Wingstop Inc. 10-Q

Item 1. Financial Statements WINGSTOP INC. AND SUBSIDIARIES Consolidated Balance Sheets (amounts in thousands, except share and par value amounts) April 1, 2023 December 31, 2022 (Unaudited) Assets Current assets Cash and cash equivalents $ 196,198 $ 184,496 Restricted cash 13,281 13,296 Accounts receivable, net 10,137 9,461 Prepaid expenses and other current assets 3,061 4,252 Advertising fund assets, restricted 26,725 15,167 Total current assets 249,402 226,672 Property and equipment, net 71,518 66,851 Goodwill 62,514 62,514 Trademarks 32,700 32,700 Customer relationships, net 8,696 9,015 Other non-current assets 26,467 26,438 Total assets $ 451,297 $ 424,190 Liabilities and stockholders' deficit Current liabilities Accounts payable $ 6,848 $ 5,219 Other current liabilities 38,438 34,726 Current portion of debt 7,300 7,300 Advertising fund liabilities 26,725 15,167 Total current liabilities 79,311 62,412 Long-term debt, net 705,483 706,846 Deferred revenues, net of current 27,667 27,052 Deferred income tax liabilities, net 3,380 4,180 Other non-current liabilities 15,246 14,561 Total liabilities 831,087 815,051 Commitments and contingencies (see Note 7) Stockholders' deficit Common stock, $ 0.01 par value; 100,000,000 shares authorized; 29,968,872 and 29,932,668 shares issued and outstanding as of April 1, 2023 and December 31, 2022, respectively 300 300 Additional paid-in-capital 809 2,797 Retained deficit ( 380,409 ) ( 393,321 ) Accumulated other comprehensive loss ( 490 ) ( 637 ) Total stockholders' deficit ( 379,790 ) ( 390,861 ) Total liabilities and stockholders' deficit $ 451,297 $ 424,190 See accompanying notes to consolidated financial statements. 4 WINGSTOP INC. AND SUBSIDIARIES Consolidated Statements of Comprehensive Income (amounts in thousands, except per share data) (Unaudited) Thirteen Weeks Ended April 1, 2023 March 26, 2022 Revenue: Royalty revenue, franchise fees and other $ 48,188 $ 35,070 Advertising fees 37,463 22,539 Company-owned restaurant sales 23,070 18,596 Total revenue 108,721 76,205 Costs and expenses: Cost of sales (1) 16,695 15,674 Advertising expenses 39,643 23,167 Selling, general and administrative 23,645 18,086 Depreciation and amortization 2,989 2,227 Loss on disposal of assets 77 444 Total costs and expenses 83,049 59,598 Operating income 25,672 16,607 Interest expense, net 4,573 4,192 Loss on debt extinguishment — 814 Other expense 188 65 Income before income tax expense 20,911 11,536 Income tax expense 5,242 2,860 Net income $ 15,669 $ 8,676 Earnings per share Basic $ 0.52 $ 0.29 Diluted $ 0.52 $ 0.29 Weighted average shares outstanding Basic 29,947 29,851 Diluted 30,031 29,974 Dividends per share $ 0.19 $ 4.17 Other comprehensive income (loss) Currency translation adjustment $ 147 $ ( 66 ) Other comprehensive income (loss) 147 ( 66 ) Comprehensive income $ 15,816 $ 8,610 (1) Cost of sales includes all operating expenses of company-owned restaurants, including advertising expenses, and excludes depreciation and amortization, which are presented separately. See accompanying notes to consolidated financial statements. 5 WINGSTOP INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Deficit For the Thirteen Weeks Ended March 26, 2022 and April 1, 2023 (amounts in thousands, except share data) (Unaudited) Common Stock Shares Amount Additional Paid-In Capital Retained Deficit Accumulated Other Comprehensive Loss Total Stockholders’ Deficit Balance at December 25, 2021 29,837,454 $ 299 $ 463 $ ( 310,031 ) $ ( 256 ) $ ( 309,525 ) Net income — — — 8,676 — 8,676 Shares issued under stock plans 41,289 — 125 — — 125 Tax payments for restricted stock upon vesting ( 1,923 ) — — ( 298 ) — ( 298 ) Stock-based compensation expense — — 2,191 — — 2,191 Dividends declared on common stock and equivalents — — ( 2,370 ) ( 122,960 ) — ( 125,330 ) Currency translation adjustment — — — — ( 66 ) ( 66 ) Balance at March 26, 2022 29,876,820 $ 299 $ 409 $ ( 424,613 ) $ ( 322 ) $ ( 424,227 ) Common Stock Shares Amount Additional Paid-In Capital Retained Deficit Accumulated Other Comprehensive Loss Total Stockholders’ Deficit Balance at December 31, 2022 29,932,668 $ 300 $ 2,797 $ ( 393,321 ) $ ( 637 ) $ ( 390,861 ) Net income — — — 15,669 — 15,669 Shares issued under stock plans 49,817 — 111 — — 111 Tax payments for restricted stock upon vesting ( 13,613 ) — — ( 2,292 ) — ( 2,292 ) Stock-based compensation expense — — 3,345 — — 3,345 Dividends declared on common stock and equivalents — — ( 5,444 ) ( 465 ) — ( 5,909 ) Currency translation adjustment — — — — 147 147 Balance at April 1, 2023 29,968,872 $ 300 $ 809 $ ( 380,409 ) $ ( 490 ) $ ( 379,790 ) See accompanying notes to consolidated financial statements. 