Wingstop Inc. 10-Q

Item 1. Financial Statements WINGSTOP INC. AND SUBSIDIARIES Consolidated Balance Sheets (amounts in thousands, except share and par value amounts) July 1, 2023 December 31, 2022 (Unaudited) Assets Current assets Cash and cash equivalents $ 188,500 $ 184,496 Restricted cash 11,444 13,296 Accounts receivable, net 10,747 9,461 Prepaid expenses and other current assets 5,548 4,252 Advertising fund assets, restricted 21,944 15,167 Total current assets 238,183 226,672 Property and equipment, net 78,570 66,851 Goodwill 65,175 62,514 Trademarks 32,700 32,700 Customer relationships, net 8,378 9,015 Other non-current assets 28,211 26,438 Total assets $ 451,217 $ 424,190 Liabilities and stockholders' deficit Current liabilities Accounts payable $ 6,112 $ 5,219 Other current liabilities 30,732 34,726 Current portion of debt — 7,300 Advertising fund liabilities 21,944 15,167 Total current liabilities 58,788 62,412 Long-term debt, net 711,411 706,846 Deferred revenues, net of current 28,296 27,052 Deferred income tax liabilities, net 3,150 4,180 Other non-current liabilities 14,923 14,561 Total liabilities 816,568 815,051 Commitments and contingencies (see Note 7) Stockholders' deficit Common stock, $ 0.01 par value; 100,000,000 shares authorized; 29,977,614 and 29,932,668 shares issued and outstanding as of July 1, 2023 and December 31, 2022, respectively 300 300 Additional paid-in-capital 2,038 2,797 Retained deficit ( 367,327 ) ( 393,321 ) Accumulated other comprehensive loss ( 362 ) ( 637 ) Total stockholders' deficit ( 365,351 ) ( 390,861 ) Total liabilities and stockholders' deficit $ 451,217 $ 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 Twenty-Six Weeks Ended July 1, 2023 June 25, 2022 July 1, 2023 June 25, 2022 Revenue: Royalty revenue, franchise fees and other $ 47,984 $ 36,044 $ 96,172 $ 71,114 Advertising fees 36,596 28,987 74,059 51,526 Company-owned restaurant sales 22,593 18,746 45,663 37,342 Total revenue 107,173 83,777 215,894 159,982 Costs and expenses: Cost of sales (1) 16,642 14,899 33,337 30,573 Advertising expenses 38,729 29,685 78,372 52,852 Selling, general and administrative 22,128 13,949 45,773 32,035 Depreciation and amortization 3,218 2,547 6,207 4,774 Loss on disposal of assets — 323 77 767 Total costs and expenses 80,717 61,403 163,766 121,001 Operating income 26,456 22,374 52,128 38,981 Interest expense, net 4,244 5,986 8,817 10,178 Loss on debt extinguishment — — — 814 Other (income) expense ( 46 ) 26 142 91 Income before income tax expense 22,258 16,362 43,169 27,898 Income tax expense 6,077 3,055 11,319 5,915 Net income $ 16,181 $ 13,307 $ 31,850 $ 21,983 Earnings per share Basic $ 0.54 $ 0.45 $ 1.06 $ 0.74 Diluted $ 0.54 $ 0.44 $ 1.06 $ 0.73 Weighted average shares outstanding Basic 29,972 29,882 29,959 29,866 Diluted 30,049 29,914 30,043 29,944 Dividends per share $ 0.19 $ 0.17 $ 0.38 $ 4.34 Other comprehensive income (loss) Currency translation adjustment $ 128 $ ( 271 ) $ 276 $ ( 337 ) Other comprehensive income (loss) 128 ( 271 ) 276 ( 337 ) Comprehensive income $ 16,309 $ 13,036 $ 32,126 $ 21,646 (1) Cost of sales includes all operating expenses of company-owned restaurants, including advertising expenses, and excludes depreciation and amortization, which are presented separately. See accompanying notes to consolidated financial statements. 5 WINGSTOP INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Deficit For the Twenty-Six Weeks Ended June 25, 2022 (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 ) Net income — — — 13,307 — 13,307 Shares issued under stock plans 37,594 — 1,838 — — 1,838 Tax payments for restricted stock upon vesting ( 46 ) — — ( 4 ) — ( 4 ) Stock-based compensation expense, net of forfeitures — — ( 1,601 ) — — ( 1,601 ) Dividends declared on common stock and equivalents — — — ( 4,512 ) — ( 4,512 ) Currency translation adjustment — — — — ( 271 ) ( 271 ) Balance at June 25, 2022 29,914,368 $ 299 $ 646 $ ( 415,822 ) $ ( 593 ) $ ( 415,470 ) See accompanying notes to consolidated financial statements. 6 WINGSTOP INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Deficit For the Twenty-Six Weeks Ended July 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 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 ) Net income — — — 16,181 — 16,181 Shares issued under stock plans 9,084 — 362 — — 362 Tax payments for restricted stock upon vesting ( 342 ) — — ( 69 ) — ( 69 ) Stock-based compensation expense — — 3,546 — — 3,546 Dividends declared on common stock and equivalents — — ( 2,679 ) ( 3,030 ) — ( 5,709 ) Currency translation adjustment — — — — 128 128 Balance at July 1, 2023 29,977,614 $ 300 $ 2,038 $ ( 367,327 ) $ ( 362 ) $ ( 365,351 ) See accompanying notes to consolidated financial statements. 