What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-03 compared with 2022-10-26 · 107 added, 216 removed, 201 unchanged (62% of the section changed)

8 unchanged sentences

Fiscal year 2023 contains 52 weeks, while fiscal year 2022 contains 53 weeks.

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.

Wingstop is the largest fast casual chicken wings-focused restaurant chain in the world, with over 1,950 locations worldwide.

We are dedicated to serving the world flavor through an unparalleled guest experience and offering of classic wings, 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.

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

Change in Presentation

Beginning in the first quarter of 2023, gains and losses on disposal of assets are no longer presented as an adjustment to EBITDA in our calculation of Adjusted EBITDA.

EBITDA and Adjusted EBITDA are both non-GAAP measures and are defined below.

Prior period gains and losses on disposal of assets have been excluded from EBITDA adjustments to conform to the current presentation.

This reclassification had no impact on operating income, balance sheets or statements of cash flows.

First Quarter of 2023 Highlights

• System-wide sales increased 30.4% over the prior fiscal first quarter to $821.6 million;

• 37 net new openings in the fiscal first quarter 2023 for a total of 1,996 worldwide locations;

• Domestic same store sales increased 20.1% over the prior fiscal first quarter;

• Company-owned restaurant same store sales increased 10.3% over the prior fiscal first quarter;

• Digital sales increased to 65.2%;

• Domestic restaurant AUVs increased to $1.7 million for the current fiscal quarter;

• Total revenue increased 42.7% to $108.7 million from the prior fiscal first quarter;

• Net income increased 80.6% to $15.7 million, or $0.52 per diluted share, compared to net income of $8.7 million, or $0.29 per diluted share in the prior fiscal first quarter;

• Adjusted EBITDA, a non-GAAP measure, increased 59.8% to $34.6 million, compared to adjusted EBITDA of $21.6 million in the prior fiscal first quarter.

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 24,

2022 September 25,

2021 September 24,

2022 September 25,

Thirteen Weeks Ended

2023 March 26,

Domestic Franchised Activity:

2 unchanged sentences

Closures — (3)

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

Re-franchised by Company — 6 — 6

Restaurants end of period 1,710 1,551

1 unchanged sentence

Beginning of period 43 36

Openings 2 1 5 3

Closures — — — —

Acquired by Company 1 3 1 3

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

Restaurants end of period 43 37

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Beginning of period 238 197

Openings 9 10 32 16

Closures (3) (1)

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Domestic AUV includes revenue from both company-owned and franchised restaurants.

Domestic AUV allows management to assess our company-owned and franchised restaurant economics.

Our domestic AUV growth is primarily driven by increases in same store sales and is also influenced by opening new restaurants.

Domestic AUV allows management to assess our domestic company-owned and franchised restaurant economics.

Changes in domestic AUV growth are primarily driven by increases in same store sales and are also influenced by opening new restaurants.

Domestic same store sales.

Domestic same store sales reflects the change in year-over-year sales for the same store base.

We define the same store base to include those restaurants open for at least 52 full weeks.

This measure highlights the performance of existing restaurants, while excluding the impact of new restaurant openings and closures.

Domestic same store sales reflects the change in year-over-year sales for the same store restaurant base.

We define the same store restaurant base to include those restaurants open for at least 52 full weeks.

This measure highlights the performance of existing restaurants, while excluding the impact of new restaurant openings and permanent closures.

We review same store sales for domestic company-owned restaurants as well as system-wide domestic restaurants.

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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 financing transactions, transaction costs, costs and fees associated with investments in our strategic initiatives, 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.

1 unchanged sentence

Adjusted Net Income and Adjusted Earnings Per Diluted Share.

We define Adjusted net income as net income adjusted 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 related tax adjustments.

We define Adjusted net income as net income adjusted for losses on debt extinguishment and financing transactions, transaction costs, costs and fees associated with investments in our strategic initiatives, and related tax adjustments that management believes are not indicative of the Company’s core operating results or business outlook over the long term.

We define Adjusted earnings per diluted share as Adjusted net income divided by weighted average diluted share count.

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 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

The following table sets forth our key performance indicators for the thirteen weeks ended April 1, 2023 and March 26, 2022 (in thousands, except unit data):

Thirteen Weeks Ended

April 1, 2023 March 26, 2022

Number of system-wide restaurants open at end of period 1,996 1,791

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$ 17,771 $ 9,815

(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.

(1) The percentage of system-wide sales attributable to company-owned restaurants was 2.8% and 3.0% for the thirteen weeks ended April 1, 2023 and March 26, 2022, respectively.

