What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-10-26 compared with 2022-07-28 · 142 added, 112 removed, 275 unchanged (48% of the section changed)

8 unchanged sentences

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 1,850 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.

Wingstop is the largest fast casual chicken wings-focused restaurant chain in the world, with 1,898 locations worldwide.

We are dedicated to serving the world flavor through an unparalleled guest experience and offering of classic and boneless wings, tenders, and chicken sandwiches, always cooked to order and hand-sauced-and-tossed in 11 bold, distinctive flavors.

The Company is primarily a franchisor, with approximately 98% of Wingstop’s restaurants currently owned and operated by independent franchisees.

We believe our asset-light, highly-franchised business model generates strong operating margins and requires low capital expenditures, creating stockholder value through strong and consistent free cash flow and capital-efficient growth.

Although our business has been challenged by COVID-19-related and other inflationary pressures, we were well positioned for the shift in consumer behavior, which allowed us to achieve domestic same store sales growth of 30.7% in the three-year period ended June 25, 2022.

While we have experienced higher product costs in certain categories, these have been mitigated by recent deflation in bone-in chicken costs.

Uncertainties related to COVID-19 and inflation, including fluctuations in costs, wage increases and inflationary pressures on the consumer, make it difficult to predict what impact, if any, these items will have on our business in the future.

Third Quarter of 2022 Highlights

• System-wide sales increased 17.7% to $699.6 million

• 40 net new openings in the fiscal third quarter of 2022

• Domestic same store sales increased 6.9%

• Total revenue increased 40.9% to $92.7 million

• Net income increased 18.4% to $13.4 million, or $0.45 per diluted share, compared to net income of $11.3 million, or $0.38 per diluted share in the prior fiscal third quarter

• Adjusted EBITDA, a non-GAAP measure, increased 32.7% to $28.4 million, compared to adjusted EBITDA of $21.4 million in the prior fiscal third quarter

Year-to-Date Third Quarter of 2022 Highlights

• System-wide sales increased 12.6% to $2.0 billion

• 167 net new openings in the year-to-date third quarter of 2022

• Domestic same store sales increased 1.6%

• Total revenue increased 20.0% to $252.7 million

• Net income decreased 1.1% to $35.4 million, or $1.18 per diluted share, compared to net income of $35.8 million, or $1.19 per diluted share in the prior fiscal year-to-date period

• Adjusted EBITDA, a non-GAAP measure, increased 8.7% to $74.1 million, compared to adjusted EBITDA of $68.2 million in the prior fiscal year-to-date period

Key Performance Indicators

2 unchanged sentences

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 Twenty-Six Weeks Ended

2022 June 26,

2021 June 25,

2022 June 26,

Thirteen Weeks Ended Thirty-Nine Weeks Ended

September 24,

2022 September 25,

2021 September 24,

2022 September 25,

Domestic Franchised Activity:

2 unchanged sentences

Closures — (1) (3) (1)

Acquired by Company (1) (3) (1) (3)

Re-franchised by Company — 6 — 6

Restaurants end of period 1,631 1,461 1,631 1,461

3 unchanged sentences

Closures — — — —

Acquired by Company 1 3 1 3

Re-franchised to franchisees — (6) — (6)

Restaurants end of period 42 32 42 32

25 unchanged sentences

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.

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

4 unchanged sentences

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 twenty-six weeks ended June 25, 2022 and June 26, 2021 (in thousands, except unit data):

Thirteen Weeks Ended Twenty-Six Weeks Ended

June 25, 2022 June 26, 2021 June 25, 2022 June 26, 2021

The following table sets forth our key performance indicators for the thirteen and thirty-nine weeks ended September 24, 2022 and September 25, 2021 (in thousands, except unit data):

Thirteen Weeks Ended Thirty-Nine Weeks Ended

September 24, 2022 September 25, 2021 September 24, 2022 September 25, 2021

Number of system-wide restaurants open at end of period 1,898 1,673 1,898 1,673

10 unchanged sentences

$ 13,550 $ 8,579 $ 37,293 $ 33,051

(1) The percentage of system-wide sales attributable to company-owned restaurants was 3.0% and 2.8% for the thirteen weeks ended June 25, 2022 and June 26, 2021, respectively, and was 3.0% and 2.9% for the twenty-six weeks ended June 25, 2022 and June 26, 2021, respectively.