6 WINGSTOP INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (amounts in thousands) (Unaudited) Thirteen Weeks Ended April 1, 2023 March 26, 2022 Operating activities Net income $ 15,669 $ 8,676 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 2,989 2,227 Deferred income taxes ( 800 ) ( 490 ) Stock-based compensation expense 3,345 2,191 Loss on disposal of assets 77 444 Amortization of debt issuance costs 515 373 Loss on debt extinguishment — 814 Changes in operating assets and liabilities: Accounts receivable ( 676 ) 608 Prepaid expenses and other assets 1,647 263 Advertising fund assets and liabilities, net 9,605 9,403 Accounts payable and other current liabilities 2,633 ( 2,931 ) Deferred revenue 654 ( 1,125 ) Other non-current liabilities 40 ( 87 ) Cash provided by operating activities 35,698 20,366 Investing activities Purchases of property and equipment ( 4,319 ) ( 6,293 ) Proceeds from sales of assets — 1,479 Cash used in investing activities ( 4,319 ) ( 4,814 ) Financing activities Proceeds from exercise of stock options 111 125 Borrowings of long-term debt — 250,000 Repayments of long-term debt ( 1,825 ) — Payment of deferred financing costs and other debt-related costs — ( 5,442 ) Tax payments for restricted stock upon vesting ( 2,292 ) ( 298 ) Dividends paid ( 6,081 ) ( 5,294 ) Cash provided by (used in) financing activities ( 10,087 ) 239,091 Net increase in cash, cash equivalents, and restricted cash 21,292 254,643 Cash, cash equivalents, and restricted cash at beginning of period 205,715 54,906 Cash, cash equivalents, and restricted cash at end of period $ 227,007 $ 309,549 Supplemental information: Accrued capital expenditures $ 6,668 $ 5,189 See accompanying notes to consolidated financial statements. 7 WINGSTOP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) (1) Basis of Presentation and Update to Significant Accounting Policies Nature of operations. Wingstop Inc., together with its consolidated subsidiaries (collectively, “Wingstop” or the “Company”), is in the business of franchising and operating Wingstop restaurants. As of April 1, 2023, the Company had a total of 1,996 restaurants in its system. The Company’s restaurant base is approximately 98 % franchised, with 1,953 franchised locations (including 243 international locations) and 43 company-owned restaurants as of April 1, 2023. Basis of presentation. The accompanying unaudited consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. Consequently, financial information and disclosures normally included in financial statements prepared annually in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted. Balance sheet amounts are as of April 1, 2023 and December 31, 2022, and operating results are for the thirteen weeks ended April 1, 2023 and March 26, 2022. In the Company’s opinion, all necessary adjustments have been made for the fair presentation of the results of the interim periods presented. The results of operations for such interim periods are not necessarily indicative of the results to be expected for the full year. The accompanying interim unaudited consolidated financial statements should be read in conjunction with the audited financial statements and the related notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022. Fiscal year. The Company uses a 52- or 53-week fiscal year that ends on the last Saturday of the calendar year. Fiscal years 2023 and 2022 have 52 and 53 weeks, respectively. Cash, Cash Equivalents, and Restricted Cash. Cash, cash equivalents, and restricted cash within the Consolidated Balance Sheets and the Consolidated Statements of Cash Flows as of April 1, 2023 and December 31, 2022 were as follows (in thousands): April 1, 2023 December 31, 2022 Cash and cash equivalents $ 196,198 $ 184,496 Restricted cash 13,281 13,296 Restricted cash, included in Advertising fund assets, restricted 17,528 7,923 Total cash, cash equivalents, and restricted cash $ 227,007 $ 205,715 Recently issued accounting pronouncements. We reviewed all recently issued accounting pronouncements and concluded that they were either not applicable or not expected to have a significant impact on our consolidated financial statements. (2) Earnings per Share Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of shares of common stock outstanding for the reporting period. Diluted earnings per share reflects the potential dilution that could occur if securities convertible into, or other contracts to issue, common stock were exercised or converted into common stock. For the calculation of diluted earnings per share, the basic weighted average number of shares is increased by the dilutive effect of the exercise and vesting of stock options and restricted stock units, respectively, as determined using the treasury stock method. 