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

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Management uses EBITDA and Adjusted EBITDA:

• as a measurement of operating performance because they assist us in comparing the operating performance of our restaurants on a consistent basis, as they remove the impact of items not directly resulting from our core operations;

• as a measurement of operating performance because we believe they assist us in comparing the operating performance of our restaurants on a consistent basis, as they remove the impact of items not directly resulting from our core operations;

• for planning purposes, including the preparation of our internal annual operating budget and financial projections;

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By providing these non-GAAP financial measures, together with a reconciliation to the most comparable GAAP measure, we believe we are enhancing investors’ understanding of our business and our results of operations, as well as assisting investors in evaluating how well we are executing our strategic initiatives.

In addition, the instruments governing our indebtedness use EBITDA (with additional adjustments) to measure our compliance with covenants, such as our fixed charge coverage, lease adjusted leverage, and debt incurrence.

EBITDA and Adjusted EBITDA have limitations as analytical tools and should not be considered in isolation, or as an alternative to, or a substitute for net income or other financial statement data presented in our consolidated financial statements as indicators of financial performance.

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Due to these limitations, EBITDA and Adjusted EBITDA should not be considered as measures of discretionary cash available to us to invest in the growth of our business.

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 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 these items will occur in future periods.

However, we believe these adjustments are appropriate because the amounts recognized can vary significantly from period to period, do not directly relate to the ongoing operations of our restaurants, and complicate comparisons of our internal operating results and operating results of other restaurant companies over time.

We compensate for these limitations by relying primarily on our GAAP results and using these non-GAAP measures only as performance measures and supplementally.

As noted in the table below, Adjusted EBITDA includes adjustments for losses on debt extinguishment and financing transactions, transaction costs, costs and fees associated with investments in our strategic initiatives, and stock-based compensation expense.

We believe these adjustments are appropriate because the amounts recognized can vary significantly from period to period, do not directly relate to the ongoing operations of our restaurants, and complicate comparisons of our internal operating results and operating results of other restaurant companies over time.

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 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,

The following table reconciles net income to EBITDA and Adjusted EBITDA for the thirteen weeks ended April 1, 2023 and March 26, 2022 (in thousands):

Thirteen Weeks Ended

2023 March 26,

Net income $ 15,669 $ 8,676

Interest expense, net 4,573 4,192

Income tax expense (benefit) 4,681 5,840 10,596 12,568

Income tax expense 5,242 2,860

Depreciation and amortization 2,989 2,227

2 unchanged sentences

Loss on debt extinguishment and financing transaction costs (a)

Loss (gain) on disposal of assets (b)

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

Consulting fees (c)

Stock-based compensation expense (d)

1,528 2,051 2,117 6,823

Consulting fees (b)

Stock-based compensation expense (c)

Adjusted EBITDA $ 34,584 $ 21,645

(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 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.

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

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 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) 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.

These measures have not been prepared in accordance with Article 11 of Regulation S-X promulgated under the Securities Act.

These measures have not been prepared in accordance with Article 11 of Regulation S-X promulgated under the Securities Act of 1933, as amended (the “Securities Act”).

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 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,

The following table reconciles net income to Adjusted net income and calculates adjusted earnings per diluted share for the thirteen weeks ended April 1, 2023 and March 26, 2022 (in thousands):

Thirteen Weeks Ended

2023 March 26,

Net income $ 15,669 $ 8,676

Loss on debt extinguishment and financing transactions (a)

Loss (gain) on disposal of assets (b)

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

Consulting fees (c)

Tax effect of adjustments (d)

(57) 856 (613) 856

Consulting fees (b)

Tax effect of adjustments (c)

Adjusted net income $ 17,771 $ 9,815

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(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 (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 thirty-nine weeks ended September 24, 2022 and September 25, 2021, which includes provisions for U.S.

(b) 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.

(c) 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 April 1, 2023 and 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 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 April 1, 2023 compared to Thirteen Weeks Ended March 26, 2022

The following table sets forth our results of operations for the thirteen weeks ended April 1, 2023 and March 26, 2022 (dollars in thousands):

Thirteen Weeks Ended Increase / (Decrease)

September 24,

2022 September 25,

2023 March 26,

Royalty revenue, franchise fees and other $ 48,188 $ 35,070 $ 13,118 37.4 %

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Depreciation and amortization 2,989 2,227 762 34.2 %

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

Loss on disposal of assets 77 444 (367) (82.7) %

Total costs and expenses 83,049 59,598 23,451 39.3 %

1 unchanged sentence

Interest expense, net 4,573 4,192 381 9.1 %

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

Loss on debt extinguishment — 814 (814) (100.0) %

Other expense 188 65 123 189.2 %

Income before income tax expense 20,911 11,536 9,375 81.3 %

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Net income $ 15,669 $ 8,676 $ 6,993 80.6 %

* 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 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.

During the thirteen weeks ended April 1, 2023, total revenue was $108.7 million, an increase of $32.5 million, or 42.7%, compared to $76.2 million in the comparable period in 2022.

