Wingstop Inc. 10-Q

Item 1. Financial Statements WINGSTOP INC. AND SUBSIDIARIES Consolidated Balance Sheets (amounts in thousands, except share and par value amounts) March 30, 2024 December 30, 2023 (Unaudited) Assets Current assets Cash and cash equivalents $ 108,305 $ 90,216 Restricted cash 11,444 11,444 Accounts receivable, net 13,643 12,408 Prepaid expenses and other current assets 3,774 4,948 Advertising fund assets, restricted 33,710 25,328 Total current assets 170,876 144,344 Property and equipment, net 99,345 91,292 Goodwill 67,708 67,708 Trademarks 32,700 32,700 Customer relationships, net 7,424 7,740 Other non-current assets 34,198 34,041 Total assets $ 412,251 $ 377,825 Liabilities and stockholders' deficit Current liabilities Accounts payable $ 6,444 $ 4,725 Other current liabilities 38,675 40,951 Advertising fund liabilities 33,710 25,328 Total current liabilities 78,829 71,004 Long-term debt, net 712,790 712,327 Deferred revenues, net of current 31,543 30,145 Deferred income tax liabilities, net 5,634 3,721 Other non-current liabilities 17,834 17,994 Total liabilities 846,630 835,191 Commitments and contingencies (see Note 7) Stockholders' deficit Common stock, $ 0.01 par value; 100,000,000 shares authorized; 29,369,978 and 29,337,920 shares issued and outstanding as of March 30, 2024 and December 30, 2023, respectively 294 293 Additional paid-in-capital 918 2,676 Retained deficit ( 435,226 ) ( 459,994 ) Accumulated other comprehensive loss ( 365 ) ( 341 ) Total stockholders' deficit ( 434,379 ) ( 457,366 ) Total liabilities and stockholders' deficit $ 412,251 $ 377,825 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 March 30, 2024 April 1, 2023 Revenue: Royalty revenue, franchise fees and other $ 67,097 $ 48,188 Advertising fees 50,149 37,463 Company-owned restaurant sales 28,543 23,070 Total revenue 145,789 108,721 Costs and expenses: Cost of sales (1) 21,271 16,695 Advertising expenses 53,192 39,643 Selling, general and administrative 25,178 23,645 Depreciation and amortization 3,410 2,989 Loss on disposal of assets — 77 Total costs and expenses 103,051 83,049 Operating income 42,738 25,672 Interest expense, net 4,544 4,573 Other (income) expense ( 303 ) 188 Income before income tax expense 38,497 20,911 Income tax expense 9,750 5,242 Net income $ 28,747 $ 15,669 Earnings per share Basic $ 0.98 $ 0.52 Diluted $ 0.98 $ 0.52 Weighted average shares outstanding Basic 29,349 29,947 Diluted 29,478 30,031 Dividends per share $ 0.22 $ 0.19 Other comprehensive income (loss) Currency translation adjustment $ ( 24 ) $ 147 Other comprehensive income (loss) ( 24 ) 147 Comprehensive income $ 28,723 $ 15,816 (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 April 1, 2023 and March 30, 2024 (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, net of forfeitures — — 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 ) Common Stock Shares Amount Additional Paid-In Capital Retained Deficit Accumulated Other Comprehensive Loss Total Stockholders’ Deficit Balance at December 30, 2023 29,337,920 $ 293 $ 2,676 $ ( 459,994 ) $ ( 341 ) $ ( 457,366 ) Net income — — — 28,747 — 28,747 Shares issued under stock plans 42,918 1 707 — — 708 Tax payments for restricted stock upon vesting ( 10,860 ) — — ( 3,717 ) — ( 3,717 ) Stock-based compensation expense, net of forfeitures — — 3,812 — — 3,812 Dividends declared on common stock and equivalents — — ( 6,277 ) ( 262 ) — ( 6,539 ) Currency translation adjustment — — — — ( 24 ) ( 24 ) Balance at March 30, 2024 29,369,978 294 918 ( 435,226 ) ( 365 ) ( 434,379 ) See accompanying notes to consolidated financial statements. 6 WINGSTOP INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (amounts in thousands) (Unaudited) Thirteen Weeks Ended March 30, 2024 April 1, 2023 Operating activities Net income $ 28,747 $ 15,669 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 3,410 2,989 Deferred income taxes 1,913 ( 800 ) Stock-based compensation expense 3,812 3,345 Loss on disposal of assets — 77 Amortization of debt issuance costs 516 515 Changes in operating assets and liabilities: Accounts receivable ( 1,235 ) ( 676 ) Prepaid expenses and other assets 391 1,647 Advertising fund assets and liabilities, net 5,297 9,605 Accounts payable and other current liabilities ( 127 ) 2,633 Deferred revenue 1,922 654 Other non-current liabilities 13 40 Cash provided by operating activities 44,659 35,698 Investing activities Purchases of property and equipment ( 11,158 ) ( 4,319 ) Payments for investments ( 500 ) — Cash used in investing activities ( 11,658 ) ( 4,319 ) Financing activities Proceeds from exercise of stock options 708 111 Repayments of long-term debt — ( 1,825 ) Tax payments for restricted stock upon vesting ( 3,717 ) ( 2,292 ) Dividends paid ( 6,606 ) ( 6,081 ) Cash provided by (used in) financing activities ( 9,615 ) ( 10,087 ) Net increase (decrease) in cash, cash equivalents, and restricted cash 23,386 21,292 Cash, cash equivalents, and restricted cash at beginning of period 119,676 205,715 Cash, cash equivalents, and restricted cash at end of period $ 143,062 $ 227,007 Supplemental information: Accrued capital expenditures $ 2,531 $ 6,668 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 March 30, 2024, the Company had a total of 2,279 restaurants in its system. The Company’s restaurant base is approximately 98 % franchised, with 2,229 franchised locations (including 305 international locations) and 50 company-owned restaurants as of March 30, 2024. 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 March 30, 2024 and December 30, 2023, and operating results are for the thirteen weeks ended March 30, 2024 and April 1, 2023. 