Wingstop Inc. 10-Q

Item 1. Financial Statements WINGSTOP INC. AND SUBSIDIARIES Consolidated Balance Sheets (amounts in thousands, except share and par value amounts) June 26, 2021 December 26, 2020 (Unaudited) Assets Current assets Cash and cash equivalents $ 43,504 $ 40,858 Restricted cash 4,657 4,815 Accounts receivable, net 5,854 4,929 Prepaid expenses and other current assets 9,132 5,532 Advertising fund assets, restricted 21,561 16,486 Total current assets 84,708 72,620 Property and equipment, net 39,598 27,948 Goodwill 53,690 53,690 Trademarks 32,700 32,700 Customer relationships, net 10,951 11,600 Other non-current assets 12,617 13,007 Total assets $ 234,264 $ 211,565 Liabilities and stockholders' deficit Current liabilities Accounts payable $ 3,812 $ 3,658 Other current liabilities 25,072 26,729 Current portion of debt 1,200 3,600 Advertising fund liabilities 21,561 16,486 Total current liabilities 51,645 50,473 Long-term debt, net 468,774 466,933 Deferred revenues, net of current 26,156 24,962 Deferred income tax liabilities, net 5,416 4,480 Other non-current liabilities 4,516 6,027 Total liabilities 556,507 552,875 Commitments and contingencies (see Note 8) Stockholders' deficit Common stock, $ 0.01 par value; 100,000,000 shares authorized; 29,743,375 and 29,687,123 shares issued and outstanding as of June 26, 2021 and December 26, 2020, respectively 298 297 Additional paid-in-capital 594 421 Retained deficit ( 323,026 ) ( 342,028 ) Accumulated other comprehensive loss ( 109 ) — Total stockholders' deficit ( 322,243 ) ( 341,310 ) Total liabilities and stockholders' deficit $ 234,264 $ 211,565 See accompanying notes to consolidated financial statements. 4 WINGSTOP INC. AND SUBSIDIARIES Consolidated Statements of Comprehensive Income (amounts in thousands, except per share data) (Unaudited) Thirteen Weeks Ended Twenty-Six Weeks Ended June 26, 2021 June 27, 2020 June 26, 2021 June 27, 2020 Revenue: Royalty revenue, franchise fees and other $ 33,135 $ 27,858 $ 64,741 $ 52,057 Advertising fees 22,577 19,923 44,097 35,937 Company-owned restaurant sales 18,288 18,324 35,852 33,547 Total revenue 74,000 66,105 144,690 121,541 Costs and expenses: Cost of sales (1) 14,207 13,387 27,486 24,563 Advertising expenses 23,301 20,424 45,328 37,420 Selling, general and administrative 16,066 13,375 29,852 25,613 Depreciation and amortization 1,523 1,398 3,318 2,953 Gain on sale of restaurants and other expenses, net — ( 2,016 ) — ( 2,016 ) Total costs and expenses 55,097 46,568 105,984 88,533 Operating income 18,903 19,537 38,706 33,008 Interest expense, net 3,724 4,214 7,506 8,359 Income before income tax expense 15,179 15,323 31,200 24,649 Income tax expense 3,867 3,784 6,728 5,014 Net income $ 11,312 $ 11,539 $ 24,472 $ 19,635 Earnings per share Basic $ 0.38 $ 0.39 $ 0.82 $ 0.66 Diluted $ 0.38 $ 0.39 $ 0.82 $ 0.66 Weighted average shares outstanding Basic 29,739 29,588 29,722 29,538 Diluted 29,873 29,793 29,859 29,751 Dividends per share $ 0.14 $ 0.11 $ 0.28 $ 0.22 Other comprehensive income (loss) Currency translation adjustment $ ( 109 ) $ — $ ( 109 ) $ — Other comprehensive income (loss) ( 109 ) — ( 109 ) — Comprehensive income $ 11,203 $ 11,539 $ 24,363 $ 19,635 (1) Cost of sales includes all operating expenses of company-owned restaurants, including advertising expenses, and excludes depreciation and amortization, which are presented separately. See accompanying notes to consolidated financial statements. 5 WINGSTOP INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Deficit For the Twenty-Six Weeks Ended June 27, 2020 and June 26, 2021 (amounts in thousands, except share data) (Unaudited) Common Stock Shares Amount Additional Paid-In Capital Retained Deficit Accumulated Other Comprehensive Loss Total Stockholders’ Deficit Balance at December 28, 2019 29,457,228 $ 295 $ 552 $ ( 210,275 ) $ — $ ( 209,428 ) Net income — — — 8,096 — 8,096 Shares issued under stock plans 128,585 1 504 — — 505 Tax payments for restricted stock upon vesting ( 2,419 ) — — ( 229 ) — ( 229 ) Stock-based compensation expense — — 1,331 — — 1,331 Dividends declared on common