What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-04 compared with 2021-11-03 · 111 added, 186 removed, 196 unchanged (60% of the section changed)

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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 11 of our Annual Report.

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

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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 2021 and 2020 each contain 52 weeks.

Fiscal year 2022 contains 53 weeks, while fiscal year 2021 contains 52 weeks.

Wingstop is the largest fast casual chicken wings-focused restaurant chain in the world, with over 1,700 locations worldwide.

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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.

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 SG&A 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.

The COVID-19 pandemic has continued to have varying degrees of disruption on our business.

Throughout the pandemic, substantially all of our domestic restaurants operated in an off-premise capacity, leveraging our carryout and delivery capabilities.

In March of 2022, we began reopening our dining rooms to dine-in guests.

Our carryout and delivery capabilities positioned us to achieve domestic same store sales growth of 21.9% in the two-year period ended March 26, 2022.

However, our business has been challenged by COVID-19-related labor availability and wage inflation, and while we have not had significant disruptions in our supply chain, we have experienced higher product costs and inflationary pressures, which have been mitigated to some extent by recent deflation in bone-in chicken costs.

While we do not know the future impact COVID-19 and inflationary pressures will have on our business, we expect labor and supply chain challenges to continue in fiscal year 2022.

Key Performance Indicators

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

Thirteen Weeks Ended Thirty-Nine Weeks Ended

September 25,

2021 September 26,

2020 September 25,

2021 September 26,

Thirteen Weeks Ended

2022 March 27,

Domestic Franchised Activity:

2 unchanged sentences

Closures (3) —

Acquired by Company (3) (5) (3) (5)

Re-franchised by Company 6 5 6 7

Restaurants end of period 1,551 1,371

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Beginning of period 36 32

Openings 1 1 3 2

Closures — — — —

Acquired by Company 3 5 3 5

Re-franchised to franchisees (6) (5) (6) (7)

Restaurants end of period 37 33

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Beginning of period 197 179

Openings 10 10 16 18

Closures (1) (6)

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We define EBITDA as net income before interest expense, net, income tax expense (benefit), and depreciation and amortization.

We define Adjusted EBITDA as net income before interest expense, net, income tax expense (benefit), and depreciation and amortization, with further adjustments for losses on debt extinguishment and refinancing transactions, 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.

We define Adjusted EBITDA as net income before interest expense, net, income tax expense (benefit), and depreciation and amortization, with further adjustments for losses on debt extinguishment and

refinancing transactions, 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.

Adjusted EBITDA may not be comparable to other similarly titled captions of other companies due to differences in methods of calculation.

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For a reconciliation of net income to Adjusted net income and for further discussion of Adjusted net income and Adjusted earnings per diluted share as non-GAAP measures and how we utilize them, see footnote 3 below.

The following table sets forth our key performance indicators for the thirteen and thirty-nine weeks ended September 25, 2021 and September 26, 2020 (in thousands, except unit data):

Thirteen Weeks Ended Thirty-Nine Weeks Ended

September 25, 2021 September 26, 2020 September 25, 2021 September 26, 2020

The following table sets forth our key performance indicators for the thirteen weeks ended March 26, 2022 and March 27, 2021 (in thousands, except unit data):

Thirteen Weeks Ended

March 26, 2022 March 27, 2021

Number of system-wide restaurants open at end of period 1,791 1,579

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$ 10,153 $ 13,160

(1) The percentage of system-wide sales attributable to company-owned restaurants was 2.9% and 3.2% for the thirteen weeks ended September 25, 2021 and September 26, 2020, respectively, and was 3.1% and 3.4% for the thirty-nine weeks ended September 25, 2021 and September 26, 2020, respectively.

(1) The percentage of system-wide sales attributable to company-owned restaurants was 3.0% and 3.1% for the thirteen weeks ended March 26, 2022 and March 27, 2021, respectively.

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

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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.

As noted in the table below, Adjusted EBITDA includes adjustments for losses on debt extinguishment and refinancing transactions, 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.

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Each of the normal recurring adjustments and other adjustments described in this paragraph and in the reconciliation table below help management measure our core operating performance over time by removing items that are not related to day-to-day operations.

