Wingstop Inc. 10-Q

Item 3. Quantitative and Qualitative Disclosures About Market Risk Impact of Inflation. The primary inflationary factors affecting our and our franchisees’ operations are food and beverage costs, labor costs, energy costs and the costs and materials used in the construction of new restaurants. Our restaurant operations are subject to federal and state minimum wage laws governing such matters as working conditions, overtime and tip credits. Significant numbers of our and our franchisees’ restaurant personnel are paid at rates related to the federal and/or state minimum wage and, accordingly, increases in the minimum wage increase our and our franchisees’ labor costs. To the extent permitted by competition and the economy, we have mitigated increased costs by increasing menu prices and may continue to do so if deemed necessary in future years. Substantial increases in costs and expenses could impact our operating results to the extent such increases cannot be passed through to our customers. Historically, inflation has not had a material effect on our results of operations. Severe increases in inflation, however, could affect the global and U.S. economies and could have an adverse impact on our business, financial condition and results of operations. Commodity Price Risk. We are exposed to market risks from changes in commodity prices. Many of the food products purchased by us are affected by weather, production, availability and other factors outside our control. Although we attempt to minimize the effect of price volatility by negotiating fixed price contracts for the supply of key ingredients, there are no established fixed price markets for fresh bone-in chicken wings, so we are subject to prevailing market conditions. Bone-in chicken wings accounted for approximately 26.2% and 28.4% of our company-owned restaurant cost of sales during the thirty-nine weeks ended September 26, 2020 and September 28, 2019, respectively. A hypothetical 10% increase in the bone-in chicken wing costs would have increased costs of sales by approximately $1.0 million during the thirty-nine weeks ended September 26, 2020. We do not engage in speculative financial transactions nor do we hold or issue financial instruments for trading purposes. In instances when we use fixed pricing arrangements with our suppliers, these arrangements cover our physical commodity needs, are not net-settled, and are accounted for as normal purchases. Interest Rate Risk. As of September 26, 2020, the Company was exposed to interest rate risk on borrowings under the 2018 Variable Funding Notes. As of September 26, 2020, the Company had borrowings of $16.0 million under the 2018 Variable Funding Notes and $4.0 million of letters of credit outstanding. A hypothetical increase or decrease of 100 basis points on the variable rate under the 2018 Variable Funding Notes as of September 26, 2020 would not materially affect our results of operations or cash flows. The majority of our long-term debt consisted of the $316.8 million outstanding under the 2018 Class A-2 Notes as of September 26, 2020 (excluding unamortized debt issuance costs and the effect of purchase accounting adjustments). The Company’s fixed rate securitized debt exposes the Company to changes in market interest rates reflected in the fair value of the debt and to the risk that the Company may need to refinance maturing debt with new debt at a higher rate. 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 the Issuer issued the 2020 Class A-2 Notes and entered into a revolving financing facility of 2020 Variable Funding Notes that permit borrowings of up to a maximum principal amount of $50.0 million. The new securitized financing facility exposes the Company to substantially the same interest rate risks as discussed above. 28