stock and equivalents — — ( 2,168 ) ( 1,055 ) — ( 3,223 ) Balance at March 28, 2020 29,583,394 296 219 ( 203,463 ) — ( 202,948 ) Net income — — — 11,539 — 11,539 Shares issued under stock plans 13,057 — 57 — — 57 Tax payments for restricted stock upon vesting ( 104 ) — — ( 12 ) — ( 12 ) Stock-based compensation expense — — 1,969 — — 1,969 Dividends declared on common stock and equivalents — — ( 2,202 ) ( 1,075 ) — ( 3,277 ) Balance at June 27, 2020 29,596,347 $ 296 $ 43 $ ( 193,011 ) $ — ( 192,672 ) Common Stock Shares Amount Additional Paid-In Capital Retained Deficit Accumulated Other Comprehensive Loss Total Stockholders’ Deficit Balance at December 26, 2020 29,687,123 $ 297 $ 421 $ ( 342,028 ) $ — $ ( 341,310 ) Net income — — — 13,160 — 13,160 Shares issued under stock plans 60,958 1 155 — — 156 Tax payments for restricted stock upon vesting ( 11,243 ) — — ( 1,862 ) — ( 1,862 ) Stock-based compensation expense — — 2,316 — — 2,316 Dividends declared on common stock and equivalents — — ( 2,866 ) ( 1,322 ) — ( 4,188 ) Balance at March 27, 2021 29,736,838 298 26 ( 332,052 ) — ( 331,728 ) Net income — — — 11,312 — 11,312 Shares issued under stock plans 6,613 — — — — — Tax payments for restricted stock upon vesting ( 76 ) — — ( 11 ) — ( 11 ) Stock-based compensation expense — — 2,456 — — 2,456 Dividends declared on common stock and equivalents — — ( 1,888 ) ( 2,275 ) — ( 4,163 ) Currency translation adjustment — — — — ( 109 ) ( 109 ) Balance at June 26, 2021 29,743,375 $ 298 $ 594 $ ( 323,026 ) $ ( 109 ) ( 322,243 ) See accompanying notes to consolidated financial statements. 6 WINGSTOP INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (amounts in thousands) (Unaudited) Twenty-Six Weeks Ended June 26, 2021 June 27, 2020 Operating activities Net income $ 24,472 $ 19,635 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 3,318 2,953 Deferred income taxes 936 1,720 Stock-based compensation expense 4,772 3,300 (Gain)/Loss on disposal of assets — ( 2,016 ) Amortization of debt issuance costs 711 815 Changes in operating assets and liabilities: Accounts receivable ( 925 ) ( 405 ) Prepaid expenses and other assets ( 2,217 ) ( 652 ) Advertising fund assets and liabilities, net 4,897 2,004 Accounts payable and other current liabilities ( 5,231 ) ( 675 ) Deferred revenue 1,315 10 Other non-current liabilities ( 436 ) ( 1,077 ) Cash provided by operating activities 31,612 25,612 Investing activities Purchases of property and equipment ( 8,258 ) ( 2,670 ) Proceeds from sales of assets — 2,300 Payments for investments (Note 6) ( 4,163 ) — Cash used in investing activities ( 12,421 ) ( 370 ) Financing activities Proceeds from exercise of stock options 156 562 Borrowings of long-term debt — 16,000 Repayments of long-term debt ( 1,200 ) ( 800 ) Tax payments for restricted stock upon vesting ( 1,873 ) ( 241 ) Dividends paid ( 8,889 ) ( 6,500 ) Cash provided by (used in) financing activities ( 11,806 ) 9,021 Net increase in cash, cash equivalents, and restricted cash 7,385 34,263 Cash, cash equivalents, and restricted cash at beginning of period 59,270 21,175 Cash, cash equivalents, and restricted cash at end of period $ 66,655 $ 55,438 Supplemental information: Accrued capital expenditures $ 6,325 $ — See accompanying notes to consolidated financial statements. 7 WINGSTOP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) (1) Basis of Presentation and Update to Significant Accounting Policies Nature of operations. Wingstop Inc., together with its consolidated subsidiaries (collectively, “Wingstop” or the “Company”), is in the business of franchising and operating Wingstop restaurants. As of June 26, 2021, the Company had 1,415 domestic franchised restaurants and 175 international franchised restaurants. As of June 26, 2021, the Company owned and operated 34 restaurants. Basis of presentation. The accompanying unaudited consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. Consequently, financial information and disclosures normally included in financial statements prepared annually in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted. Balance