The following table reconciles net income to EBITDA and Adjusted EBITDA for the thirteen and thirty-nine weeks ended September 25, 2021 and September 26, 2020 (in thousands):

Thirteen Weeks Ended Thirty-Nine Weeks Ended

September 25,

2021 September 26,

2020 September 25,

2021 September 26,

The following table reconciles net income to EBITDA and Adjusted EBITDA for the thirteen weeks ended March 26, 2022 and March 27, 2021 (in thousands):

Thirteen Weeks Ended

2022 March 27,

Net income $ 8,676 $ 13,160

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Additional adjustments:

Gain on disposal of assets (a)

(3,567) (1,233) (3,567) (3,249)

Stock-based compensation expense (b)

2,051 3,007 6,823 6,307

Loss on debt extinguishment and financing transaction costs (a)

Loss on disposal of assets (b)

Consulting fees (c)

Stock-based compensation expense (d)

Adjusted EBITDA $ 22,089 $ 23,914

(a) Represents a gain resulting from the re-franchise of company-owned restaurants to a franchisee which is included in Gain on sale of restaurants and other expenses, net in the Consolidated Statements of Comprehensive Income.

(b) Includes non-cash, stock-based compensation.

(a) Represents costs and expenses related to our 2022 securitized financing facility and payment of a special dividend, as well as the extinguishment of our 2020 variable funding note facility;

all transaction costs are included in Loss on debt extinguishment during the thirteen weeks ended March 26, 2022, with the exception of $310,000 that is included in Selling, general and administrative on the Consolidated Statements of Comprehensive Income.

(b) Represents a loss resulting from the sale of assets to a franchisee pursuant to a multi-unit development agreement executed in the prior fiscal year.

This loss is included in Loss on disposal of assets in the Consolidated Statements of Comprehensive Income.

(c) Represents costs and expenses related to a consulting project to support the Company's strategic initiatives, which are included in Selling, general and administrative on the Consolidated Statements of Comprehensive Income.

(d) Includes non-cash, stock-based compensation.

(3) Adjusted net income and adjusted earnings per diluted share are supplemental measures of operating performance that do not represent and should not be considered alternatives to net income and earnings per share, as determined by GAAP.

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Management believes adjusted net income and adjusted earnings per diluted share supplement GAAP measures and enable management to more effectively evaluate the Company’s performance period-over-period and relative to competitors.

The following table reconciles net income to Adjusted net income and calculates adjusted earnings per diluted share for the thirteen and thirty-nine weeks ended September 25, 2021 and September 26, 2020 (in thousands):

Thirteen Weeks Ended Thirty-Nine Weeks Ended

September 25,

2021 September 26,

2020 September 25,

2021 September 26,

The following table reconciles net income to Adjusted net income and calculates adjusted earnings per diluted share for the thirteen weeks ended March 26, 2022 and March 27, 2021 (in thousands):

Thirteen Weeks Ended

2022 March 27,

Net income $ 8,676 $ 13,160

Gain on disposal of assets, net (a)

(3,567) (1,233) (3,567) (3,249)

Tax effect of adjustments (b)

856 296 856 780

Loss on debt extinguishment and financing transactions (a)

Loss on disposal of assets (b)

Consulting fees (c)

Tax effect of adjustments (d)

Adjusted net income $ 10,153 $ 13,160

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Adjusted earnings per diluted share $ 0.34 $ 0.44

(b) Represents the tax effect of the aforementioned adjustments to reflect corporate income taxes at an assumed effective tax rate of 24% for the thirteen and thirty-nine weeks ended September 25, 2021 and September 26, 2020, which includes provisions for U.S.

(a) Represents costs and expenses related to our 2022 securitized financing facility and payment of a special dividend, as well as the extinguishment of our 2020 variable funding note facility;

(b) Represents a loss resulting from the sale of assets to a franchisee pursuant to a multi-unit development agreement executed in the prior fiscal year.

This loss is included in Loss on disposal of assets in the Consolidated Statements of Comprehensive Income.

(d) Represents the tax effect of the aforementioned adjustments to reflect corporate income taxes at an assumed effective tax rate of 24% for the thirteen weeks ended March 26, 2022, which includes provisions for U.S.

federal income taxes, and assumes the respective statutory rates for applicable state and local jurisdictions.