8 WINGSTOP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) Basic weighted average shares outstanding is reconciled to diluted weighted average shares outstanding as follows (in thousands): Thirteen Weeks Ended April 1, 2023 March 26, 2022 Basic weighted average shares outstanding 29,947 29,851 Dilutive shares 84 123 Diluted weighted average shares outstanding 30,031 29,974 For the thirteen weeks ended April 1, 2023 and March 26, 2022, equity awards representing approximately 13,000 and 8,000 shares, respectively, were excluded from the dilutive earnings per share calculation because the effect would have been anti-dilutive. (3) Dividends In connection with the Company’s regular dividend program, on February 21, 2023, our Board of Directors declared a quarterly dividend of $ 0.19 per share of common stock, resulting in a total dividend of approximately $ 5.7 million. This dividend was paid on March 31, 2023 to stockholders of record as of March 10, 2023. Subsequent to the first quarter, on May 2, 2023, the Company’s Board of Directors declared a quarterly dividend of $ 0.19 per share of common stock for stockholders of record as of May 19, 2023. The regular quarterly dividend is to be paid on June 9, 2023, totaling approximately $ 5.7 million. (4) Fair Value Measurements Fair value is the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. Assets and liabilities are classified using a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value as follows: Level 1 — Unadjusted quoted prices for identical instruments traded in active markets. Level 2 — Observable market-based inputs or unobservable inputs corroborated by market data. Level 3 — Unobservable inputs reflecting management’s estimates and assumptions. The carrying values of cash and cash equivalents, accounts receivable, and accounts payable approximate fair value due to their short-term nature. Fair value of debt and the investment in bonds issued by the Company’s United Kingdom master franchisee, Lemon Pepper Holdings Ltd. (“LPH”), are determined on a non-recurring basis, which results are summarized as follows (in thousands): Fair Value Hierarchy April 1, 2023 December 31, 2022 Carrying Value Fair Value Carrying Value Fair Value Securitized Financing Facility: 2020-1 Class A-2 Senior Secured Notes (1) Level 2 $ 474,000 $ 408,233 $ 475,200 $ 406,462 2022-1 Class A-2 Senior Secured Notes (1) Level 2 $ 248,750 $ 215,169 $ 249,375 $ 215,709 Investments in bonds of LPH (2) Level 3 $ 3,305 $ 4,030 $ 3,196 $ 3,906 (1) The fair value of the 2020-1 and 2022-1 Class A-2 Senior Secured Notes was estimated using available market information. (2) The fair value approximates discounted cash flows using current market rates for debt investments with similar maturities and credit risk. The Company also measures certain non-financial assets (primarily long-lived assets, intangible assets, and goodwill) at fair value on a non-recurring basis in connection with its periodic evaluations of such assets for potential impairment. 9 WINGSTOP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) (5) Income Taxes Income tax expense and the effective tax rate were $ 5.2 million and 25.1 %, respectively, for the thirteen weeks ended April 1, 2023, and $ 2.9 million and 24.8 %, respectively, for the thirteen weeks ended March 26, 2022. The effective tax rate remained comparable to the prior fiscal first quarter. (6) Debt Obligations Long-term debt consisted of the following components (in thousands): April 1, 2023 December 31, 2022 2020-1 Class A-2 Senior Secured Notes $ 474,000 $ 475,200 2022-1 Class A-2 Senior Secured Notes 248,750 249,375 Debt issuance costs, net of amortization ( 9,967 ) ( 10,429 ) Total debt 712,783 714,146 Less: current portion of debt ( 7,300 ) ( 7,300 ) Long-term debt, net $ 705,483 $ 706,846 The Company’s outstanding debt was issued by Wingstop Funding LLC, a limited-purpose, bankruptcy-remote, wholly-owned indirect subsidiary of Wingstop Inc. and consists of (i) Series 2020-1 2.84 % Fixed Rate Senior Secured Notes, Class A-2 (the “2020 Class A-2 Notes”), (ii) Series 2022-1 3.734 % Fixed Rate Senior Secured Notes, Class A-2 (the “2022 Class A-2 Notes”), and (iii) 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. No borrowings were outstanding under the 2022 Variable Funding Notes as of April 1, 2023 and December 31, 2022. The 2020 Class A-2 Notes and 2022 Notes were issued in securitization transactions, and are guaranteed by certain limited-purpose, bankruptcy-remote, wholly-owned indirect subsidiaries of the Company and secured