sheet amounts are as of June 26, 2021 and December 26, 2020, and operating results are for the thirteen and twenty-six weeks ended June 26, 2021 and June 27, 2020. The foreign currency translation adjustment included in the Consolidated Statements of Comprehensive Income represents the unrealized impact of translating our foreign investment. This amount is not included in Net Income and would only be realized upon disposition of our investment. The related Accumulated other comprehensive loss is presented in the Consolidated Balance Sheets. In the Company’s opinion, all necessary adjustments have been made for the fair presentation of the results of the interim periods presented. The results of operations for such interim periods are not necessarily indicative of the results to be expected for the full year. The accompanying interim unaudited consolidated financial statements should be read in conjunction with the audited financial statements and the related notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 26, 2020. Fiscal year. The Company uses a 52/53-week fiscal year that ends on the last Saturday of the calendar year. Fiscal years 2021 and 2020 each have 52 weeks . Cash, Cash Equivalents, and Restricted Cash. Cash, cash equivalents, and restricted cash within the Consolidated Balance Sheets and the Consolidated Statements of Cash Flows as of June 26, 2021 and December 26, 2020 were as follows (in thousands): June 26, 2021 December 26, 2020 Cash and cash equivalents $ 43,504 $ 40,858 Restricted cash 4,657 4,815 Restricted cash, included in Advertising fund assets, restricted 18,494 13,597 Total cash, cash equivalents, and restricted cash $ 66,655 $ 59,270 Change in presentation. Beginning in the first quarter of 2021, headcount related expenses that support our national advertising fund are presented within “Advertising expenses” on the Consolidated Statements of Comprehensive Income. Prior to the first quarter of 2021, these expenses were presented within “Selling, general and administrative expenses.” Prior period amounts have been reclassified to conform to the current presentation. This reclassification had no impact on operating income, balance sheets or statements of cash flows. Headcount related expenses associated with the national advertising fund were $ 1.9 million and $ 1.8 million for the thirteen weeks ended June 26, 2021 and June 27, 2020, respectively, and were $ 4.0 million and $ 3.9 million for the twenty-six weeks ended June 26, 2021 and June 27, 2020, respectively. Recently issued accounting pronouncements. We reviewed all recently issued accounting pronouncements and concluded that they were either not applicable or not expected to have a significant impact on our consolidated financial statements. (2) Earnings per Share Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of shares of common stock outstanding for the reporting period. Diluted earnings per share reflects the potential dilution that could occur if securities convertible into, or other contracts to issue, common stock were exercised or converted into common stock. For the calculation of diluted earnings per share, the basic weighted average number of shares is increased by the dilutive effect 8 WINGSTOP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) of the exercise and vesting of stock options and restricted stock units, respectively, as determined using the treasury stock method. Basic weighted average shares outstanding is reconciled to diluted weighted average shares outstanding as follows (in thousands): Thirteen Weeks Ended Twenty-Six Weeks Ended June 26, 2021 June 27, 2020 June 26, 2021 June 27, 2020 Basic weighted average shares outstanding 29,739 29,588 29,722 29,538 Dilutive shares 134 205 137 213 Diluted weighted average shares outstanding 29,873 29,793 29,859 29,751 For the thirteen weeks ended June 26, 2021 and June 27, 2020, equity awards representing approximately 8,000 and 1,000 shares, respectively, were excluded from the dilutive earnings per share calculation because the effect would have been anti-dilutive. For the twenty-six weeks