Results of Operations

Thirteen Weeks Ended September 25, 2021 compared to Thirteen Weeks Ended September 26, 2020

The following table sets forth our results of operations for the thirteen weeks ended September 25, 2021 and September 26, 2020 (dollars in thousands):

Thirteen Weeks Ended March 26, 2022 compared to Thirteen Weeks Ended March 27, 2021

The following table sets forth our results of operations for the thirteen weeks ended March 26, 2022 and March 27, 2021 (dollars in thousands):

Thirteen Weeks Ended Increase / (Decrease)

September 25,

2021 September 26,

Royalty revenue, franchise fees and other $ 32,829 $ 28,806 $ 4,023 14.0 %

Advertising fees 15,575 19,653 (4,078) (20.8) %

Company-owned restaurant sales 17,380 15,529 1,851 11.9 %

Total revenue 65,784 63,988 1,796 2.8 %

Costs and expenses:

Cost of sales (1)

15,206 11,804 3,402 28.8 %

Advertising expenses 16,232 20,240 (4,008) (19.8) %

Selling, general and administrative 15,020 16,542 (1,522) (9.2) %

Depreciation and amortization 2,061 2,334 (273) (11.7) %

Gain on sale of restaurants and other expenses, net (3,567) (1,233) (2,334) 189.3 %

Total costs and expenses 44,952 49,687 (4,735) (9.5) %

Operating income 20,832 14,301 6,531 45.7 %

Interest expense, net 3,724 4,405 (681) (15.5) %

Other income (22) — (22) 100.0 %

Income before income tax expense 17,130 9,896 7,234 73.1 %

Income tax expense (benefit) 5,840 (185) 6,025 (3,256.8) %

Net income $ 11,290 $ 10,081 $ 1,209 12.0 %

(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 25, 2021, total revenue was $65.8 million, an increase of $1.8 million, or 2.8%, compared to $64.0 million in the comparable period in 2020.

Royalty revenue, franchise fees and other increased $4.0 million primarily due to domestic same store sales growth of 3.9% as well as 193 net franchise restaurant openings since September 26, 2020.

Advertising fees decreased $4.1 million due to a $6.9 million rebate of advertising surplus that was returned to franchisees during the third quarter of 2021 in an effort to mitigate increased food and labor costs.

This was partially offset by an increase in advertising fees related to the 16.7% increase in system-wide sales in the thirteen weeks ended September 25, 2021 compared to the thirteen weeks ended September 26, 2020.

Company-owned restaurant sales increased $1.9 million primarily due to the acquisition of three franchised restaurants in the third quarter of 2021 and the opening of three new company-owned restaurants since the prior year comparable period.

Cost of sales.

During the thirteen weeks ended September 25, 2021, cost of sales was $15.2 million, an increase of $3.4 million, or 28.8%, compared to $11.8 million in the comparable period in 2020.

Cost of sales as a percentage of company-owned restaurant sales was 87.5% in the thirteen weeks ended September 25, 2021, compared to 76.0% in the comparable period in 2020.

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

Thirteen Weeks Ended

September 25, 2021 September 26, 2020

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 $ 8,353 48.1 % $ 5,655 36.4 %

Labor costs 4,269 24.6 % 3,944 25.4 %

Other restaurant operating expenses 2,980 17.1 % 2,512 16.2 %

Vendor rebates (396) (2.3) % (307) (2.0) %

Total cost of sales $ 15,206 87.5 % $ 11,804 76.0 %

Food, beverage and packaging costs as a percentage of company-owned restaurant sales were 48.1% in the thirteen weeks ended September 25, 2021, compared to 36.4% in the comparable period in 2020.

The increase was primarily due to a 48.9% increase in the cost of bone-in chicken wings as compared to the prior year period, in which we experienced unusually significant deflation in the cost of bone-in chicken wings.

Labor costs as a percentage of company-owned restaurant sales were 24.6% for the thirteen weeks ended September 25, 2021, compared to 25.4% in the comparable period in 2020.

The decrease as a percentage of company-owned restaurant sales was primarily due to incentive pay provided to team members in response to the COVID-19 pandemic during the prior year period.

