Item 1. Business
Item 1. Business
Throughout this report, unless the context indicates otherwise, Wingstop Inc. (NASDAQ: WING) and its consolidated subsidiaries are referred to as the "Company," "Wingstop," or in the first-person notations of "we," "us" and "our."
Overview
Wingstop is the largest fast casual chicken wings-focused restaurant chain in the world, with over 1,500 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. Wingstop generates revenues by charging royalties, advertising fees, and franchise fees to our franchisees and by operating a number of our own restaurants. 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.
Our History
The first Wingstop restaurant opened in Garland, Texas in 1994. We began franchising Wingstop restaurants in 1997, and in 2009 we opened our first international location in Mexico.
Wingstop Inc. was incorporated in Delaware on March 18, 2015. On June 15, 2015, we completed our initial public offering, and our stock became listed on the NASDAQ Global Select Market under the symbol “WING.”
Our Industry
We operate in the rapidly-growing, and intensely competitive, fast casual segment of the restaurant industry. We believe that fast casual concepts, which are a segment of limited service restaurants ("LSRs"), such as Wingstop, attract customers away from other restaurant segments and, accordingly, are generating faster growth than the overall restaurant industry and increasing their market share relative to other segments.
We compete on the basis of taste, quality, price of food offered, guest service, ambiance, location, and overall dining experience. We also compete with many restaurant and retail establishments for site locations and restaurant-level employees.
We believe we compete primarily with fast casual establishments and quick service restaurants, local and regional sports bars, and casual dining restaurants. Many of these direct and indirect competitors are well-established national, regional, or local chains. We believe that our attractive price-value relationship, our flexible service model, and the quality and distinctive flavor of our food enables us to differentiate ourselves from our competitors.
Our Menu
It is our mission to serve the world flavor. We offer our guests fresh, cooked-to-order wings with bold, layered flavors that touch all of the senses and complement our wings with fresh-cut, seasoned fries and fresh, hand-cut carrots and celery. We round out the flavor experience with ranch and bleu cheese dips that are made in-house daily. We never use heat lamps or microwaves in the preparation of our food.
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Our 11 flavor offerings create a differentiated experience that drives demand across multiple day parts and occasions. Paired with our numerous order options (eat-in (to the extent available) / to go / delivery; individual / combo meals / family packs) that allow guests to eat Wingstop during any occasion, whether it is a quick carry-out snack, a party size order for their favorite group occasion, or delivery for a family dinner, we believe this customizable unique experience drives repeat business and brand loyalty.
Our Vision
Our vision is to become a top 10 global restaurant brand. Based on our internal analysis, we believe there is opportunity for our brand to grow to more than 3,000 restaurants across the United States and to more than 3,000 restaurants internationally. Our approach to becoming a top 10 global restaurant brand centers around the following key strategic priorities:
– sustaining long-term same store sales growth through brand awareness and innovation;
– maintaining best in class unit economics; and
– expanding our global footprint.
This approach is built upon the foundation of our investments in the people and infrastructure necessary to build our organization for the next level.
Sustaining Long-Term Same Store Sales Growth through Brand Awareness and Innovation
In February 2017, we launched our national advertising program. Our transition from advertising cooperatives, a more locally driven advertising approach, to national advertising provided us with more reach and frequency in existing media markets and expanded our coverage to smaller and newer markets where we did not previously utilize television advertising. We fund our national advertising program through the Wingstop Restaurants Advertising Fund (the “Ad Fund”), a consolidated not-for-profit advertising fund for which a percentage of gross sales is collected from Wingstop restaurant domestic franchisees and company-owned restaurants to be used for various forms of advertising for the Wingstop brand. Beginning in fiscal year 2019, we increased the contribution rate that domestic franchisees are required to contribute to the Ad Fund from 3% to 4% of gross sales. Our national advertising program focuses on two key messaging windows and utilizes an extensive range of social media and digital marketing tools, including search engine, digital video, and social media advertising, to allow us to target core customers and increase brand awareness.
We are making focused investments in technology to provide a convenient and engaging brand experience, with the goal of digitizing every transaction. We developed a custom website and mobile ordering application that we believe position Wingstop for further digital expansion. Delivery also continues to drive our digital sales.
In 2017, we partnered with DoorDash to provide delivery to our customers, and substantially all of our domestic restaurants offered delivery as of the end of the 2020 fiscal year. We believe our DoorDash partnership and delivery strategy will continue to drive domestic same store sales growth. Our digital sales increased to 62.5% of sales during the fourth quarter of 2020, compared to 38.2% of sales during the fourth quarter of 2019.