ended June 26, 2021 and June 27, 2020, equity awards representing approximately 7,000 and 1,000 shares, respectively, were excluded from the dilutive earnings per share calculation because the effect would have been anti-dilutive. (3) Dividends In each of the first two quarters of 2021, the Company’s Board of Directors declared a quarterly dividend of $ 0.14 per share of common stock, which, in the aggregate, totaled $ 8.4 million, or $ 0.28 per share of common stock, and which was paid during the twenty-six weeks ended June 26, 2021. Subsequent to the second quarter, on July 27, 2021, the Company’s Board of Directors declared a quarterly dividend of $ 0.17 per share of common stock for stockholders of record as of August 13, 2021. The regular quarterly dividend is to be paid on September 3, 2021, totaling approximately $ 5.1 million. (4) Fair Value Measurements Fair value is the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. Assets and liabilities are classified using a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value as follows: Level 1 — Unadjusted quoted prices for identical instruments traded in active markets. Level 2 — Observable market-based inputs or unobservable inputs corroborated by market data. Level 3 — Unobservable inputs reflecting management’s estimates and assumptions. The carrying values of cash and cash equivalents, accounts receivable, and accounts payable approximate fair value due to their short-term nature. Fair value of debt is determined on a non-recurring basis, which results are summarized as follows (in thousands): Fair Value Hierarchy June 26, 2021 December 26, 2020 Carrying Value Fair Value Carrying Value Fair Value Securitized Financing Facility: 2020-1 Class A-2 Senior Secured Notes (1) Level 2 $ 478,800 $ 488,826 $ 480,000 $ 483,365 (1) The fair value of the 2020-1 Class A-2 Senior Secured Notes was estimated using available market information. The Company also measures certain non-financial assets (primarily long-lived assets, intangible assets, and goodwill) at fair value on a non-recurring basis in connection with its periodic evaluations of such assets for potential impairment. 9 WINGSTOP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) (5) Income Taxes Income tax expense and the effective tax rate were $ 3.9 million and 25.5 %, respectively, for the thirteen weeks ended June 26, 2021, and $ 3.8 million and 24.7 %, respectively, for the thirteen weeks ended June 27, 2020. Income tax expense and the effective tax rate were $ 6.7 million and 21.6 %, respectively, for the twenty-six weeks ended June 26, 2021, and $ 5.0 million and 20.3 %, respectively, for the twenty-six weeks ended June 27, 2020. Income tax expense for the thirteen and twenty-six weeks ended June 26, 2021 included $ 0.1 million and $ 1.5 million, respectively, in tax benefits resulting from the recognition of excess tax benefits from stock-based compensation, as compared to $ 0.2 million and $ 1.5 million in tax benefits for the thirteen and twenty-six weeks ended June 27, 2020, respectively. (6) Investments In the second quarter of 2021, a wholly-owned subsidiary of the Company acquired a 20 % non-controlling interest in Wingstop’s United Kingdom master franchisee , Lemon Pepper Holdings Ltd., (“LPH”) for an aggregate amount of $ 4.2 million. Substantially all of the investment consisted of bonds issued by a subsidiary of LPH, which do not have a readily determinable fair value and are recorded at cost with adjustments for observable changes in prices resulting from orderly transactions for the identical or a similar investment of the same issuer or impairments within long-term other assets in the Company’s consolidated balance sheet. In addition, the Company received 20 % of the outstanding stock, which will be accounted for using the equity method of accounting, under which the Company’s share of the income (loss) of the investee will be recorded in our results of operations in “Other operating income, net.” The Company did not record any adjustments to the carrying amount of $ 4.2 million in the second quarter ended June 26, 2021 . (7) Debt Obligations Long-term debt consisted of the following components (in thousands): June 26, 2021 December 26, 2020 2020-1 Class A-2 Senior Secured Notes $ 478,800 $ 480,000 Debt issuance costs, net of amortization ( 8,826 ) ( 9,467 ) Total debt 469,974 470,533 Less: current portion of debt ( 1,200 ) ( 3,600 ) Long-term debt, net $ 468,774 $ 466,933 The Company’s outstanding debt consists of (i) Series 2020-1 2.84 % Fixed Rate Senior Secured Notes, Class A-2 (the “2020 Class A-2 Notes”) issued by Wingstop Funding LLC (the “Issuer”), a limited-purpose, bankruptcy-remote, wholly owned indirect subsidiary of Wingstop Inc. and (ii) Series 2020-1 Variable Funding Senior Notes, Class A-1 (the “2020 Variable Funding Notes” and together with the Class A-2 Notes, the “2020 Notes”), which permit borrowings of up to a maximum principal amount of $ 50 million which may be used to borrow amounts on a revolving basis and to issue letters of credit. As of June 26, 2021 and December 26, 2020, the Company had $ 478.8 million and $ 480.0 million of 2020 Class A-2 Notes outstanding, respectively. There were no borrowings outstanding under the 2020 Variable Funding Notes as of June 26, 2021 and December 26, 2020. Further, as of June 26, 2021 and December 26, 2020, $ 3.5 million and $ 4.9 million, respectively, of letters of credit were outstanding against the 2020 Variable Funding Notes, which relate primarily to interest reserves required under the base indenture and related supplemental indenture. There were no amounts drawn down on the letters of credit as of June 26, 2021 or December 26, 2020. As of June 26, 2021, the Company’s leverage ratio under the Class A-2 Notes was less than 5.0 x. Per the terms of the Company’s debt agreements, principal payments can be suspended at the borrower’s election until the repayment date as long as the Company maintains a leverage ratio of less than 5.0 x. Accordingly, the Company expects to suspend payments following the principal payment due in the third quarter, and the remaining outstanding balance of the Class A-2 notes has been classified as long-term debt. The 2020 Notes were issued in a securitization transaction pursuant to which certain of the Company’s domestic and foreign revenue-generating assets, consisting principally of franchise-related agreements and intellectual property, were contributed or otherwise transferred to the Issuer and certain other limited-purpose, bankruptcy-remote, wholly owned indirect subsidiaries of the Company that act as guarantors of the Notes and that have pledged substantially all of their assets. 10 WINGSTOP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) (8) Commitments and Contingencies The Company is subject to legal proceedings, claims, and liabilities, such as employment-related claims and premises-liability cases, which arise in the ordinary course of business and are generally covered by insurance. In the opinion of management, the amount of ultimate liability with respect to such actions is not likely to have a material adverse impact on the Company’s financial position, results of operations, or cash flows. (9) Stock-Based Compensation During the twenty-six weeks ended June 26, 2021, the Company granted stock options to purchase 42,703 shares of common stock and 19,967 restricted stock units (“RSUs”) to certain employees. The stock options vest in equal annual amounts over a three-year period subsequent to the grant date, and have a maximum contractual term of ten years . The stock options were granted with a weighted-average exercise price of $ 129.11 per share and had a weighted-average grant-date fair value of $ 42.51 per share. The RSUs granted to certain employees generally vest in equal annual amounts over a three-year period, subsequent to the grant date and had a weighted-average grant-date fair value of $ 130.16 per unit. In addition, the Company granted 31,564 performance stock units (“PSUs”) to certain employees during the twenty-six weeks ended June 26, 2021. Of the total PSUs granted, 25,623 PSUs are subject to a service condition and a performance vesting condition based on return on incremental invested capital (“ROI PSUs”). The ROI PSUs are generally eligible to cliff-vest approximately three years from the grant date, and the maximum vesting percentage that could be realized for each of the ROI PSUs is 250 % based on the level of performance achieved for the awards. The remaining 5,941 PSUs granted are subject to a service condition and a performance vesting condition based on the number of net new restaurants opened over the performance period (“NNR PSUs”). The NNR PSUs vest in equal annual amounts over a three-year period, and the maximum vesting percentage that could be realized for each of the NNR PSUs is 100 % based on the level of performance achieved for the awards. The PSUs had a weighted-average grant-date fair value of $ 129.77 per unit. Total compensation cost for the PSUs is determined based on the most likely outcome of the performance condition and the number of awards expected to vest based on the outcome. Total compensation expense related to all share-based awards was $ 4.8 million and $ 3.3 million for the twenty-six weeks ended June 26, 2021 and June 27, 2020, respectively, and was included in Selling, general and administrative (“SG&A”) expense in the Consolidated Statements of Comprehensive Income. (10) Revenue from Contracts with Customers The following table represents a disaggregation of revenue from contracts with customers for the thirteen and twenty-six weeks ended June 26, 2021 and June 27, 2020 (in thousands): Thirteen Weeks Ended Twenty-Six Weeks Ended June 26, 2021 June 27, 2020 June 26, 2021 June 27, 2020 Royalty revenue $ 30,414 $ 25,447 $ 59,223 $ 46,755 Advertising fees and related income 22,577 19,923 44,097 35,937 Franchise fees 864 881 2,060 1,763 Franchise fee, development fee, and international territory fee payments received by the Company are recorded as deferred revenue on the Consolidated Balance Sheets, which represents a contract liability. Deferred revenue is reduced as fees are recognized in revenue over the term of the franchise license for the respective restaurant. As the term of the franchise license is typically ten years , substantially all of the franchise fee revenue recognized in the thirteen and twenty-six weeks ended June 26, 2021 was included in the deferred revenue balance as of December 26, 2020. Approximately $ 9.9 million and $ 9.8 million of deferred revenue as of June 26, 2021 and December 26, 2020, respectively, relates to restaurants that have not yet opened, so the fees are not yet being amortized. The weighted average remaining amortization period for deferred franchise and renewal fees related to open restaurants is 7.2 years. The Company did not have any material contract assets as of June 26, 2021. 11 WINGSTOP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) (11) Acquisitions and Refranchising of Company-owned Restaurants During the first fiscal quarter 2021, the Company entered into an arrangement to re-franchise six company-owned restaurants in the Colorado market for a total purchase price of approximately $ 6.7 million. This transaction is subject to customary closing conditions, and the Company expects the transaction to close in the third fiscal quarter 2021. The assets associated with these restaurants held for sale totaled $ 4.5 million and were included in Prepaid expenses and other current assets on the Consolidated Balance Sheet as of June 26, 2021. Subsequent to the end of second fiscal quarter 2021, the company acquired two existing restaurants from franchisees. The total purchase price was $ 3.9 million and was funded by cash flow from operations. The restaurant acquisitions will be accounted for as business combinations. The Company is still determining the estimated fair value of assets acquired and liabilities assumed. The excess of the purchase price over the aggregate fair value of assets acquired will be allocated to goodwill. The results of operations of these locations will be included in our Consolidated Statements of Comprehensive Income as of the respective dates of acquisition. 12