by a security interest in substantially all of their assets, including certain domestic and foreign revenue-generating assets, consisting principally of franchise-related agreements, intellectual property, and vendor rebate contracts. (7) Commitments and Contingencies The Company is subject to legal proceedings, claims, and liabilities, such as employment-related claims and premises-liability cases, which arise in the ordinary course of business and are generally covered by insurance. In the opinion of management, the amount of ultimate liability with respect to such actions is not likely to have a material adverse impact on the Company’s financial position, results of operations, or cash flows. (8) Stock-Based Compensation During the thirteen weeks ended April 1, 2023, the Company granted 38,338 restricted stock units (“RSUs”) to certain employees. The RSUs granted to certain employees generally vest in equal annual amounts over a three-year period, subsequent to the grant date and had a weighted-average grant-date fair value of $ 170.17 per unit. In addition, the Company granted 34,242 performance stock units (“PSUs”) to certain employees during the thirteen weeks ended April 1, 2023. Of the total PSUs granted, 27,258 PSUs are subject to a service condition and a performance vesting condition based on return on incremental invested capital (“ROI PSUs”). The ROI PSUs are generally eligible to cliff-vest approximately three years from the grant date, and the maximum vesting percentage that could be realized for each of the ROI PSUs is 250 % based on the level of performance achieved for the awards. The remaining 6,984 PSUs granted are subject to a service condition and a performance vesting condition based on the number of net new restaurants opened over the performance period (“NNR PSUs”). The NNR PSUs vest in equal annual amounts over a three-year period, and the maximum vesting percentage that could be realized for each of the NNR PSUs is 100 % based on the level of performance achieved for the awards. The PSUs had a weighted-average grant-date fair value of $ 169.77 per unit. Total compensation cost for the PSUs is determined based on the most likely outcome of the performance condition and the number of awards expected to vest based on the outcome. 10 WINGSTOP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) Total compensation expense related to all share-based awards was $ 3.3 million and $ 2.2 million for the thirteen weeks ended April 1, 2023 and March 26, 2022, respectively, and was included in Selling, general and administrative (“SG&A”) expense in the Consolidated Statements of Comprehensive Income. (9) Revenue from Contracts with Customers The following table represents a disaggregation of revenue from contracts with customers for the thirteen weeks ended April 1, 2023 and March 26, 2022 (in thousands): Thirteen Weeks Ended April 1, 2023 March 26, 2022 Royalty revenue $ 43,513 $ 32,204 Advertising fees and related income 37,463 22,539 Franchise fees 1,061 960 Franchise fee, development fee, and international territory fee payments received by the Company are recorded as deferred revenue on the Consolidated Balance Sheets, which represents a contract liability. Deferred revenue is reduced as fees are recognized in revenue over the term of the franchise license for the respective restaurant. As the term of the franchise license is typically ten years , substantially all of the franchise fee revenue recognized in the thirteen weeks ended April 1, 2023 was included in the deferred revenue balance as of December 31, 2022. Approximately $ 8.4 million and $ 7.7 million of deferred revenue as of April 1, 2023 and December 31, 2022, respectively, relates to restaurants that have not yet opened, so the fees are not yet being amortized. The weighted average remaining amortization period for deferred franchise and renewal fees related to open restaurants is 7.1 years. The Company did not have any material contract assets as of April 1, 2023. (10) Subsequent Event Subsequent to the end of first fiscal quarter 2023, the Company acquired two existing restaurants in the Dallas, TX market from a franchisee. The total purchase price was $ 4.4 million, funded by cash on hand. The restaurant acquisitions are accounted for as business combinations and the Company is still determining the estimated fair value of assets acquired and liabilities assumed. The excess of the purchase price over the aggregate fair value of assets acquired will be allocated to goodwill. The results of operations of these locations will be included in our Consolidated Statements of Comprehensive Income as of the respective dates of acquisition. 11