This was partially offset by a highly competitive labor market that resulted in increases in company-owned restaurant wages and hiring and training costs during the thirteen weeks ended September 25, 2021.

Other restaurant operating expenses as a percentage of company-owned restaurant sales were 17.1% for the thirteen weeks ended September 25, 2021, compared to 16.2% in the comparable period in 2020.

The increase as a percentage of company-owned restaurant sales was primarily a result of pre-opening expenses related to our investment in opening company-owned restaurants in Manhattan, as well as repairs and maintenance in our company-owned restaurants.

These increases were partially offset by a decrease in advertising contributions, due to a rebate of national advertising surplus received during the thirteen weeks ended September 25, 2021.

Advertising expenses.

During the thirteen weeks ended September 25, 2021, advertising expenses were $16.2 million, a decrease of $4.0 million compared to $20.2 million in the comparable period in 2020.

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 25, 2021, SG&A expense was $15.0 million, a decrease of $1.5 million compared to $16.5 million in the comparable period in 2020.

The decrease in SG&A expense was primarily due to a decrease of $3.4 million in variable-based compensation expense, inclusive of stock-based compensation expense, and $0.5 million related to COVID-19 and support provided to international franchisees in the prior year comparable period.

These decreases were partially offset by an increase in headcount-related expenses of $1.2 million to support the growth in our business, as well as an increase of $0.8 million in travel expenses.

Depreciation and amortization.

During the thirteen weeks ended September 25, 2021, depreciation expense was $2.1 million, a decrease of $0.3 million compared to $2.3 million in the comparable period in 2020.

Interest expense, net.

During the thirteen weeks ended September 25, 2021, interest expense, net was $3.7 million, a decrease of $0.7 million compared to $4.4 million of interest expense, net in the comparable period in 2020.

The decrease was due to the refinancing of our securitized financing facility on October 30, 2020, which increased our outstanding debt by $162.4 million and reduced our interest rate from 4.97% to 2.84%.

Income tax expense.

During the thirteen weeks ended September 25, 2021, we recognized income tax expense of $5.8 million yielding an effective tax rate of 34.1%, compared to an effective tax rate of (1.9)% in the prior year period.

The increase in the effective tax rate was primarily due to the impact of nondeductible expenses for executive compensation, as well as the impact of excess tax benefits associated with stock options exercised in the prior year comparable period.

Thirty-Nine Weeks Ended September 25, 2021 compared to Thirty-Nine Weeks Ended September 26, 2020

The following table sets forth our results of operations for the thirty-nine weeks ended September 25, 2021 and September 26, 2020 (dollars in thousands):

Thirty-Nine Weeks Ended Increase / (Decrease)

September 25,

2021 September 26,

2022 March 27,

Royalty revenue, franchise fees and other $ 35,070 $ 31,606 $ 3,464 11.0 %

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Depreciation and amortization 2,227 1,795 432 24.1 %

Gain on sale of restaurants and other expenses, net (3,567) (3,249) (318) 9.8 %

Loss on disposal of assets 444 — 444 100.0 %

Total costs and expenses 59,598 50,887 8,711 17.1 %

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Interest expense, net 4,192 3,782 410 10.8 %

Other income (22) — (22) 100.0 %

Loss on debt extinguishment 814 — 814 100.0 %

Other expense 65 — 65 100.0 %

Income before income tax expense 11,536 16,021 (4,485) (28.0) %

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Total revenue.

During the thirty-nine weeks ended September 25, 2021, total revenue was $210.5 million, an increase of $24.9 million, or 13.4%, compared to $185.5 million in the comparable period in 2020.

Royalty revenue, franchise fees and other increased $16.7 million primarily due to domestic same store sales growth of 8.1% as well as 193 net franchise restaurant openings since September 26, 2020.

Advertising fees increased $4.1 million due to the 20.4% increase in system-wide sales in the thirty-nine weeks ended September 25, 2021 compared to the thirty-nine weeks ended September 26, 2020.

This was partially offset by a $6.9 million rebate of advertising surplus that was returned to franchisees during the third quarter of 2021 in an effort to mitigate increased food and labor costs.