Royalty revenue, franchise fees and other increased $13.1 million, of which $3.6 million was due to 199 net franchise restaurant openings since March 26, 2022, and $7.8 million was due to domestic same store sales growth of 20.1%.

Other revenue increased by $1.7 million primarily due to an increase in vendor rebates.

Advertising fees increased $14.9 million, of which $8.7 million was due to a 30.4% increase in system-wide sales during the fiscal first quarter 2023, and $6.2 million was 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.

Company-owned restaurant sales increased $4.5 million, due to an increase of $2.9 million related to the addition of six net new company-owned restaurants since the prior year fiscal quarter.

The remainder of the increase was due to company-owned same store sales growth of 10.3%, which was driven by an increase in transactions.

Cost of sales.

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.

During the thirteen weeks ended April 1, 2023, cost of sales was $16.7 million, an increase of $1.0 million, or 6.5%, compared to $15.7 million in the comparable period in 2022.

Cost of sales as a percentage of company-owned restaurant sales was 72.4% in the thirteen weeks ended April 1, 2023, compared to 84.3% in the comparable period in 2022.

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

Thirteen Weeks Ended

September 24, 2022 September 25, 2021

April 1, 2023 March 26, 2022

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

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Vendor rebates (534) (2.3) % (407) (2.2) %

Cost of sales (excluding pre-opening expenses) 15,557 77.2 % 15,007 86.3 %

Pre-opening expenses 167 0.8 % 199 1.1 %

Total cost of sales $ 16,695 72.4 % $ 15,674 84.3 %

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.

Food, beverage and packaging costs as a percentage of company-owned restaurant sales were 32.4% in the thirteen weeks ended April 1, 2023, compared to 42.8% in the comparable period in 2022.

This improvement was primarily due to a 52.8% decrease in the cost of bone-in chicken wings as compared to the prior year period, partially offset by inflation in other food costs since the prior fiscal first quarter 2022.

Labor costs as a percentage of company-owned restaurant sales were 23.9% for the thirteen weeks ended April 1, 2023, compared to 25.8% in the comparable period in 2022.

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 10.3%.

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.

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 fiscal third quarter 2022.

This was partially offset by increases in company-owned restaurant wages during the thirteen weeks ended April 1, 2023.

Other restaurant operating expenses as a percentage of company-owned restaurant sales were 18.3% for the thirteen weeks ended April 1, 2023, compared to 17.8% in the comparable period in 2022.

The increase as a percentage of company-owned restaurant sales were primarily a result of the increase in the national advertising fund contribution rate to 5% from 4% effective the first day of the fiscal second quarter 2022.

This increase was partially offset by a decline in pre-opening expenses of $0.4 million related to company-owned restaurants opened in Manhattan, NY in the prior fiscal first quarter.

Advertising expenses.

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.

During the thirteen weeks ended April 1, 2023, advertising expenses were $39.6 million, an increase of $16.5 million compared to $23.2 million in the comparable period in 2022.

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 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.

During the thirteen weeks ended April 1, 2023, SG&A expense was $23.6 million, an increase of $5.6 million compared to $18.1 million in the comparable period in 2022.

The increase in SG&A expense was due to an increase of $2.8 million related to consulting fees associated with the Company’s strategic initiatives, a $1.6 million increase in incentive compensation and performance-based stock compensation expense recognized related to the Company’s performance, and a $0.6 million increase in headcount related expenses to support the growth in our business.

Depreciation and amortization.

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.

During the thirteen weeks ended April 1, 2023, depreciation expense was $3.0 million, an increase of $0.8 million compared to $2.2 million in the comparable period in 2022.

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 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 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 %

Advertising fees 83,672 59,672 24,000 40.2 %

Company-owned restaurant sales 57,505 53,232 4,273 8.0 %

Total revenue 252,654 210,474 42,180 20.0 %

Costs and expenses:

Cost of sales (1)

46,297 42,692 3,605 8.4 %

Advertising expenses 85,958 61,560 24,398 39.6 %

Selling, general and administrative 48,721 44,872 3,849 8.6 %

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

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 %

Operating income 63,062 59,538 3,524 5.9 %

Interest expense, net 15,920 11,230 4,690 41.8 %

Loss on debt extinguishment 814 — 814 100.0 %

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

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

Income tax expense 10,596 12,568 (1,972) (15.7) %

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 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 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):

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

Cost of sales:

Food, beverage and packaging costs $ 22,847 39.7 % $ 23,680 44.5 %

Labor costs 13,788 24.0 % 11,771 22.1 %

Other restaurant operating expenses 10,122 17.6 % 8,219 15.4 %

Vendor rebates (1,260) (2.2) % (1,187) (2.2) %

Cost of sales (excluding pre-opening expenses) 45,497 79.1 % 42,483 79.8 %

Pre-opening expenses 800 1.4 % 209 0.4 %

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 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 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.