(1) The percentage of system-wide sales attributable to company-owned restaurants was 2.9% for both the thirteen weeks ended September 24, 2022 and September 25, 2021, and was 2.9% and 3.1% for the thirty-nine weeks ended September 24, 2022 and September 25, 2021, respectively.

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

27 unchanged sentences

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 twenty-six weeks ended June 25, 2022 and June 26, 2021 (in thousands):

Thirteen Weeks Ended Twenty-Six Weeks Ended

2022 June 26,

2021 June 25,

2022 June 26,

The following table reconciles net income to EBITDA and Adjusted EBITDA for the thirteen and thirty-nine weeks ended September 24, 2022 and September 25, 2021 (in thousands):

Thirteen Weeks Ended Thirty-Nine Weeks Ended

September 24,

2022 September 25,

2021 September 24,

2022 September 25,

Net income $ 13,368 $ 11,290 $ 35,351 $ 35,762

5 unchanged sentences

Loss on debt extinguishment and financing transaction costs (a)

Loss on disposal of assets (b)

Loss (gain) on disposal of assets (b)

239 (3,567) 1,006 (3,567)

Consulting fees (c)

3 unchanged sentences

(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 twenty-six weeks ended June 25, 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.

all transaction costs are included in Loss on debt extinguishment during the thirty-nine weeks ended September 24, 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 (gain) resulting from the sale of assets to a franchisee.

This loss (gain) is included in Loss (gain) 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.

3 unchanged sentences

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 twenty-six weeks ended June 25, 2022 and June 26, 2021 (in thousands):

Thirteen Weeks Ended Twenty-Six Weeks Ended

2022 June 26,

2021 June 25,

2022 June 26,

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 24, 2022 and September 25, 2021 (in thousands):

Thirteen Weeks Ended Thirty-Nine Weeks Ended

September 24,

2022 September 25,

2021 September 24,

2022 September 25,

Net income $ 13,368 $ 11,290 $ 35,351 $ 35,762

Loss on debt extinguishment and financing transactions (a)

Loss on disposal of assets (b)

Loss (gain) on disposal of assets (b)

239 (3,567) 1,006 (3,567)

Consulting fees (c)

5 unchanged sentences

(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.

(b) Represents a loss (gain) resulting from the sale of assets to a franchisee.

This loss (gain) 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 and twenty-six weeks ended June 25, 2022 and June 26, 2021, which includes provisions for U.S.

(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 and thirty-nine weeks ended September 24, 2022 and September 25, 2021, 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 June 25, 2022 compared to Thirteen Weeks Ended June 26, 2021

The following table sets forth our results of operations for the thirteen weeks ended June 25, 2022 and June 26, 2021 (dollars in thousands):

Thirteen Weeks Ended September 24, 2022 compared to Thirteen Weeks Ended September 25, 2021

The following table sets forth our results of operations for the thirteen weeks ended September 24, 2022 and September 25, 2021 (dollars in thousands):

Thirteen Weeks Ended Increase / (Decrease)

2022 June 26,

September 24,

2022 September 25,

Royalty revenue, franchise fees and other $ 40,363 $ 32,829 $ 7,534 22.9 %

8 unchanged sentences

Depreciation and amortization 2,836 2,061 775 37.6 %

Loss on disposal of assets 323 — 323 100.0 %

Loss (gain) on disposal of assets 239 (3,567) 3,806 (106.7) %

Total costs and expenses 68,591 44,952 23,639 52.6 %

1 unchanged sentence

Interest expense, net 5,742 3,724 2,018 54.2 %

Other expense 26 — 26 100.0 %

Other expense (income) 290 (22) 312 NM*

Income before income tax expense 18,049 17,130 919 5.4 %

1 unchanged sentence

Net income $ 13,368 $ 11,290 $ 2,078 18.4 %

* Not meaningful.