Maintaining Best-in-Class Unit Economics
We believe the growing popularity of the Wingstop experience and the operational simplicity of our restaurants translate into attractive economics at our franchised and company-owned locations. Existing franchisees accounted for approximately 94% of franchised restaurants opened in 2020 and approximately 90% of franchised restaurants opened in 2019, which we believe further underscores our restaurant model’s financial appeal.
Upon opening, our restaurant volume generally builds year after year. Our domestic average unit volume (“AUV”) has grown consistently, approaching $1.5 million during fiscal year 2020. Our operating model targets a low average estimated initial investment of approximately $390,000, excluding real estate purchase or lease costs and pre-opening expenses. In year two of operation, we target a franchisee unlevered cash-on-cash return of approximately 35% to 40%. We believe low entry costs and high returns provide a compelling investment opportunity for our franchisees that has helped drive the continued growth of our system.
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Expanding Our Global Footprint
We believe that there is significant opportunity to expand globally, and we intend to focus our efforts on increasing our geographic penetration in both existing and new domestic markets, as well as international markets. We believe our highly-franchised model positions us for continued strong unit growth over the medium- and long-term. We expect franchisee demand for our brand, supported by compelling unit economics, operational simplicity, low entry costs, and flexible real estate profile, to drive global restaurant growth.
We believe we can achieve our domestic restaurant potential by expanding in our existing markets where we believe we can more than double our current restaurant count, as well as continuing to expand into emerging markets. Our “inside out” domestic market expansion strategy focuses our initial development in urban centers where our core demographic is most densely populated and then builds outward into suburban areas as our brand awareness grows in the market. We have a robust domestic development pipeline and over 80% of our domestic commitments as of December 26, 2020 were from existing franchisees, supporting the attractiveness of our restaurant business model as well as our positive franchisor-franchisee relationships.
We also believe that there is a significant opportunity to grow our business internationally. As of December 26, 2020, we had 179 international restaurants located in nine countries, all of which were franchised. In fiscal year 2020, we opened 26 international locations. We believe that our restaurant operating model translates well internationally based on our small real estate footprint, our simplicity of operations, the universal and broad appeal of chicken, and our ability to customize our wide variety of flavors to local tastes.
Our Franchise
Franchise Overview
Our franchisees operated a total of 1,506 restaurants in 44 states and ten countries as of December 26, 2020. We have rigorous qualification criteria and training programs for our franchisees and require them to adhere to strict operating standards. We work hard to ensure that every Wingstop franchise location meets the same quality and customer service benchmarks in order to preserve the consistency and reliability of the Wingstop brand.
Franchisees (along with their managers) must attend and successfully complete a four-week training program prior to opening a new franchise restaurant. Our training program covers various topics including Wingstop culture, food preparation and storage, food safety, cleaning and sanitation, marketing and advertising, point of sale ("POS") systems, accounting, and hospitality, among others.
All of our franchise agreements require that each franchised restaurant be operated in accordance with our defined operating procedures, adhere to the menu we establish, and meet applicable quality, service, health, and cleanliness standards. We may terminate the franchise rights of any franchisee who does not comply with our standards and requirements. We believe that maintaining superior food quality, an inviting and energetic atmosphere, and excellent guest service are critical to the reputation and success of our concept. Therefore, we enforce the contractual requirements of our franchise agreements.
We have a broad and diversified domestic franchisee base. Since 2014, the number of franchisees who own ten or more restaurants has more than doubled. This increase is consistent with our strategy to grow with our existing franchisees. As of December 26, 2020, our domestic franchise base had an average restaurant ownership of approximately six restaurants per franchisee and an average tenure of seven years.
U.S. Franchise Agreements
We enter into franchise agreements with U.S. franchisees under which the franchisee is generally granted the right to operate a restaurant in a particular location, typically providing for a 10-year initial term, with an opportunity to enter into one or more renewal franchise agreements subject to certain conditions. We generally update and/or revise our franchise agreement on an annual basis and, as a result, the agreements we enter into with individual franchisees may vary. Our franchise documents currently provide that franchisees must pay a franchise fee of $20,000 for each restaurant opened. If a franchisee has entered into an area development agreement to develop restaurants in a defined market area with us (which occurs, in most cases, even if a franchisee wants to develop only one restaurant), the aggregate initial fee is $30,000 for each restaurant, which includes a $10,000 development fee per restaurant. The $10,000 development fee per restaurant to-be-developed is paid in full at the time a development agreement is signed for the grant of development rights and is not refundable.
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Under our current standard franchise agreement, each franchisee is required to pay us a royalty of 6% of their gross sales net of discounts. Each restaurant also contributes 4% of gross sales net of discounts to fund national marketing and advertising campaigns. These funds are managed by the Ad Fund and are primarily used to create advertising content and purchase digital and television advertising on a national level. In addition to the national and market-level advertising contributions, U.S. stores generally spend additional funds on local restaurant marketing activities . For example, our current form of franchise agreement requires franchisees to spend a percentage of their gross sales on local advertising and promotions.