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 current year fiscal period.

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.

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 current year fiscal period.

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 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 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 $4.7 million in stock-based compensation expense related to stock awards forfeited during the current year fiscal period.

Depreciation and amortization.

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 (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 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.

During the thirteen weeks ended April 1, 2023, interest expense, net was $4.6 million, an increase of $0.4 million compared to $4.2 million of interest expense, net in the comparable period in 2022.

The increase was due to an additional $1.8 million in interest expense relating to the securitized financing transaction completed on March 9, 2022, which increased our outstanding debt by $250 million.

This was partially offset by an increase of $1.4 million in interest income earned on our cash balances during the thirteen weeks ended April 1, 2023.

Loss on debt extinguishment.

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.

Loss on debt extinguishment in the prior fiscal first quarter was $0.8 million 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 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.

During the thirteen weeks ended April 1, 2023, we recognized income tax expense of $5.2 million yielding an effective tax rate of 25.1%, which is comparable to the effective tax rate of 24.8% in the prior year 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 September 24, 2022, the Company had $200.9 million of cash and restricted cash on its balance sheet.

As of April 1, 2023, the Company had $227.0 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 thirty-nine weeks ended September 24, 2022 and September 25, 2021 (in thousands):

Thirty-Nine Weeks Ended

September 24,

2022 September 25,

The following table shows summary cash flows information for the thirteen weeks ended April 1, 2023 and March 26, 2022 (in thousands):

Thirteen Weeks Ended

2023 March 26,

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 $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.

Net cash provided by operating activities was $35.7 million in the thirteen weeks ended April 1, 2023, an increase of $15.3 million from cash provided by operating activities of $20.4 million in the thirteen weeks ended March 26, 2022.

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

Investing activities .

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.

Our net cash used in investing activities was $4.3 million in the thirteen weeks ended April 1, 2023, a decrease of $0.5 million from cash used in investing activities of $4.8 million in the thirteen weeks ended March 26, 2022.

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

Financing activities .

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.

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 thirty-nine weeks ended September 24, 2022

Our net cash used in financing activities was $10.1 million in the thirteen weeks ended April 1, 2023, a change of $249.2 million from cash provided by financing activities of $239.1 million in the thirteen weeks ended March 26, 2022.

The change was primarily due to the net cash provided by additional borrowings under our 2022 Class A-2 Notes (as defined below) of $250 million in the first quarter of 2022.

Securitized financing facility .

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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 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.

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 Class A-2 Notes”).

No borrowings were outstanding under the 2022 Variable Funding Notes as of April 1, 2023.

We paid a quarterly cash dividend of $0.19 per share of common stock, aggregating $5.7 million in the first quarter of 2023.

On May 2, 2023 the Company’s Board of Directors approved a dividend of $0.19 per share, to be paid on June 9, 2023 to stockholders of record as of May 19, 2023, 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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These estimates and assumptions are affected by the application of our accounting policies.

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.

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.

Recent Accounting Pronouncements

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Special Note Regarding Forward-Looking Statements

This report includes statements of our expectations, intentions, plans and beliefs that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and are intended to come within the safe harbor protection provided by those sections.

This report includes statements of our expectations, intentions, plans and beliefs that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and are intended to come within the safe harbor protection provided by those sections.

These statements, which involve risks and uncertainties, relate to the discussion of our business strategies and our expectations concerning future operations, margins, profitability, trends, liquidity and capital resources and to analyses and other information that are based on forecasts of future results and estimates of amounts not yet determinable.

These forward-looking statements can generally by identified by the use of forward-looking terminology, including the terms “may,” “will,” “should,” “expect,” “intend,” “plan,” “outlook,” “anticipate,” “believe,” “think,” “estimate,” “seek,” “predict,” “could,” “project,” “potential” or, in each case, their negative or other variations or comparable terminology, although not all forward-looking statements are accompanied by such terms.

These forward-looking statements can generally be identified by the use of forward-looking terminology, including the terms “may,” “will,” “should,” “expect,” “intend,” “plan,” “outlook,” “anticipate,” “believe,” “think,” “estimate,” “seek,” “predict,” “could,” “project,” “potential” or, in each case, their negative or other variations or comparable terminology, although not all forward-looking statements are accompanied by such terms.

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.

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• our ability to effectively implement our growth strategy;

• risks associated with changes in food and supply costs;

• 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 food safety, food-borne illness and other health concerns;

• risks associated with changes in food and supply costs;

• 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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• risks associated with the geographic concentration of our business;

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

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

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When considering forward-looking statements in this report or that we make in other reports or statements, you should keep in mind the cautionary statements in this report and future reports we file with the SEC.

Any forward-looking statements made in this report speak only as of the date of the report, unless specified otherwise.

New risks and uncertainties arise from time to time, and we cannot predict when they may arise or how they may affect us.

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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