(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 June 25, 2022, total revenue was $83.8 million, an increase of $9.8 million, or 13.2%, compared to $74.0 million in the comparable period in 2021.

Royalty revenue, franchise fees and other increased $2.9 million primarily due to 229 net franchise restaurant openings since June 26, 2021, partially offset by a decline in domestic same store sales of 3.3%.

Advertising fees increased $6.4 million due to an increase in the national advertising fund contribution rate to 5% from 4% effective the first day of the fiscal second quarter 2022, as well as the 7.5% increase in system-wide sales in the thirteen weeks ended June 25, 2022 compared to the thirteen weeks ended June 26, 2021.

Company-owned restaurant sales increased $0.5 million due to an increase of $1.2 million related to the addition of six net new company-owned restaurants compared to the prior year comparable period, partially offset by a 4.9% decline in company-owned same store sales, which was driven by a decline in transactions.

During the thirteen weeks ended September 24, 2022, total revenue was $92.7 million, an increase of $26.9 million, or 40.9%, compared to $65.8 million in the comparable period in 2021.

Royalty revenue, franchise fees and other increased $7.5 million, of which $3.6 million was due to 215 net franchise restaurant openings since September 25, 2021, and $3.2 million was due to domestic same store sales growth of 6.9%.

Advertising fees increased $16.6 million due to an increase in the national advertising fund contribution rate to 5% from 4% effective the first day of the fiscal second quarter 2022, as well as the 17.7% increase in system-wide sales in the fiscal third quarter 2022 compared to the fiscal third quarter 2021.

Additionally, during the fiscal third quarter 2021, a $6.9 million non-recurring rebate of advertising surplus was returned to franchisees, reducing the revenue recognized.

Company-owned restaurant sales increased $2.8 million due to an increase of $2.3 million related to the addition of nine net new company-owned restaurants compared to the prior year comparable period, as well as a 4.3% increase in company-owned same store sales, which was driven by an increase in menu prices and an increase in transactions.

Cost of sales.

During the thirteen weeks ended June 25, 2022, cost of sales was $14.9 million, an increase of $0.7 million, or 4.9%, compared to $14.2 million in the comparable period in 2021.

Cost of sales as a percentage of company-owned restaurant sales was 79.5% in the thirteen weeks ended June 25, 2022, compared to 77.7% in the comparable period in 2021.

During the thirteen weeks ended September 24, 2022, cost of sales was $15.7 million, an increase of $0.5 million, or 3.4%, compared to $15.2 million in the comparable period in 2021.

Cost of sales as a percentage of company-owned restaurant sales was 78.0% in the fiscal third quarter 2022, compared to 87.5% in the fiscal third quarter 2021.

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

Thirteen Weeks Ended

June 25, 2022 June 26, 2021

September 24, 2022 September 25, 2021

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

7 unchanged sentences

Total cost of sales 15,724 78.0 % 15,206 87.5 %

Food, beverage and packaging costs as a percentage of company-owned restaurant sales were 39.3% in the thirteen weeks ended June 25, 2022, compared to 43.9% in the comparable period in 2021.

The decrease was primarily due to an 18.8% decrease in the cost of bone-in chicken wings as compared to the prior year period.

This decrease was partially offset by inflation in other food costs during the thirteen weeks ended June 25, 2022.

Labor costs as a percentage of company-owned restaurant sales were 23.1% for the thirteen weeks ended June 25, 2022, compared to 20.6% in the comparable period in 2021.