Company-owned restaurant sales increased $4.2 million primarily due to company-owned same store sales growth of 2.9%, which was driven by an increase in transaction size.

Also contributing to the increase was the acquisition of three franchised restaurants in the third quarter of the current year and the opening of three new company-owned restaurants since the prior year comparable period, resulting in additional sales of $2.4 million.

During the thirteen weeks ended March 26, 2022, total revenue was $76.2 million, an increase of $5.5 million, or 7.8%, compared to $70.7 million in the comparable period in 2021.

Royalty revenue, franchise fees and other increased $3.5 million primarily due to 208 net franchise restaurant openings since March 27, 2021, as well as domestic same store sales growth of 1.2%.

Advertising fees increased $1.0 million due to the 12.7% increase in system-wide sales in the thirteen weeks ended March 26, 2022 compared to the thirteen weeks ended March 27, 2021.

Company-owned restaurant sales increased $1.0 million due to an increase of $0.7 million related to the addition of four net new company-owned restaurants since the prior year comparable period, and $0.3 million, or 2.1%, company-owned same store sales growth, which was driven by an increase in menu prices, partially offset by a decline in transactions.

Cost of sales.

During the thirty-nine weeks ended September 25, 2021, cost of sales was $42.7 million, an increase of $6.3 million, or 17.4%, compared to $36.4 million in the comparable period in 2020.

Cost of sales as a percentage of company-owned restaurant sales was 80.2% in the thirty-nine weeks ended September 25, 2021, compared to 74.1% in the comparable period in 2020.

During the thirteen weeks ended March 26, 2022, cost of sales was $15.7 million, an increase of $2.4 million, or 18.0%, compared to $13.3 million in the comparable period in 2021.

Cost of sales as a percentage of company-owned restaurant sales was 84.3% in the thirteen weeks ended March 26, 2022, compared to 75.6% in the comparable period in 2021.

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

Thirty-Nine Weeks Ended

September 25, 2021 September 26, 2020

Thirteen Weeks Ended

March 26, 2022 March 27, 2021

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

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Vendor rebates (407) (2.2) % (380) (2.2) %

Cost of sales (excluding pre-opening expenses) 15,229 81.9 % 13,279 75.6 %

Pre-opening expenses 445 2.4 % — — %

Total cost of sales 15,674 84.3 % 13,279 75.6 %

Food, beverage and packaging costs as a percentage of company-owned restaurant sales were 44.5% in the thirty-nine weeks ended September 25, 2021, compared to 34.8% in the comparable period in 2020.

The increase was primarily due to a 46.4% increase in the cost of bone-in chicken wings as compared to the prior year period, in which we experienced unusually significant deflation in the cost of bone-in chicken wings.

Labor costs as a percentage of company-owned restaurant sales were 22.1% for the thirty-nine weeks ended September 25, 2021, compared to 24.8% in the comparable period in 2020.

The decrease as a percentage of company-owned restaurant sales was primarily due to incentive pay provided to team members in response to the COVID-19 pandemic during the prior year period, partially offset by a highly competitive labor market that resulted in increases in company-owned restaurant wages and hiring and training costs during the thirty-nine weeks ended September 25, 2021.

Other restaurant operating expenses as a percentage of company-owned restaurant sales were 15.8% for the thirty-nine weeks ended September 25, 2021, compared to 16.6% in the comparable period in 2020.

The decrease as a percentage of company-owned restaurant sales was primarily due to a decrease in delivery fees and security fees, partially offset by an increase in pre-opening expenses related to our investment in opening company-owned restaurants in Manhattan.

Food, beverage and packaging costs as a percentage of company-owned restaurant sales were 42.8% in the thirteen weeks ended March 26, 2022, compared to 41.6% in the comparable period in 2021.

The increase was primarily due to a 14.2% increase 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 25.8% for the thirteen weeks ended March 26, 2022, compared to 21.2% in the comparable period in 2021.

The increase as a percentage of company-owned restaurant sales was primarily due to increases in company-owned restaurant wages and hiring and training costs as a result of the ongoing COVID-19 pandemic and a competitive labor market during the thirteen weeks ended March 26, 2022.

