of governments and of our Company to the pandemic; • our ability to effectively implement our growth strategy; • risks associated with changes in food and supply costs; • our relationships with, and the performance of, our franchisees, as well as actions by franchisees that could harm our business; • our ability to identify, recruit and contract with a sufficient number of qualified franchisees; • risks associated with food safety, food-borne illness and other health concerns; • our ability to successfully expand into new markets; • our ability to effectively compete within our industry; • risks associated with interruptions in our supply chain, including availability of food products; • risks associated with our future performance and operating results falling below the expectations of securities analysts and investors; • risks associated with data privacy, cyber security, and the use and implementation of information technology; • risks associated with our increasing dependence on digital commerce platforms and third-party delivery service providers; • uncertainty in the law with respect to the assignment of liabilities in the franchise business model; • risks associated with litigation against us or our franchisees; 26 • our ability to successfully advertise and market our business; • risks associated with changes in customer preferences and perceptions; • our ability to comply with government regulations relating to food products and franchising, including increased costs associated with new or changing regulations; • risks associated with the geographic concentration of our business; • our ability to maintain adequate insurance coverage for our business; • risks associated with damage to our reputation or lack of acceptance of our brand in existing or new markets; • risks associated with our expansion into international markets and foreign government restrictions on operations; • our ability to comply with the terms of our securitized debt financing and generate sufficient cash flows to satisfy our significant debt service obligations thereunder; • our ability to attract and retain our executive officers and other key employees; and • our ability to protect our intellectual property, including trademarks and trade secrets. 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. 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. New risks and uncertainties arise from time to time, and we cannot predict when they may arise or how they may affect us. Except as required by law, 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. 27