7 WINGSTOP INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (amounts in thousands) (Unaudited) Twenty-Six Weeks Ended July 1, 2023 June 25, 2022 Operating activities Net income $ 31,850 $ 21,983 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 6,207 4,774 Deferred income taxes ( 1,030 ) ( 1,534 ) Stock-based compensation expense 6,891 590 Loss on disposal of assets 77 767 Amortization of debt issuance costs 1,021 879 Loss on debt extinguishment — 814 Changes in operating assets and liabilities: Accounts receivable ( 1,286 ) ( 241 ) Prepaid expenses and other assets ( 4 ) ( 1,173 ) Advertising fund assets and liabilities, net 6,235 5,814 Accounts payable and other current liabilities ( 3,528 ) ( 2,216 ) Deferred revenue 1,442 ( 844 ) Other non-current liabilities 92 ( 149 ) Cash provided by operating activities 47,967 29,464 Investing activities Purchases of property and equipment ( 17,002 ) ( 12,695 ) Acquisition of restaurants from franchisee ( 4,396 ) — Proceeds from sales of assets — 3,637 Payments for investments ( 808 ) — Cash used in investing activities ( 22,206 ) ( 9,058 ) Financing activities Proceeds from exercise of stock options 473 1,963 Borrowings of long-term debt — 250,000 Repayments of long-term debt ( 3,650 ) — Payment of deferred financing costs and other debt-related costs — ( 5,442 ) Tax payments for restricted stock upon vesting ( 2,361 ) ( 302 ) Dividends paid ( 11,836 ) ( 129,906 ) Cash provided by (used in) financing activities ( 17,374 ) 116,313 Net increase in cash, cash equivalents, and restricted cash 8,387 136,719 Cash, cash equivalents, and restricted cash at beginning of period 205,715 54,906 Cash, cash equivalents, and restricted cash at end of period $ 214,102 $ 191,625 Supplemental information: Accrued capital expenditures $ 4,179 $ 6,831 8 See accompanying notes to consolidated financial statements. 9 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 July 1, 2023, the Company had a total of 2,046 restaurants in its system. The Company’s restaurant base is approximately 98 % franchised, with 2,001 franchised locations (including 252 international locations) and 45 company-owned restaurants as of July 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 July 1, 2023 and December 31, 2022, and operating results are for the thirteen and twenty-six weeks ended July 1, 2023 and June 25, 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 July 1, 2023 and December 31, 2022 were as follows (in thousands): July 1, 2023 December 31, 2022 Cash and cash equivalents $ 188,500 $ 184,496 Restricted cash 11,444 13,296 Restricted cash, included in Advertising fund assets, restricted 14,158 7,923 Total cash, cash equivalents, and restricted cash $ 214,102 $ 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. 10 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 Twenty-Six Weeks Ended July 1, 2023 June 25, 2022 July 1, 2023 June 25, 2022 Basic weighted average shares outstanding 29,972 29,882 29,959 29,866 Dilutive shares 77 32 84 78 Diluted weighted average shares outstanding 30,049 29,914 30,043 29,944 For the thirteen weeks ended July 1, 2023 and June 25, 2022, equity awards representing approximately 1,000 and 77,000 shares, respectively, were excluded from the dilutive earnings per share calculation because the effect would have been anti-dilutive. For the twenty-six weeks ended July 1, 2023 and June 25, 2022, equity awards representing approximately 3,000 and 38,000 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, in each of the first two quarters of 2023, our Board of Directors declared a quarterly dividend of $ 0.19 per share of common stock, which, in aggregate, totaled $ 11.4 million, or $ 0.38 per share of common stock, and which was paid during the twenty-six weeks ended July 1, 2023. Subsequent to the second quarter, on August 1, 2023, the Company’s Board of Directors declared a quarterly dividend of $ 0.22 per share of common stock for stockholders of record as of August 18, 2023. The regular quarterly dividend is to be paid on September 8, 2023, totaling approximately $ 6.6 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. 