International Franchise Agreements
Our markets outside of the United States are operated by master franchisees with franchise and distribution rights for entire regions or countries. The master franchise agreement typically requires the franchisees to open a minimum number of restaurants within a specified period. The master franchisee is generally required to pay an initial, upfront development fee for the territory as well as a franchise fee for each restaurant opened. Under our current standard master franchise agreement, each master franchisee is also required to pay a continuing royalty fee as a percentage of sales, which varies among international markets, but is currently set at 6%.
Suppliers and Distribution
Our franchisees are required to purchase all chicken, groceries, produce, beverages, equipment and signage, furniture, fixtures, logo-imprinted paper goods, and cleaning supplies solely from suppliers that we designate and approve. Our supply partners are required to meet strict quality standards to ensure food safety. We regularly inspect vendors to ensure our standards are being met and that prices offered are competitive.
The principal raw materials for a Wingstop restaurant operation are bone-in and boneless chicken wings. Therefore, chicken is our largest product cost item and represented approximately 65% of all purchases for the 2020 fiscal year. Company-owned and franchised restaurants purchase their bone-in and boneless chicken wings from suppliers that we designate and approve. We designate sources for potatoes to ensure that they are grown to our specifications. We also require franchisees to use our proprietary sauces, seasonings, and spice blends and to purchase them and other proprietary products only from designated sources.
All food items and packaging goods for Wingstop restaurants are sourced through one distributor, Performance Food Group ("PFG"). There are sixteen geographically diverse PFG distribution centers, which carry all products required for a Wingstop restaurant and service all of Wingstop’s domestic restaurants. PFG is contractually obligated to deliver products to our restaurants at least twice weekly. PFG provides consolidated deliveries with a tightly controlled and monitored cold chain. Its national distribution system has a documented recovery plan to handle any disruption. Wingstop contracts directly with manufacturers to sell products to PFG, who in turn receives a fee for delivering these items to our restaurants. The majority of Wingstop’s highest-spend items are formula or fixed-contract priced. Wingstop has also negotiated agreements with its soft drink suppliers to offer soft drink dispensing systems, along with associated branded products, in all Wingstop restaurants.
Information / Technology Systems
We have core information systems in place that, together with focused investments we are making in technology, we believe are designed to scale and support our future growth plans. We specify a standard point of sale ("POS") system and restaurant management system in all domestic restaurants that helps facilitate the operation of the restaurants by recording sales, purchasing and inventory of goods, managing of labor and assessing restaurant performance. Our POS system and restaurant management system is configured to record and store financial information in a manner that we specify, and we require franchisees to provide us with continual and unlimited independent access to all information on each POS system.
We have an online ordering platform and mobile ordering applications that integrate with third party delivery providers and our POS system, which makes it easy for our guests to order-ahead, and which we believe leads to higher check averages.
We require our franchisees’ electronic information systems, including POS systems, comply with and maintain established network security standards, including applicable Payment Card Industry ("PCI") and data privacy standards.
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Human Capital Resources
As of December 26, 2020, we employed 819 employees, affectionately referred to as team members, of whom 238 were full-time corporate-based and regional personnel. The remainder were part-time or restaurant-level team members. None of our team members are represented by a labor union or covered by a collective bargaining agreement, and we believe that we have good relations with our team members. Our franchise owners are independent business owners, so they and their team members are not included in our team member count and are not our team members.
Our human capital objectives include attracting, training, motivating, rewarding and retaining team members. To support these objectives, our team member programs are designed to develop talent and prepare team members for advancement and leadership positions in the future; provide market-competitive pay and benefits; focus on team members’ health, safety and well-being; enhance our culture through our continuing efforts to make our workplace more engaging and inclusive; and acquire talent and facilitate internal talent mobility to create a high-performing and diverse workforce.
We are committed to fostering an environment of diversity and inclusion, including among our board members, and having diverse representation across all levels of our workforce. Examples of some of our recent efforts and metrics include:
• we implemented unconscious bias training for all our corporate team members;
• currently 50% of our board of directors classify as diverse;
• we are a member of the Women’s Foodservice Forum; and
• our Chief Executive Officer joined the CEO Action for Diversity and Inclusion.
We are also committed to providing competitive pay to compensate and reward our team members. All corporate management and staff and restaurant management positions, including hourly assistant managers and shift leaders, are eligible for performance-based cash incentives. Our incentive plan reinforces and rewards individuals for achievement of specific company and/or restaurant business goals.