The increase as a percentage of company-owned restaurant sales was primarily due to higher wage rates in the company-owned restaurants recently opened in New York City, as well as increases in company-owned restaurant wages, hiring and training costs as a result of the ongoing competitive labor market during the thirteen weeks ended June 25, 2022.

Other restaurant operating expenses as a percentage of company-owned restaurant sales were 18.2% for the thirteen weeks ended June 25, 2022, compared to 15.4% in the comparable period in 2021.

The increase as a percentage of company-owned restaurant sales was primarily a result of higher rent and occupancy costs associated with company-owned restaurants recently opened in New York City during the thirteen weeks ended June 25, 2022.

Pre-opening expenses as a percentage of company-owned restaurant sales were 1.0% for the thirteen weeks ended June 25, 2022 due to our development of the New York City market.

Food, beverage and packaging costs as a percentage of company-owned restaurant sales were 37.2% in the thirteen weeks ended September 24, 2022, compared to 48.1% in the comparable period in 2021.

The decrease was primarily due to a 42.7% decrease in the cost of bone-in chicken wings as compared to the prior year period.

This decrease was partially offset by inflation in other food costs during the fiscal third quarter 2022.

Labor costs as a percentage of company-owned restaurant sales were 23.1% for the thirteen weeks ended September 24, 2022, compared to 24.6% in the comparable period in 2021.

The decrease as a percentage of company-owned restaurant sales was primarily due to our ability to leverage costs due to the company-owned domestic same store sales increase of 4.3%.

This was partially offset by higher wage rates in the company-owned restaurants recently opened in New York City, as well as increases in company-owned restaurant wages as a result of the ongoing competitive labor market during the fiscal third quarter 2022.

Other restaurant operating expenses as a percentage of company-owned restaurant sales were 19.1% for the thirteen weeks ended September 24, 2022, compared to 16.0% in the comparable period in 2021.

Advertising expenses.

During the thirteen weeks ended June 25, 2022, advertising expenses were $29.7 million, an increase of $6.4 million compared to $23.3 million in the comparable period in 2021.

During the thirteen weeks ended September 24, 2022, advertising expenses were $33.1 million, an increase of $16.9 million compared to $16.2 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 thirteen weeks ended June 25, 2022, SG&A expense was $13.9 million, a decrease of $2.1 million compared to $16.1 million in the comparable period in 2021.

The decrease of SG&A expense was primarily due to a decrease of $4.1 million in stock based compensation expense related to stock awards forfeited during the thirteen weeks ended June 25, 2022.

This was partially offset by an increase of $0.9 million in professional fees to support the Company’s strategic initiatives and an increase of $0.5 million in travel expense as compared to the prior year period.

During the thirteen weeks ended September 24, 2022, SG&A expense was $16.7 million, an increase of $1.7 million compared to $15.0 million in the comparable period in 2021.

The increase of SG&A expense was primarily due to an increase of $1.0 million in headcount related expenses to support the growth in our business, as well as an increase of $0.4 million in professional fees to support the Company’s strategic initiatives.

These increases were partially offset by a decrease of $0.5 million in stock-based compensation expense related to stock awards forfeited during the fiscal third quarter 2022.

Depreciation and amortization.

During the thirteen weeks ended June 25, 2022, depreciation expense was $2.5 million, an increase of $1.0 million compared to $1.5 million in the comparable period in 2021.

The increase in depreciation and amortization was primarily due to capital expenditures related to our corporate headquarters building and investments in technology.

Loss on disposal of assets.

During the thirteen weeks ended June 25, 2022, loss on disposal of assets was $0.3 million related to the sale of restaurant assets to a franchisee.

During the thirteen weeks ended September 24, 2022, depreciation expense was $2.8 million, an increase of $0.8 million compared to $2.1 million in the comparable period in 2021.

The increase in depreciation and amortization was primarily due to capital expenditures related to our technology investments.

Loss (gain) on disposal of assets.

During the thirteen weeks ended September 24, 2022, loss on disposal of assets was $0.2 million related to the sale of restaurant assets to a franchisee.