11 WINGSTOP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) 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 July 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 $ 472,800 $ 409,620 $ 475,200 $ 406,462 2022-1 Class A-2 Senior Secured Notes (1) Level 2 $ 248,125 $ 214,628 $ 249,375 $ 215,709 Investments in bonds of LPH (2) Level 3 $ 3,450 $ 4,197 $ 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. (5) Income Taxes Income tax expense and the effective tax rate were $ 6.1 million and 27.3 %, respectively, for the thirteen weeks ended July 1, 2023, and $ 3.1 million and 18.7 %, respectively, for the thirteen weeks ended June 25, 2022. Income tax expense and the effective tax rate were $ 11.3 million and 26.2 %, respectively, for the twenty-six weeks ended July 1, 2023, and $ 5.9 million and 21.2 %, respectively, for the twenty-six weeks ended June 25, 2022. The main component of the year-over-year increase in effective tax rates was the impact of stock awards forfeited during the thirteen and twenty-six weeks ended June 25, 2022. (6) Debt Obligations Long-term debt consisted of the following components (in thousands): July 1, 2023 December 31, 2022 2020-1 Class A-2 Senior Secured Notes $ 472,800 $ 475,200 2022-1 Class A-2 Senior Secured Notes 248,125 249,375 Debt issuance costs, net of amortization ( 9,514 ) ( 10,429 ) Total debt 711,411 714,146 Less: current portion of debt — ( 7,300 ) Long-term debt, net $ 711,411 $ 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 July 1, 2023 and December 31, 2022. As of July 1, 2023, the Company’s leverage ratio under the 2020 Class A-2 Notes and the 2022 Class A-2 Notes was less than 5.0 x. Per the terms of the Company’s debt agreements, principal payments can be suspended at the borrower’s election until the repayment date as long as the Company maintains a leverage ratio of less than 5.0 x. Accordingly, the Company elected to suspend payments following the principal payment made in the second quarter of 2023, and the entire outstanding balance of $ 720.9 million of the 2020 Class A-2 Notes and the 2022 Class A-2 Notes has been classified as long-term debt due after fiscal year 2026. 12 WINGSTOP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) 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, including claims and actions resulting from employment-related and franchise-related matters, 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 twenty-six weeks ended July 1, 2023, the Company granted 41,885 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 $ 172.73 per unit. In addition, the Company granted 37,414 performance stock units (“PSUs”) to certain employees during the twenty-six weeks ended July 1, 2023. Of the total PSUs granted, 30,430 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 $ 172.22 per unit. Total compensation cost for the PSUs is determined based on the most likely outcome of the performance condition and the number of awards expected to vest based on the outcome. Total compensation expense related to all share-based awards, net of forfeitures recognized, was $ 6.9 million and $ 0.6 million for the twenty-six weeks ended July 1, 2023 and June 25, 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 and twenty-six weeks ended July 1, 2023 and June 25, 2022 (in thousands): Thirteen Weeks Ended Twenty-Six Weeks Ended July 1, 2023 June 25, 2022 July 1, 2023 June 25, 2022 Royalty revenue $ 43,271 $ 33,037 $ 86,785 $ 65,241 Advertising fees and related income 36,596 28,987 74,059 51,526 Franchise fees 1,107 1,004 2,169 1,963 Franchise fee, development fee, and international territory fee payments received by the Company are recorded as deferred revenue on the Consolidated Balance Sheets, which represents a contract liability. Deferred revenue is reduced as fees are recognized in revenue over the term of the franchise license for the respective restaurant. As the term of the franchise license is typically ten years , substantially all of the franchise fee revenue recognized in the thirteen and twenty-six weeks ended July 1, 2023 was included in the deferred revenue balance as of December 31, 2022. Approximately $ 8.8 million and $ 7.7 million of deferred revenue as of July 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 July 1, 2023. 13 WINGSTOP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) (10) Acquisitions of Company-owned Restaurants In the second fiscal quarter 2023, the Company acquired two existing restaurants from a franchisee. The combined purchase price was $ 4.4 million and was funded by cash flow from operations. The following table summarizes the allocations of the purchase price to the estimated fair value of assets acquired and liabilities assumed at the date of the acquisition (in thousands): Purchase Price Allocation Working capital $ 13 Property and equipment 92 Reacquired franchise rights 1,630 Goodwill 2,661 Total purchase price $ 4,396 The excess of the purchase price over the aggregate fair value of assets acquired was allocated to goodwill and is attributable to the benefits expected as a result of the acquisition, including sales and unit growth opportunities. All of the goodwill from the acquisition is expected to be deductible for federal income tax purposes. Pro-forma financial information of the combined entities is not presented due to the immaterial impact of the financial results of the acquired restaurants on our consolidated financial statements. 14