Other restaurant operating expenses as a percentage of company-owned restaurant sales were 15.4% for the thirteen weeks ended March 26, 2022, compared to 15.0% in the comparable period in 2021.

The increase as a percentage of company-owned restaurant sales was primarily a result of increases in rent and other costs related to company-owned restaurants in Manhattan, New York, which increases were partially offset by a decrease in advertising fees during the thirteen weeks ended March 26, 2022.

Pre-opening expenses as a percentage of company-owned restaurant sales were 2.4% for the thirteen weeks ended March 26, 2022 due to our investment in opening company-owned restaurants in Manhattan, New York.

Advertising expenses.

During the thirty-nine weeks ended September 25, 2021, advertising expenses were $61.6 million, an increase of $3.9 million compared to $57.7 million in the comparable period in 2020.

During the thirteen weeks ended March 26, 2022, advertising expenses were $23.2 million, an increase of $1.1 million compared to $22.0 million in the comparable period in 2021.

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 thirty-nine weeks ended September 25, 2021, SG&A expense was $44.9 million, an increase of $2.7 million compared to $42.2 million in the comparable period in 2020.

The increase in SG&A expense was primarily due to an increase of $3.2 million in headcount related expenses to support the growth in our business, inclusive of stock-based compensation expense, an increase of $2.1 million in professional fees to support the Company’s strategic initiatives, and an increase of $0.6 million in travel expense.

These increases were partially offset by a decrease of $1.7 million in variable-based compensation expense, $1.0 million related to a donation made in the prior year period to the National Restaurant Employee Relief Fund to support restaurant workers in times of need, and $0.5 million related to COVID-19 and support provided to international franchisees in the prior year comparable period.

During the thirteen weeks ended March 26, 2022, SG&A expense was $18.1 million, an increase of $4.3 million compared to $13.8 million in the comparable period in 2021.

The increase SG&A expense was primarily due to an increase of $2.0 million in headcount related expenses to support the growth in our business, an increase of $1.1 million in professional fees to support the Company’s strategic initiatives, an increase of $0.7 million in travel expense as compared to the prior year period which was limited due to COVID-19, and approximately $0.3 million in one-time expenses related to our new securitized financing facility and payment of the special dividend.

Depreciation and amortization.

During the thirty-nine weeks ended September 25, 2021, depreciation expense was $5.4 million, an increase of $0.1 million compared to $5.3 million in the comparable period in 2020.

During the thirteen weeks ended March 26, 2022, depreciation expense was $2.2 million, an increase of $0.4 million compared to $1.8 million in the comparable period in 2021.

Loss on disposal of assets.

During the thirteen weeks ended March 26, 2022, loss on disposal of assets was $0.4 million related to the sale of restaurant assets to a franchisee.

Interest expense, net.

During the thirty-nine weeks ended September 25, 2021, interest expense, net was $11.2 million, a decrease of $1.5 million compared to $12.8 million of interest expense, net in the comparable period in 2020.

The decrease in interest expense, net was due to the refinancing of our securitized financing facility on October 30, 2020, which increased our outstanding debt by $162.4 million and reduced our interest rate from 4.97% to 2.84%.

During the thirteen weeks ended March 26, 2022, interest expense, net was $4.2 million, an increase of $0.4 million compared to $3.8 million of interest expense, net in the comparable period in 2021.

The increase was due to the securitized financing transaction completed on March 9, 2022, which increased our outstanding debt by $250 million.

Loss on debt extinguishment.

Loss on debt extinguishment was $0.8 million during the thirteen weeks ended March 26, 2022 due to costs and fees associated with the extinguishment of our 2020 Variable Funding Note facility on March 9, 2022.

Income tax expense.

During the thirty-nine weeks ended September 25, 2021, we recognized income tax expense of $12.6 million yielding an effective tax rate of 26.0%, compared to an effective tax rate of 14.0% in the prior year period.

During the thirteen weeks ended March 26, 2022, we recognized income tax expense of $2.9 million yielding an effective tax rate of 24.8%, compared to an effective tax rate of 17.9% in the prior year period.

The increase in the effective tax rate was primarily due to the impact of excess tax benefits associated with stock awards vested in the prior year comparable period.