In the comparable period in 2021, gain on disposal of assets was $3.6 million related to the sale of six company-owned restaurants to a franchisee.

Interest expense, net.

During the thirteen weeks ended June 25, 2022, interest expense, net was $6.0 million, an increase of $2.3 million compared to $3.7 million of interest expense, net in the comparable period in 2021.

During the thirteen weeks ended September 24, 2022, interest expense, net was $5.7 million, an increase of $2.0 million compared to $3.7 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.

Income tax expense.

During the thirteen weeks ended June 25, 2022, we recognized income tax expense of $3.1 million yielding an effective tax rate of 18.7%, compared to an effective tax rate of 25.5% in the prior year period.

The decrease in the effective tax rate was primarily due to the impact of stock awards forfeited during the thirteen weeks ended June 25, 2022.

Twenty-Six Weeks Ended June 25, 2022 compared to Twenty-Six Weeks Ended June 26, 2021

The following table sets forth our results of operations for the twenty-six weeks ended June 25, 2022 and June 26, 2021 (dollars in thousands):

Twenty-Six Weeks Ended Increase / (Decrease)

2022 June 26,

During the thirteen weeks ended September 24, 2022, we recognized income tax expense of $4.7 million yielding an effective tax rate of 25.9%, compared to an effective tax rate of 34.1% in the prior year period.

The decrease in the

effective tax rate was primarily due to the impact of nondeductible expenses for executive compensation during the prior year comparable period.

Thirty-Nine Weeks Ended September 24, 2022 compared to Thirty-Nine Weeks Ended September 25, 2021

The following table sets forth our results of operations for the thirty-nine weeks ended September 24, 2022 and September 25, 2021 (dollars in thousands):

Thirty-Nine Weeks Ended Increase / (Decrease)

September 24,

2022 September 25,

Royalty revenue, franchise fees and other $ 111,477 $ 97,570 $ 13,907 14.3 %

8 unchanged sentences

Depreciation and amortization 7,610 5,379 2,231 41.5 %

Loss on disposal of assets 767 — 767 100.0 %

Loss (gain) on disposal of assets 1,006 (3,567) 4,573 (128.2) %

Total costs and expenses 189,592 150,936 38,656 25.6 %

2 unchanged sentences

Loss on debt extinguishment 814 — 814 100.0 %

Other expense 91 — 91 100.0 %

Other expense (income) 381 (22) 403 NM*

Income before income tax expense 45,947 48,330 (2,383) (4.9) %

1 unchanged sentence

Net income $ 35,351 $ 35,762 $ (411) (1.1) %

* Not meaningful.

(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 twenty-six weeks ended June 25, 2022, total revenue was $160.0 million, an increase of $15.3 million, or 10.6%, compared to $144.7 million in the comparable period in 2021.

Royalty revenue, franchise fees and other increased $6.4 million primarily due to 229 net franchise restaurant openings since June 26, 2021, partially offset by a decline in domestic same store sales of 1.1%.

Advertising fees increased $7.4 million due to an increase in the national advertising fund contribution rate to 5% from 4% effective the first day of the fiscal second quarter 2022, as well as the 10.0% increase in system-wide sales in the twenty-six weeks ended June 25, 2022 compared to the twenty-six weeks ended June 26, 2021.

Company-owned restaurant sales increased $1.5 million primarily due to an increase of $1.9 million related to the addition of six net new company-owned restaurants compared to the prior year comparable period.

This increase was partially offset by a decline of 1.5% in company-owned same store sales driven by a decrease in transactions.

During the thirty-nine weeks ended September 24, 2022, total revenue was $252.7 million, an increase of $42.2 million, or 20.0%, compared to $210.5 million in the comparable period in 2021.

Royalty revenue, franchise fees and other increased $13.9 million, of which $7.6 million was due to 215 net franchise restaurant openings since September 25, 2021, and $5.5 million was due to domestic same store sales growth of 1.6%.