We offer comprehensive benefit programs to eligible team members. Our core health and welfare benefits are supplemented with a variety of voluntary benefits and paid time away from work programs. Since the onset of the COVID-19 pandemic, we have continued a strong focus on team member well-being, health and safety.
Another area of focus for us is investing in people and infrastructure to build the organization for the next level. In addition to seeking to acquire new talent in the marketplace that share our values and goals, we recognize and support the growth and development of our team members and offer opportunities to participate in regular talent and development planning reviews to assist us with growing our internal restaurant teams, resulting in a majority of current managers of company-owned restaurants being promoted from within.
COVID-19 Response
We took early action regarding team member well-being in response to the COVID-19 pandemic, implementing comprehensive protocols to protect the health and safety of our team members and guests. Remote work for corporate management and staff was adopted ahead of state and county requirements. We did not reduce scheduled hours for team members in our company-owned restaurants. For team members of our company-owned restaurants, we also enhanced our benefits programs to offer expanded supplemental paid sick leave ahead of state and county mandates and in counties where sick leave was not mandated, as well as distributed COVID-19 related incentive payments to our restaurant team members.
Government Regulation
We and our franchisees are subject to various federal regulations affecting the operation of our business. We and our franchisees are subject to the U.S. Fair Labor Standards Act, the U.S. Immigration Reform and Control Act of 1986, the Occupational Safety and Health Act, and various other federal and state laws governing matters such as minimum wage requirements, overtime, fringe benefits, workplace safety and other working conditions and citizenship requirements. A significant number of our and our franchisees’ food service personnel are paid at rates related to the applicable minimum wage, and past increases in the minimum wage have increased our and our franchisees’ labor costs, as would future increases. Our distributors and suppliers also may be affected by higher minimum wage and benefit standards, which could result in higher costs for goods and services supplied to us and our franchisees.
We are subject to extensive and varied state and local government regulation affecting the operation of our business, as are our franchisees, including regulations relating to public and occupational health and safety, sanitation, fire prevention, and franchise operation. Each restaurant is subject to licensing and regulation by a number of governmental authorities, including with respect to zoning, health, safety, sanitation, nutritional information disclosure, environmental, and building and fire safety, in the jurisdiction in which the restaurant is located. Our and our franchisees’ licenses to sell alcoholic beverages must be renewed
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annually and may be suspended or revoked at any time for cause, including violation by us or our employees, or our franchisees or their employees, of any law or regulation pertaining to alcoholic beverage control, such as those regulating the minimum age of patrons or employees, advertising, wholesale purchasing, and inventory control.
In addition, we are subject to the rules and regulations of the Federal Trade Commission (the "FTC") and various state laws regulating the offer and sale of franchises. The FTC and various state franchise laws require that we furnish a franchise disclosure document containing certain information to prospective franchisees in advance of any franchise sale or the receipt of any consideration for the franchise, and a number of states require registration of the franchise disclosure document at least annually with state authorities. We are operating under exemptions from registration (though not disclosure) in several states based on our qualifications for exemption as set forth in each such state’s laws. Substantive state laws that regulate the franchisor-franchisee relationship, including in the areas of termination and non-renewal, presently exist in a substantial number of states. We believe that our franchise disclosure document and franchising procedures comply in all material respects with both the FTC guidelines and all applicable state laws regulating franchising in those states in which we have offered franchises.
Our international franchised restaurants are subject to national and local laws and regulations that are often similar to those affecting our U.S. restaurants. We believe that we have established procedures at our international franchised restaurants that provide reasonable assurance that our international franchised restaurants comply in all material respects with the laws of the applicable foreign jurisdiction.
Environmental Matters
We are not aware of any federal, state or local environmental laws or regulations that we would expect to materially affect our earnings or competitive position or result in material capital expenditures. However, we cannot predict the effect of possible future environmental legislation or regulations. During the 2020 fiscal year, there were no material environmental compliance-related capital expenditures.
Community Involvement
We are committed to strengthening the neighborhoods that we serve by being strong, active, corporate citizens and good neighbors. In fiscal year 2020, we donated $1 million to the National Restaurant Association Educational Foundation’s Restaurant Employee Relief Fund and, along with our franchisees, provided more than 1 million meals to frontline workers and COVID first responders. In 2016, we created Wingstop Charities, a non-profit organization dedicated to enhancing and elevating the community work of our franchisees to make a difference in the lives of our youth, which has donated over $600,000 through local grants and team member assistance since its inception. You can find more about the involvement of Wingstop Charities in its local communities at www.wingstopcharities.org.
Additional Information about the Company
We make available, free of charge, through our internet website www.wingstop.com, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. Materials filed with the SEC are also available at www.sec.gov.
References to our website addresses or the website addresses of third parties in this report do not constitute incorporation by reference of the information contained on such websites and should not be considered part of this report.
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