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 30, 2023. Fiscal year. The Company uses a 52- or 53-week fiscal year that ends on the last Saturday of the calendar year. Fiscal years 2024 and 2023 each have 52 weeks. 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 March 30, 2024 and December 30, 2023 were as follows (in thousands): March 30, 2024 December 30, 2023 Cash and cash equivalents $ 108,305 $ 90,216 Restricted cash 11,444 11,444 Restricted cash, included in Advertising fund assets, restricted 23,313 18,016 Total cash, cash equivalents, and restricted cash $ 143,062 $ 119,676 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. There have been no changes to the recently issued accounting pronouncements not yet adopted disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 30, 2023. (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 service-based and performance-based 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 March 30, 2024 April 1, 2023 Basic weighted average shares outstanding 29,349 29,947 Dilutive shares 129 84 Diluted weighted average shares outstanding 29,478 30,031 For the thirteen weeks ended March 30, 2024 and April 1, 2023, equity awards representing approximately 12,000 and 13,000 shares, respectively, were excluded from the dilutive earnings per share calculation because the effect would have been anti-dilutive. (3) Stockholders’ Deficit Dividends In connection with the Company’s regular dividend program, the Company’s Board of Directors declared a quarterly dividend of $ 0.22 per share of common stock in the first quarter of 2024, resulting in a total dividend payment of approximately $ 6.5 million. Subsequent to the first quarter, on April 30, 2024, the Company’s Board of Directors declared a quarterly dividend of $ 0.22 per share of common stock for stockholders of record as of May 17, 2024. The regular quarterly dividend is to be paid on June 7, 2024, totaling approximately $ 6.5 million. Share Repurchase Program On August 17, 2023, the Company announced a share repurchase program with authorization to purchase up to $ 250.0 million of its outstanding shares of common stock (the “Share Repurchase Program”). As of March 30, 2024, $ 125.0 million remained available for repurchase under the Share Repurchase Program. (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. 9 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 March 30, 2024 December 30, 2023 Carrying Value Fair Value Carrying Value Fair Value Securitized Financing Facility: 2020-1 Class A-2 Senior Secured Notes (1) Level 2 $ 472,800 $ 426,187 $ 472,800 $ 423,823 2022-1 Class A-2 Senior Secured Notes (1) Level 2 $ 248,125 $ 222,370 $ 248,125 $ 222,370 Investments in bonds of LPH (2) Level 3 $ 3,572 $ 4,314 $ 3,557 $ 4,306 (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 $ 9.8 million and 25.3 %, respectively, for the thirteen weeks ended March 30, 2024, and $ 5.2 million and 25.1 %, respectively, for the thirteen weeks ended April 1, 2023. 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): March 30, 2024 December 30, 2023 2020-1 Class A-2 Senior Secured Notes $ 472,800 $ 472,800 2022-1 Class A-2 Senior Secured Notes 248,125 248,125 Debt issuance costs, net of amortization ( 8,135 ) ( 8,598 ) Total debt 712,790 712,327 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 March 30, 2024 and December 30, 2023. As of March 30, 2024, 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. 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 10 WINGSTOP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) 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. Corporate office lease During the fiscal first quarter 2024, the Company executed a lease for an office building with undiscounted fixed payments over the initial term of $ 66.9 million. The lease has not yet commenced, and therefore has not been recognized on the Company's Consolidated Balance Sheet. The lease has an initial lease term of 13.3 years and is expected to commence in the fiscal second quarter 2024. (8) Stock-Based Compensation During the thirteen weeks ended March 30, 2024, the Company granted 22,200 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 $ 370.76 per unit. In addition, the Company granted 23,433 performance stock units (“PSUs”) to certain employees during the thirteen weeks ended March 30, 2024. Of the total PSUs granted, 20,297 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 3,136 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 $ 370.76 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 $ 3.8 million and $ 3.3 million for the thirteen weeks ended March 30, 2024 and April 1, 2023, 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 March 30, 2024 and April 1, 2023 (in thousands): Thirteen Weeks Ended March 30, 2024 April 1, 2023 Royalty revenue $ 61,192 $ 43,513 Advertising fees and related income 50,149 37,463 Franchise fees 1,242 1,061 11 WINGSTOP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) 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 March 30, 2024 was included in the deferred revenue balance as of December 30, 2023. Approximately $ 10.2 million and $ 9.3 million of deferred revenue as of March 30, 2024 and December 30, 2023, 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 7.0 years. The Company did not have any material contract assets as of March 30, 2024. (10) Subsequent Event Subsequent to the end of the fiscal first quarter 2024, the Company acquired one existing restaurant from a franchisee. The total purchase price was $ 3.3 million, funded by cash on hand. The restaurant acquisition is accounted for as a business combination. 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 this location will be included in our Consolidated Statements of Comprehensive Income as of the date of acquisition. 12