Liquidity and Capital Resources

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.

Our primary sources of liquidity and capital resources are cash provided from operating activities, cash and cash equivalents on hand, and borrowings available under our securitized financing facility.

Our primary requirements for liquidity and capital are working capital, general corporate needs, capital expenditures, income tax payments, debt service requirements, and dividend payments.

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 25, 2021 and September 26, 2020 (in thousands):

Thirty-Nine Weeks Ended

September 25,

2021 September 26,

We generally reinvest available cash flows from operations to invest in our business, service our debt obligations, and pay dividends.

Our primary sources of short-term and long-term liquidity are expected to be cash flows from operations and available borrowings under our 2022 Variable Funding Notes.

As of March 26, 2022, the Company had $309.5 million of cash and restricted cash on its balance sheet.

Based upon current levels of operations and anticipated growth, we expect that cash flows from operations, combined with our securitized financing facility including our 2022 Variable Funding Notes, will be sufficient to meet our capital expenditure, working capital and debt service requirements for at least the next twelve months and the foreseeable future.

The following table shows summary cash flows information for the thirteen weeks ended March 26, 2022 and March 27, 2021 (in thousands):

Thirteen Weeks Ended

2022 March 27,

Net cash provided by (used in):

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Restaurant-level operating costs at our company-owned restaurants, unearned franchise and development fees, and corporate overhead costs also impact our cash flow from operating activities.

Net cash provided by operating activities was $54.0 million in the thirty-nine weeks ended September 25, 2021, an increase of $7.3 million from cash provided by operating activities of $46.8 million in the thirty-nine weeks ended September 26, 2020.

The increase is the result of increased operating income associated with the increased sales over the prior period, partially offset by the timing of changes in working capital.

Net cash provided by operating activities was $20.4 million in the thirteen weeks ended March 26, 2022, an increase of $6.6 million from cash provided by operating activities of $13.8 million in the thirteen weeks ended March 27, 2021.

The increase is primarily due to changes in advertising fund cash and cash equivalents, directly related to the timing of payments for expenses incurred for national advertising.

Also contributing to the increase is the change in timing of working capital, which is partially offset by the decrease in operating income.

Investing activities .

Our net cash used in investing activities was $18.4 million in the thirty-nine weeks ended September 25, 2021, an increase of $13.8 million from cash used in investing activities of $4.6 million in the thirty-nine weeks ended September 26, 2020.

The increase in cash used in investing activities was primarily due to an increase in capital expenditures related to our investments in technology and the remodel of our corporate headquarters building, as well as a payment of $4.2 million related to a foreign investment in LPH (see Note 6 in the accompanying notes to our unaudited consolidated financial statements included elsewhere in this Quarterly Report).

Our net cash used in investing activities was $4.8 million in the thirteen weeks ended March 26, 2022, an increase of $2.0 million from cash used in investing activities of $2.8 million in the thirteen weeks ended March 27, 2021.

The increase in cash used in investing activities was primarily due to an increase in capital expenditures related to our investments in technology.

Financing activities .

Our net cash used in financing activities was $18.3 million in the thirty-nine weeks ended September 25, 2021, a change of $23.4 million from cash provided by financing activities of $5.1 million in the thirty-nine weeks ended September 26, 2020.

The change was primarily due to borrowings under our 2018 Variable Funding Notes (as defined below) of $16.0 million in the thirty-nine weeks ended September 26, 2020, which is partially offset by an increase in the amount of dividends paid as compared to the prior year period.

Our net cash provided by financing activities was $239.1 million in the thirteen weeks ended March 26, 2022, a change of $245.5 million from cash used in financing activities of $6.4 million in the thirteen weeks ended March 27, 2021.

The change was primarily due to additional borrowings under our 2022 Class A-2 Notes (as defined below) of $250 million, partially offset by deferred financing and other debt related costs incurred of $5.4 million during the thirteen weeks ended March 27, 2021.

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 (the “2020 Variable Funding Notes,” and together with the 2020 Class A-2 Notes, the “2020 Notes”) which permits borrowings of up to a maximum principal amount of $50.0 million, which may be used to issue letters of credit.