Advertising fees increased $24.0 million due to an increase in the national advertising fund contribution rate to 5% from 4% effective the first day of the fiscal second quarter 2022, as well as the 12.6% increase in system-wide sales as compared to the prior year fiscal period.

Additionally, during the prior year fiscal period, a $6.9 million non-recurring rebate of advertising surplus was returned to franchisees, reducing the revenue recognized.

Company-owned restaurant sales increased $4.3 million primarily due to an increase of $4.2 million related to the addition of nine net new company-owned restaurants compared to the prior year comparable period.

Cost of sales.

During the twenty-six weeks ended June 25, 2022, cost of sales was $30.6 million, an increase of $3.1 million, or 11.2%, compared to $27.5 million in the comparable period in 2021.

Cost of sales as a percentage of company-owned restaurant sales was 81.9% in the twenty-six weeks ended June 25, 2022, compared to 76.7% in the comparable period in 2021.

During the thirty-nine weeks ended September 24, 2022, cost of sales was $46.3 million, an increase of $3.6 million, or 8.4%, compared to $42.7 million in the comparable period in 2021.

Cost of sales as a percentage of company-owned restaurant sales was 80.5% in the current year fiscal period, compared to 80.2% in the prior year fiscal period.

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

Twenty-Six Weeks Ended

June 25, 2022 June 26, 2021

Thirty-Nine Weeks Ended

September 24, 2022 September 25, 2021

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

7 unchanged sentences

Total cost of sales $ 46,297 80.5 % $ 42,692 80.2 %

Food, beverage and packaging costs as a percentage of company-owned restaurant sales were 41.1% in the twenty-six weeks ended June 25, 2022, compared to 42.8% in the comparable period in 2021.

Food, beverage and packaging costs as a percentage of company-owned restaurant sales were 39.7% in the thirty-nine weeks ended September 24, 2022, compared to 44.5% in the comparable period in 2021.

The decrease was primarily due to the benefit of menu price increases coupled with a 18.1% decrease in the cost of bone-in chicken wings as compared to the prior year period.

These decreases were partially offset by the inflation in other food costs during the twenty-six weeks ended June 25, 2022.

Labor costs as a percentage of company-owned restaurant sales were 24.5% for the twenty-six weeks ended June 25, 2022, compared to 20.9% in the comparable period in 2021.

The increase as a percentage of company-owned restaurant sales was primarily due to higher wage rates in the restaurants recently opened in New York City, as well as increases in company-owned restaurant wages, hiring and training costs as a result of the ongoing competitive labor market during the twenty-six weeks ended June 25, 2022.

Other restaurant operating expenses as a percentage of company-owned restaurant sales were 16.8% for the twenty-six weeks ended June 25, 2022, compared to 15.2% in the comparable period in 2021.

The increase as a percentage of company-owned restaurant sales was primarily a result of higher rent and occupancy costs associated with the opening of company-owned restaurants in New York City for the twenty-six weeks ended June 25, 2022.

Pre-opening expenses as a percentage of company-owned restaurant sales were 1.7% for the twenty-six weeks ended June 25, 2022 due to our development of the New York City market.

These decreases were partially offset by the inflation in other food costs during the current year fiscal period.

Labor costs as a percentage of company-owned restaurant sales were 24.0% for the thirty-nine weeks ended September 24, 2022, compared to 22.1% in the comparable period in 2021.

Other restaurant operating expenses as a percentage of company-owned restaurant sales were 17.6% for the thirty-nine weeks ended September 24, 2022, compared to 15.4% in the comparable period in 2021.

Pre-opening expenses as a percentage of company-owned restaurant sales were 1.4% for the thirty-nine weeks ended September 24, 2022 compared to 0.4% in the comparable period in 2021.

The increase is primarily due to our development of the New York City market.

Advertising expenses.

During the twenty-six weeks ended June 25, 2022, advertising expenses were $52.9 million, an increase of $7.5 million compared to $45.3 million in the comparable period in 2021.

During the thirty-nine weeks ended September 24, 2022, advertising expenses were $86.0 million, an increase of $24.4 million compared to $61.6 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 twenty-six weeks ended June 25, 2022, SG&A expense was $32.0 million, an increase of $2.2 million compared to $29.9 million in the comparable period in 2021.

During the thirty-nine weeks ended September 24, 2022, SG&A expense was $48.7 million, an increase of $3.8 million compared to $44.9 million in the comparable period in 2021.

The increase in SG&A expense was primarily due to an increase of $3.4 million in headcount related expenses to support the growth in our business, an increase of $2.5 million in professional fees to support the Company’s strategic initiatives, and an increase of $1.2 million in travel expense as compared to the prior year period.

These increases were partially offset by a decrease of $4.2 million in stock-based compensation expense related to stock awards forfeited during the twenty-six weeks ended June 25, 2022.

These increases were partially offset by a decrease of $4.7 million in stock-based compensation expense related to stock awards forfeited during the current year fiscal period.

Depreciation and amortization.

During the twenty-six weeks ended June 25, 2022, depreciation expense was $4.8 million, an increase of $1.5 million compared to $3.3 million in the comparable period in 2021.

During the thirty-nine weeks ended September 24, 2022, depreciation expense was $7.6 million, an increase of $2.2 million compared to $5.4 million in the comparable period in 2021.

The increase in depreciation and amortization was primarily due to capital expenditures related to our corporate headquarters building and investments in technology.

Loss on disposal of assets.

During the twenty-six weeks ended June 25, 2022, loss on disposal of assets was $0.8 million related to the sale of restaurant assets to a franchisee.

Loss (gain) on disposal of assets.

During the thirty-nine weeks ended September 24, 2022, loss on disposal of assets was $1.0 million related to the sale of restaurant assets to a franchisee.

In the comparable period in 2021, gain on disposal of assets was $3.6 million related to the sale of six company-owned restaurants to a franchisee.

Interest expense, net.

During the twenty-six weeks ended June 25, 2022, interest expense, net was $10.2 million, an increase of $2.7 million compared to $7.5 million of interest expense, net in the comparable period in 2021.

During the thirty-nine weeks ended September 24, 2022, interest expense, net was $15.9 million, an increase of $4.7 million compared to $11.2 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 twenty-six weeks ended June 25, 2022 due to costs and fees associated with the extinguishment of our 2020 Variable Funding Note facility on March 9, 2022.

Loss on debt extinguishment was $0.8 million during the thirty-nine weeks ended September 24, 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 twenty-six weeks ended June 25, 2022, we recognized income tax expense of $5.9 million yielding an effective tax rate of 21.2%, compared to an effective tax rate of 21.6% in the prior year period.

The decrease in the effective tax rate was primarily due to the impact of stock awards forfeited during the twenty-six weeks ended June 25, 2022, partially offset by the impact of excess tax benefits associated with stock options exercised in the prior year comparable period.

During the thirty-nine weeks ended September 24, 2022, we recognized income tax expense of $10.6 million yielding an effective tax rate of 23.1%, compared to an effective tax rate of 26.0% in the prior year period.

The decrease in the effective tax rate was primarily due to the impact of stock awards forfeited during the current year fiscal period, partially offset by the impact of excess tax benefits associated with stock options exercised in the prior year comparable period.

Liquidity and Capital Resources

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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 defined below).

As of June 25, 2022, the Company had $191.6 million of cash and restricted cash on its balance sheet.

As of September 24, 2022, the Company had $200.9 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 twenty-six weeks ended June 25, 2022 and June 26, 2021 (in thousands):

Twenty-Six Weeks Ended

2022 June 26,

The following table shows summary cash flows information for the thirty-nine weeks ended September 24, 2022 and September 25, 2021 (in thousands):

Thirty-Nine Weeks Ended

September 24,

2022 September 25,

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 $29.5 million in the twenty-six weeks ended June 25, 2022, a decrease of $2.1 million from cash provided by operating activities of $31.6 million in the twenty-six weeks ended June 26, 2021.

The decrease is primarily due to the decrease in net income, including non-cash adjustments, totaling $5.9 million, partially offset by the change in timing of working capital.

Net cash provided by operating activities was $53.2 million in the thirty-nine weeks ended September 24, 2022, a decrease of $0.9 million from cash provided by operating activities of $54.0 million in the thirty-nine weeks ended September 25, 2021.

The decrease is primarily due to the change in timing of working capital.

Investing activities .

Our net cash used in investing activities was $9.1 million in the twenty-six weeks ended June 25, 2022, a decrease of $3.4 million from cash used in investing activities of $12.4 million in the twenty-six weeks ended June 26, 2021.

The decrease in cash used in investing activities was primarily due to a payment of $4.2 million related to a foreign investment in our United Kingdom franchisee made during the twenty-six weeks ended June 26, 2021, as well as the sale of restaurant assets to a franchisee during the twenty-six weeks ended June 25, 2022.

Our net cash used in investing activities was $16.6 million in the thirty-nine weeks ended September 24, 2022, a decrease of $1.7 million from cash used in investing activities of $18.4 million in the thirty-nine weeks ended September 25, 2021.

The decrease in cash used in investing activities was primarily due to a payment of $4.2 million related to a foreign investment in our United Kingdom franchisee made during the thirty-nine weeks ended September 25, 2021.

This was partially offset by an increase in capital expenditures related to our investments in technology as compared to the prior year period.

Financing activities .

Our net cash provided by financing activities was $116.3 million in the twenty-six weeks ended June 25, 2022, a change of $128.1 million from cash used in financing activities of $11.8 million in the twenty-six weeks ended June 26, 2021.

The change was due to additional borrowings under our 2022 Class A-2 Notes (as defined below) of $250 million, partially offset by the payment of a special dividend in connection with the securitized financing transaction totaling $119.5 million, as well as deferred financing and other debt related costs incurred of $5.4 million during the twenty-six weeks ended June 25, 2022

Our net cash provided by financing activities was $109.4 million in the thirty-nine weeks ended September 24, 2022, a change of $127.8 million from cash used in financing activities of $18.3 million in the thirty-nine weeks ended September 25, 2021.

Securitized financing facility .

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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 June 25, 2022.

We paid a quarterly cash dividend of $0.17 per share of common stock in each of the first two quarters of 2022, resulting in aggregate dividend payments of $10.2 million during the twenty-six weeks ended June 25, 2022.

On July 27, 2022, the Company’s Board of Directors approved a dividend of $0.19 per share, to be paid on September 2, 2022 to stockholders of record as of August 12, 2022, totaling approximately $5.7 million.

No borrowings were outstanding under the 2022 Variable Funding Notes as of September 24, 2022.

We paid a quarterly cash dividend of $0.17 per share of common stock in each of the first two quarters of 2022, and a quarterly cash dividend of $0.19 per share of common stock in the third quarter of 2022, resulting in aggregate dividend payments of $15.8 million during the thirty-nine weeks ended September 24, 2022.

On October 25, 2022, the Company’s Board of Directors approved a dividend of $0.19 per share, to be paid on December 2, 2022 to stockholders of record as of November 11, 2022, totaling approximately $5.7 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.

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• our ability to successfully expand into new markets;

• the impact on our business from a pandemic, epidemic or outbreak, such as COVID-19;

• our ability to effectively compete within our industry;

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• our ability to successfully advertise and market our business;

• risks associated with changes in customer preferences and perceptions;

• risks associated with changes in customer preferences, perceptions and eating habits;

• 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 comply with laws and 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;

10 unchanged sentences

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