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 Series 2018-1 4.97% Fixed Rate Senior Secured Notes, Class A-2 and Series 2018-1 Variable Funding Senior Secured Notes, Class A-1 (the “2018 Variable Funding Notes”) and to pay a special cash dividend of approximately $148.4 million to our stockholders in December 2020.

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

During the third fiscal quarter of 2021, the Company had a leverage

ratio under the Class A-2 Notes of less than 5.0x.

Per the terms of the Company’s debt agreements, principal payments are not due until the repayment date as long as the Company maintains a leverage ratio of less than 5.0x.

Accordingly, the Company has elected to suspend payments following the principal payment made in the third quarter of 2021.

We paid a quarterly cash dividend of $0.14 per share of common stock in each of the first two quarters of 2021, and a quarterly cash dividend of $0.17 per share of common stock in the third quarter of 2021, resulting in aggregate dividend payments of $13.4 million, or $0.45 per share of common stock, during the thirty-nine weeks ended September 25, 2021.

On November 2, 2021, the Company’s Board of Directors approved a dividend of $0.17 per share, to be paid on December 10, 2021 to stockholders of record as of November 19, 2021, totaling approximately $5.1 million.

On March 9, 2022, the Company completed a securitized financing transaction, pursuant to which Wingstop Funding LLC (the “Issuer”), a limited purpose, bankruptcy-remote, indirect wholly owned subsidiary of the Company, issued $250 million of its Series 2022-1 3.734% Fixed Rate Senior Secured Notes, Class A-2 (the "2022 Class A-2 Notes").

The Issuer also entered into a revolving financing facility of Series 2022-1 Variable Funding Senior Notes, Class A-1 (the “2022 Variable Funding Notes,” and together with the 2022 Class A-2 Notes, the “2022 Notes”), which permits borrowings of up to a maximum principal amount of $200 million, subject to certain borrowing conditions, a portion of which may be used to issue letters of credit.

The Company’s existing revolving financing facility of Series 2020-1 Class A-1 Notes was terminated in connection with the transaction.

The proceeds from the securitized financing transaction were used to pay related transaction fees and expenses, strengthen the Company's liquidity position and for general corporate purposes, which included a return of capital to the Company’s stockholders.

In addition to the 2022 Notes, the Company’s outstanding debt consists of its existing Series 2020-1 2.84% Fixed Rate Senior Secured Notes, Class A-2 (the “2020 Notes”).

No borrowings were outstanding under the 2022 Variable Funding Notes as of March 26, 2022.

We paid a quarterly cash dividend of $0.17 per share of common stock, aggregating $5.1 million, in the first quarter of 2022.

On May 3, 2022, the Company’s Board of Directors approved a dividend of $0.17 per share, to be paid on June 10, 2022 to stockholders of record as of May 20, 2022, totaling approximately $5.1 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 the Company and our stockholders.

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 $3.5 million at September 25, 2021.

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

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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.

For a description of the Company’s critical accounting policies and estimates, refer to “Part II—Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report.

The Company considers its significant accounting policy over revenue recognition to be particularly important to the portrayal and understanding of our financial position and results of operations.

There have been no material changes to the Company’s critical accounting policies and estimates since December 25, 2021.

Recent Accounting Pronouncements

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

Such risks and other factors include those listed below and elsewhere in this report, 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;

Such risks and other factors include those listed below and elsewhere in this report and our Annual Report, that could cause actual results or outcomes to differ from the results expressed or implied by forward-looking statements:

• our ability to effectively implement our growth strategy;

• risks associated with changes in food and supply costs;

• risks associated with the availability and cost of labor;

• our relationships with, and the performance of, our franchisees, as well as actions by franchisees that could harm our business;

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• risks associated with interruptions in our supply chain, including availability of food products;

• risks associated with the availability and cost of labor;

• risks associated with our future performance and operating results falling below the expectations of securities analysts and investors;

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• 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;

• uncertainty in the law with respect to the assignment or allocation of liabilities in the franchise business model;

• risks associated with litigation against us or our franchisees;

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• 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 comply with government regulations relating to food products and franchising, including increased costs associated with new or changing regulations;

• our ability to maintain adequate insurance coverage for our business;

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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.

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.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis