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EX-32.2 - EXHIBIT 32.2 - Wingstop Inc.exh322sox_cfoxcertxq32018.htm
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EX-31.2 - EXHIBIT 31.2 - Wingstop Inc.exh312cfocert_q32018.htm
EX-31.1 - EXHIBIT 31.1 - Wingstop Inc.exh311ceocert_q32018.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark one)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 29, 2018
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____                   

Commission File No. 001-37425
 
WINGSTOP INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
47-3494862
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification No.)
 
 
 
5501 LBJ Freeway, 5th Floor,
Dallas, Texas
 
75240

(Address of principal executive offices)
 
(Zip Code)
(972) 686-6500
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes   ¨ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). x Yes   ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
 
Accelerated filer
¨
Non-accelerated filer
¨
 
Smaller reporting company
¨
 
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes   x No
On October 29, 2018 there were 29,296,047 shares of common stock outstanding.
 



TABLE OF CONTENTS
 
 
Page
PART I
Item 1.
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
PART II
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 
 
 
 



2


PART I.     FINANCIAL INFORMATION
Item 1.     Financial Statements
WINGSTOP INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(amounts in thousands, except share and per share amounts)
 
September 29,
2018
 
December 30,
2017
 
(Unaudited)
 
As adjusted*
Assets
 

 
 

Current assets
 

 
 

Cash and cash equivalents
$
3,023

 
$
4,063

Accounts receivable, net
3,918

 
4,567

Prepaid expenses and other current assets
3,313

 
4,334

Advertising fund assets, restricted
7,484

 
2,944

Total current assets
17,738

 
15,908

Property and equipment, net
7,363

 
5,826

Goodwill
49,655

 
46,557

Trademarks
32,700

 
32,700

Customer relationships, net
14,566

 
15,567

Other non-current assets
5,814

 
3,278

Total assets
$
127,836

 
$
119,836

Liabilities and stockholders' deficit
 
 
 
Current liabilities
 
 
 
Accounts payable
$
2,133

 
$
1,752

Other current liabilities
10,107

 
10,929

Current portion of debt
3,750

 
3,500

Advertising fund liabilities
7,484

 
2,944

Total current liabilities
23,474

 
19,125

Long-term debt, net
211,100

 
129,841

Deferred revenues, net of current
21,866

 
21,226

Deferred income tax liabilities, net
5,642

 
5,920

Other non-current liabilities
2,013

 
2,142

Total liabilities
264,095

 
178,254

Commitments and contingencies (see Note 7)


 


Stockholders' deficit
 
 
 
Common stock, $0.01 par value; 100,000,000 shares authorized; 29,296,047 and 29,092,669 shares issued and outstanding as of September 29, 2018 and December 30, 2017, respectively
293

 
291

Additional paid-in-capital
100

 
262

Accumulated deficit
(136,652
)
 
(58,971
)
Total stockholders' deficit
(136,259
)
 
(58,418
)
Total liabilities and stockholders' deficit
$
127,836

 
$
119,836

*See Note 1.
See accompanying notes to consolidated financial statements.





3


WINGSTOP INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(amounts in thousands, except per share data)
(Unaudited)
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
 
 
 
As adjusted*
 
 
 
As adjusted*
Revenue:
 
 
 
 
 

 
 

Royalty revenue, franchise fees and other
$
17,787

 
$
15,872

 
$
52,772

 
$
48,735

Advertising fees and related income
8,614

 
7,579

 
25,574

 
22,313

Company-owned restaurant sales
11,845

 
9,672

 
34,326

 
27,063

Total revenue
38,246

 
33,123

 
112,672

 
98,111

Costs and expenses:
 
 
 
 
 

 
 

Cost of sales (1)
8,040

 
7,823

 
23,182

 
21,290

Advertising expenses
8,431

 
7,665

 
25,283

 
24,522

Selling, general and administrative
10,285

 
8,058

 
31,196

 
24,485

Depreciation and amortization
1,134

 
881

 
3,163

 
2,407

Total costs and expenses
27,890

 
24,427

 
82,824

 
72,704

Operating income
10,356

 
8,696

 
29,848

 
25,407

Interest expense, net
2,545

 
1,302

 
6,623

 
3,908

Income before income tax expense
7,811

 
7,394

 
23,225

 
21,499

Income tax expense
1,518

 
2,690

 
3,925

 
5,631

Net income
$
6,293

 
$
4,704

 
$
19,300

 
$
15,868

 
 
 
 
 
 
 
 
Earnings per share
 
 
 
 
 
 
 
Basic
$
0.21

 
$
0.16

 
$
0.66

 
$
0.55

Diluted
$
0.21

 
$
0.16

 
$
0.65

 
$
0.54

 
 
 
 
 
 
 
 
Weighted average shares outstanding
 
 
 
 
 
 
 
Basic
29,284

 
29,081

 
29,210

 
29,003

Diluted
29,584

 
29,384

 
29,561

 
29,362

 
 
 
 
 
 
 
 
Dividends per share
$
0.09

 
$
0.07

 
$
3.40

 
$
0.07


(1) Cost of sales excludes depreciation and amortization, which are presented separately, and includes advertising expenses incurred at company-owned restaurants.

* See Note 1.
See accompanying notes to consolidated financial statements.



4

WINGSTOP INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(amounts in thousands)
(Unaudited)



 
Thirty-Nine Weeks Ended
 
September 29,
2018
 
September 30,
2017
 
 
 
As adjusted*
 
 
 
 
Operating activities
 

 
 

Net income
$
19,300

 
$
15,868

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
Depreciation and amortization
3,163

 
2,407

Deferred income taxes
(278
)
 
(797
)
Stock-based compensation expense
2,012

 
894

Amortization of debt issuance costs
265

 
219

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
649

 
(1,442
)
Prepaid expenses and other assets
(280
)
 
(951
)
Advertising fund assets and liabilities, net
4,457

 
1,887

Accounts payable and other current liabilities
587

 
(331
)
Deferred revenue
877

 
2,240

Other non-current liabilities
(129
)
 
(127
)
Cash provided by operating activities
30,623

 
19,867

 
 
 
 
Investing activities
 
 
 
Purchases of property and equipment
(2,883
)
 
(1,834
)
Acquisition of restaurants from franchisees
(5,996
)
 
(3,949
)
Cash used in investing activities
(8,879
)
 
(5,783
)
 
 
 
 
Financing activities
 
 
 
Proceeds from exercise of stock options
506

 
1,301

Borrowings of long-term debt
231,108

 
3,500

Repayments of long-term debt
(149,500
)
 
(14,125
)
Payment of deferred financing costs
(782
)
 

Tax payments for restricted stock upon vesting
(182
)
 

Dividends paid
(99,476
)
 
(2,034
)
Cash used in financing activities
(18,326
)
 
(11,358
)
 
 
 
 
Net change in cash, cash equivalents, and restricted cash
3,418

 
2,726

Cash, cash equivalents, and restricted cash at beginning of period
6,392

 
5,693

Cash, cash equivalents, and restricted cash at end of period
$
9,810

 
$
8,419

*See Note 1.
See accompanying notes to consolidated financial statements.



5

WINGSTOP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)


(1)    Basis of Presentation
Basis of Presentation
Wingstop Inc., through its primary operating subsidiary, Wingstop Restaurants Inc. (“WRI”), collectively referred to as “Wingstop” or the “Company,” is in the business of franchising and operating Wingstop restaurants. As of September 29, 2018, 1,059 franchised restaurants were in operation domestically, and 130 international franchised restaurants were in operation across nine countries. As of September 29, 2018, the Company owned and operated 26 restaurants.
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 have been condensed or omitted. Balance sheet amounts are as of September 29, 2018 and December 30, 2017 and operating results are for the thirteen and thirty-nine weeks ended September 29, 2018 and September 30, 2017.
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, 2017.
The Company uses a 52/53-week fiscal year that ends on the last Saturday of the calendar year. Fiscal years 2018 and 2017 have 52 weeks.
The Company has reclassified certain prior period amounts due to the adoption of ASU 2014-09 and ASU 2016-18, as defined below.
Advertising Fund
The Company administers the Wingstop Restaurants Advertising Fund (“Ad Fund”), which is used for various forms of advertising for the Wingstop brand. Advertising fund contributions and expenditures are reported on a gross basis in the Consolidated Statements of Operations, which are largely offsetting and therefore do not significantly impact our reported net income. Advertising expenses incurred by company-owned restaurants are included within cost of sales in the Consolidated Statements of Operations. Administrative support services and compensation expenses of employees that provide services directly to the Ad Fund, are included in selling, general and administrative expenses (“SG&A”) in the Consolidated Statements of Operations.
The Ad Fund contribution collected from Wingstop restaurant franchisees and company-owned and operated restaurants during the thirty-nine weeks ended September 29, 2018 and September 30, 2017 was equal to 3% of gross sales. For the thirty-nine weeks ended September 29, 2018 and September 30, 2017, the Company contributed $2.8 million and $4.8 million, respectively, for the purpose of supplementing the national advertising campaign, which amounts were included in Advertising expenses in the Consolidated Statements of Operations.
The Company consolidates and reports all assets and liabilities of the Ad Fund as restricted assets of the Ad Fund and liabilities of the Ad Fund within current assets and current liabilities, respectively, in the Consolidated Balance Sheets. The assets and liabilities of the Ad Fund consist primarily of cash, receivables, accrued expenses, other liabilities, and any cumulative surplus related to the Ad Fund. Pursuant to the Company’s franchise agreements, use of Ad Fund contributions is restricted to advertising, public relations, merchandising, similar activities, and administrative expenses to increase sales and further enhance the public reputation of the Wingstop brand. The aforementioned administrative expenses may also include personnel expenses and allocated costs incurred by the Company that are directly associated with administering the Ad Fund, as outlined in the provisions of the applicable franchise agreements. Total cash balances related to the Ad Fund as of September 29, 2018 and December 30, 2017 were $6.8 million and $2.3 million, respectively.
Recently Issued Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 amends the existing accounting standards for lease accounting, including

6

WINGSTOP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. ASU 2016-02 will be effective beginning in the first quarter of fiscal year 2019. Early adoption of ASU 2016-02 as of its issuance is permitted. This new guidance requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. The Company expects to adopt this new guidance in fiscal year 2019 without restating comparative periods. The discounted minimum remaining rental payments will be the starting point for determining the right-of-use asset and lease liability. The Company expects that adoption of the new guidance will have a material impact on the consolidated balance sheets due to the recognition of the right-of-use asset and lease liability related to our current operating leases.
Though the majority of the assessment is complete, the Company continues to evaluate the impact the adoption of this new guidance will have on the Company’s consolidated financial statements, as well as the impact on accounting policies and related disclosures. Additionally, the Company is in the process of implementing new accounting systems, business processes, and internal controls related to lease accounting to assist in the application of the new guidance.
In March 2018, the FASB issued ASU 2018-05, Income Taxes (Topic 740) (“ASU 2018-05”). ASU 2018-05 provides guidance on accounting for the income tax effects of the Tax Cuts and Jobs Act of 2017 (the “Act”), which impacts U.S. corporate tax rates, business-related exclusions, and deductions and credits. The Act also has tax consequences for many companies that operate internationally. The Company recognized the income tax effects of the Act in its 2017 financial statements in accordance with Staff Accounting Bulletin No. 118, which provides SEC staff guidance for the application of Accounting Standards Codification (“ASC”) Topic 740, "Income Taxes," in the reporting period in which the Act was signed into law. As such, the Company’s financial results reflect the income tax effects of the Act for which the accounting under ASC Topic 740 is complete and provisional amounts for those specific income tax effects of the Act for which the accounting under ASC Topic 740 is incomplete but a reasonable estimate could be determined.

The Company will continue to analyze additional information and guidance related to the Act as supplemental legislation, regulatory guidance, or evolving technical interpretations become available. The final impacts may differ from the recorded amounts as of September 29, 2018, and we will continue to refine such amounts within the measurement period provided by Staff Accounting Bulletin No. 118. We expect to complete our analysis no later than the fourth quarter of 2018.

Recently Adopted Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which superseded nearly all existing revenue recognition guidance. The new guidance provided a single framework in which revenue is required to be recognized to depict the transfer of goods or services to customers in amounts that reflect the consideration to which a company expects to be entitled in exchange for those goods or services.
The Company adopted this new guidance effective the first day of fiscal year 2018, using the full retrospective transition method, which resulted in adjusting each prior reporting period presented and a cumulative effect adjustment, which was recorded as of the first day of 2016. The adoption changed the timing of recognition of initial franchise fees, development fees, territory fees for our international business and renewal and transfer fees, as well as the reporting of Ad Fund contributions and related expenditures. See Note 11 to our consolidated financial statements, Revenue from Contracts with Customers, for further discussion.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”), which requires that restricted cash and cash equivalents be included as components of total cash and cash equivalents as presented on the statement of cash flows. ASU 2016-18 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017 and a retrospective transition method is required. The Company adopted this new guidance effective the first day of fiscal year 2018, using the full retrospective transition method, which resulted in adjusting the Statement of Cash Flows for each prior period presented.

7

WINGSTOP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

The following table presents the effect of the adoption of ASU 2014-09 on our consolidated balance sheets as of December 30, 2017 (in thousands):
 
 As reported
 
Adjustments for adoption of ASU 2014-09
 
As Adjusted
Assets
 
 
 
 
 
Current assets
 
 
 
 
 
Cash and cash equivalents
$
4,063

 
$

 
$
4,063

Accounts receivable, net
4,567

 

 
4,567

Prepaid expenses and other current assets
4,334

 

 
4,334

Advertising fund assets, restricted
2,944

 

 
2,944

Total current assets
15,908

 

 
15,908

Property and equipment, net
5,826

 

 
5,826

Goodwill
46,557

 

 
46,557

Trademarks
32,700

 

 
32,700

Customer relationships, net
15,567

 

 
15,567

Other non-current assets
3,278

 

 
3,278

Total assets
$
119,836

 
$

 
$
119,836

Liabilities and stockholders' deficit
 
 
 
 
 
Current liabilities
 
 
 
 
 
Accounts payable
$
1,752

 
$

 
$
1,752

Other current liabilities
10,683

 
246

 
10,929

Current portion of debt
3,500

 

 
3,500

Advertising fund liabilities
2,944

 

 
2,944

Total current liabilities
18,879

 
246

 
19,125

Long-term debt, net
129,841

 

 
129,841

Deferred revenues, net of current
8,427

 
12,799

 
21,226

Deferred income tax liabilities, net
8,799

 
(2,879
)
 
5,920

Other non-current liabilities
2,142

 

 
2,142

Total liabilities
168,088

 
10,166

 
178,254

Commitments and contingencies (see Note 7)
 
 
 
 
 
Stockholders' deficit
 
 
 
 
 
Common stock
291

 

 
291

Additional paid-in-capital
262

 

 
262

Accumulated deficit
(48,805
)
 
(10,166
)
 
(58,971
)
Total stockholders' deficit
(48,252
)
 
(10,166
)
 
(58,418
)
Total liabilities and stockholders' deficit
$
119,836

 
$

 
$
119,836


8

WINGSTOP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

The following table presents the effect of the adoption of ASU 2014-09 on our consolidated statements of operations for the thirteen weeks ended September 30, 2017 (in thousands, except per share amounts):
 
 
 
Adjustments for adoption of ASU 2014-09
 
 
 
 As reported
 
 Franchise Fees
 
 Advertising
 
As Adjusted
Revenue:
 
 
 
 
 
 
 
Royalty revenue, franchise fees and other
$
16,354

 
$
(482
)
 
$

 
$
15,872

Advertising fees and related income

 

 
7,579

 
7,579

Company-owned restaurant sales
9,672

 

 

 
9,672

Total revenue
26,026

 
(482
)
 
7,579

 
33,123

Costs and expenses:
 
 
 
 
 
 
 
Cost of sales (1)
7,823

 

 

 
7,823

Advertising expenses

 

 
7,665

 
7,665

Selling, general and administrative
8,144

 

 
(86
)
 
8,058

Depreciation and amortization
881

 

 

 
881

Total costs and expenses
16,848

 

 
7,579

 
24,427

Operating income
9,178

 
(482
)
 

 
8,696

Interest expense, net
1,302

 

 

 
1,302

Income before income tax expense
7,876

 
(482
)
 

 
7,394

Income tax expense
2,864

 
(174
)
 

 
2,690

Net income
$
5,012

 
$
(308
)
 
$

 
$
4,704

 
 
 
 
 
 
 
 
Earnings per share
 
 
 
 
 
 
 
Basic
$
0.17

 
$
(0.01
)
 
$

 
$
0.16

Diluted
$
0.17

 
$
(0.01
)
 
$

 
$
0.16

 
(1) Cost of sales excludes depreciation and amortization, which are presented separately, and includes advertising expenses incurred at company-owned restaurants.

9

WINGSTOP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

The following table presents the effect of the adoption of ASU 2014-09 on our consolidated statements of operations for the thirty-nine weeks ended September 30, 2017 (in thousands, except per share amounts):
 
 
 
Adjustments for adoption of ASU 2014-09
 
 
 
 As reported
 
 Franchise Fees
 
 Advertising
 
As Adjusted
Revenue:
 
 
 
 
 
 
 
Royalty revenue, franchise fees and other
$
50,204

 
$
(1,469
)
 
$

 
$
48,735

Advertising fees and related income

 

 
22,313

 
22,313

Company-owned restaurant sales
27,063

 

 

 
27,063

Total revenue
77,267

 
(1,469
)
 
22,313

 
98,111

Costs and expenses:
 
 
 
 
 
 
 
Cost of sales (1)
21,290

 

 

 
21,290

Advertising expenses

 

 
24,522

 
24,522

Selling, general and administrative
26,694

 

 
(2,209
)
 
24,485

Depreciation and amortization
2,407

 

 

 
2,407

Total costs and expenses
50,391

 

 
22,313

 
72,704

Operating income
26,876

 
(1,469
)
 

 
25,407

Interest expense, net
3,908

 

 

 
3,908

Income before income tax expense
22,968

 
(1,469
)
 

 
21,499

Income tax expense
6,161

 
(530
)
 

 
5,631

Net income
$
16,807

 
$
(939
)
 
$

 
$
15,868

 
 
 
 
 
 
 
 
Earnings per share
 
 
 
 
 
 
 
Basic
$
0.58

 
$
(0.03
)
 
$

 
$
0.55

Diluted
$
0.57

 
$
(0.03
)
 
$

 
$
0.54

 
(1) Cost of sales excludes depreciation and amortization, which are presented separately, and includes advertising expenses incurred at company-owned restaurants.





10

WINGSTOP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

The following table presents the effect of the adoption of ASU 2014-09 and ASU 2016-18 on our consolidated statements of cash flows for the thirty-nine weeks ended September 30, 2017 (in thousands):
 
 As reported
 
Adjustments for adoption of ASU 2014-09
 
Adjustments for adoption of ASU 2016-18
 
As adjusted
Operating activities
 
 
 
 
 
 
 
Net income
$
16,807

 
$
(939
)
 
$

 
$
15,868

Adjustments to reconcile net income to cash provided by operating activities:
 
 
Depreciation and amortization
2,407

 

 

 
2,407

Deferred income taxes
(265
)
 
(532
)
 

 
(797
)
Stock-based compensation expense
894

 

 

 
894

Amortization of debt issuance costs
219

 

 

 
219

Changes in operating assets and liabilities:
 
 


 
 
 
 
Accounts receivable
(1,442
)
 

 

 
(1,442
)
Prepaid expenses and other assets
(951
)
 

 

 
(951
)
Advertising fund assets and liabilities, net

 

 
1,887

 
1,887

Accounts payable and other current liabilities
(331
)
 

 

 
(331
)
Deferred revenue
769

 
1,471

 

 
2,240

Other non-current liabilities
(127
)
 

 

 
(127
)
Cash provided by operating activities
17,980

 

 
1,887

 
19,867

 
 
 

 
 
 
 
Investing activities
 
 


 
 
 
 
Purchases of property and equipment
(1,834
)
 

 

 
(1,834
)
Acquisition of restaurant from franchisee
(3,949
)
 

 

 
(3,949
)
Cash used in investing activities
(5,783
)
 

 

 
(5,783
)
 
 
 

 
 
 
 
Financing activities
 
 


 


 
 
Proceeds from exercise of stock options
1,301

 

 

 
1,301

Borrowings of long-term debt
3,500

 

 

 
3,500

Repayments of long-term debt
(14,125
)
 

 

 
(14,125
)
Dividends paid
(2,034
)
 

 

 
(2,034
)
Cash used in financing activities
(11,358
)
 

 

 
(11,358
)
 
 
 

 
 
 
 
Net change in cash, cash equivalents, and restricted cash
839

 

 
1,887

 
2,726

Cash, cash equivalents, and restricted cash at beginning of period
3,750

 


 
1,943

 
5,693

Cash, cash equivalents, and restricted cash at end of period
$
4,589

 


 
$
3,830

 
$
8,419

(2)    Earnings per Share
Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares 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 stock options and restricted stock units, determined using the treasury stock method.

11

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
 
Thirty-Nine Weeks Ended
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
Basic weighted average shares outstanding
29,284

 
29,081

 
29,210

 
29,003

Dilutive shares
300

 
303

 
351

 
359

Diluted weighted average shares outstanding
29,584

 
29,384

 
29,561

 
29,362

For the thirteen weeks ended September 29, 2018 and September 30, 2017, equity awards representing approximately 1,000 and 3,000 shares, respectively, were excluded from the dilutive earnings per share calculation because the effect would have been anti-dilutive.
For the thirty-nine weeks ended September 29, 2018 and September 30, 2017, equity awards representing approximately 4,000 and 11,000 shares, respectively, were excluded from the dilutive earnings per share calculation because the effect would have been anti-dilutive. 
(3)    Dividends
During 2018, the Company’s Board of Directors approved a quarterly dividend of $0.07 per share of common stock in each of the first two quarters, and a quarterly dividend of $0.09 per share of common stock in the third quarter, with aggregate dividends of $6.8 million, or $0.23 per common share, which were paid during the thirty-nine weeks ended September 29, 2018. On January 30, 2018, the Company’s Board of Directors declared a special cash dividend of $3.17 per share, which was paid on February 14, 2018, totaling $92.7 million.
Subsequent to the third quarter, on October 26, 2018, the Company’s Board of Directors declared a quarterly dividend of $0.09 per share of common stock for stockholders of record as of December 4, 2018, to be paid on December 18, 2018, totaling approximately $2.6 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.
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 is determined on a non-recurring basis, which results are summarized as follows (in thousands):
 
Fair Value
Hierarchy
 
September 29, 2018
 
December 30, 2017
 
 
Carrying
Value (1)
 
Fair Value (2)
 
Carrying
Value (1)
 
Fair Value (2)
Senior Secured Credit Facility:
 
 
 

 
 

 
 

 
 

Term loan facility
Level 2
 
$
96,250

 
$
96,250

 
$
64,750

 
$
64,750

Revolving credit facility
Level 2
 
$
119,108

 
$
119,108

 
$
69,000

 
$
69,000

(1) Excluding issuance costs netted on the Consolidated Balance Sheet.
(2) The fair value of long-term debt was estimated using available market information.
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.

12

WINGSTOP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

(5)    Income Taxes
Income tax expense and the effective tax rate were $1.5 million and 19.4%, respectively, for the thirteen weeks ended September 29, 2018, and $2.7 million and 36.4%, respectively, for the thirteen weeks ended September 30, 2017. Income tax expense and the effective tax rate were $3.9 million and 16.9%, respectively, for the thirty-nine weeks ended September 29, 2018, and $5.6 million and 26.2%, respectively, for the thirty-nine weeks ended September 30, 2017.
Income tax expense for the thirteen and thirty-nine weeks ended September 29, 2018 includes $0.3 million and $1.8 million, respectively, in tax benefits resulting from the recognition of excess tax benefits from stock-based compensation, compared to $0.1 million and $2.5 million of tax benefits recognized in the thirteen and thirty-nine weeks ended September 30, 2017, respectively. Income tax expense for the thirteen and thirty-nine weeks ended September 29, 2018 also reflects the reduction in the federal statutory rate from 35% to 21% effective the first day of fiscal 2018.
(6)    Debt Obligations
On January 30, 2018, the Company entered into an amended senior secured credit facility (the “2018 Facility”), which replaced its senior secured credit facility dated June 30, 2016 (the “2016 Facility”). The 2018 Facility includes a term loan facility in an aggregate principal amount of $100 million and a revolving credit facility up to an aggregate principal amount of $150 million. The Company used the proceeds from the 2018 Facility to refinance $133.8 million of indebtedness under the 2016 Facility and to pay a special dividend of $92.7 million to its stockholders. Borrowings under the 2018 Facility bear interest, payable quarterly, at the Company’s option, at the base rate plus a margin (0.75% to 1.75%, dependent on the Company’s reported leverage ratio) or LIBOR plus a margin (1.75% to 2.75%, dependent on the Company’s reported leverage ratio). The 2018 Facility matures in January 2023.
As of September 29, 2018, the term loan facility and the revolving credit facility under the 2018 Facility had outstanding balances of $96.3 million and $119.1 million, respectively, bearing interest at 4.49%.
During the thirty-nine weeks ended September 29, 2018, the Company made payments of $12.0 million and $3.8 million on the outstanding principal balance of its revolving credit facility and term loan facility, respectively, under the 2018 Facility.
In conjunction with the 2018 Facility, the Company evaluated the refinancing of the 2016 Facility and determined $202.5 million should be accounted for as a debt modification and $47.5 million should be new debt issuance. The Company incurred $1.0 million in financing costs of which $0.2 million was expensed and $0.8 million was capitalized and is being amortized using the effective interest rate method.
The 2018 Facility is secured by substantially all assets of the Company and requires compliance with certain financial and non-financial covenants. As of September 29, 2018, the Company was in compliance with all covenants.
As of September 29, 2018, the scheduled principal payments on debt outstanding under the 2018 Facility were as follows (in thousands):
Remainder of fiscal year 2018
$
1,250

Fiscal year 2019
3,750

Fiscal year 2020
5,000

Fiscal year 2021
5,000

Fiscal year 2022
6,250

Fiscal year 2023
194,108

Total
$
215,358

(7)    Commitments and Contingencies
WRI leases certain office and retail space and equipment under non-cancelable operating leases with terms expiring at various dates through March 2034.

13

WINGSTOP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

A schedule of future minimum rental payments required under our operating leases, excluding contingent rent, that have initial or remaining non-cancelable lease terms in excess of one year, as of September 29, 2018, is as follows (in thousands):
Remainder of fiscal year 2018
$
493

Fiscal year 2019
1,970

Fiscal year 2020
1,855

Fiscal year 2021
1,703

Fiscal year 2022
1,651

Fiscal year 2023
1,451

Thereafter
4,979

Total
$
14,102

Rent expense under cancelable and non-cancelable leases was $556,000 and $508,000 for the thirteen weeks ended September 29, 2018 and September 30, 2017, respectively, and $1.7 million and $1.5 million for the thirty-nine weeks ended September 29, 2018 and September 30, 2017, respectively.
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
Stock-based compensation is measured at the date of grant, based on the calculated fair value of the award, and is recognized as expense over the requisite employee service period (generally the vesting period of the grant). The Company recognized $2.0 million in stock-based compensation expense for the thirty-nine weeks ended September 29, 2018, with a corresponding increase to additional paid-in-capital. Stock-based compensation expense is included in SG&A in the Consolidated Statements of Operations.
Stock Options
The following table summarizes stock option activity (in thousands, except per share data):
 
Stock Options
 
Weighted Average Exercise Price
 
Aggregate Intrinsic Value
 
Weighted Average Remaining Term
Outstanding - December 30, 2017
420

 
$
5.45

 
$
14,068

 
5.7
Options granted
2

 
44.03

 
 
 
 
Options exercised
(157
)
 
3.22

 
 
 
 
Options canceled
(27
)
 
6.68

 
 
 
 
Outstanding - September 29, 2018
238

 
$
6.18

 
$
14,741

 
5.0
The total grant-date fair value of stock options vested during the thirty-nine weeks ended September 29, 2018 was $0.5 million. The total intrinsic value of stock options exercised during the thirty-nine weeks ended September 29, 2018 was $7.6 million. As of September 29, 2018, total unrecognized compensation expense related to unvested stock options was $0.5 million, which is expected to be recognized over a weighted-average period of 1.3 years.

14

WINGSTOP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

Restricted Stock Units and Performance Stock Units
The following table summarizes activity related to restricted stock units (“RSUs”) and performance stock units (“PSUs”) (in thousands, except per share data):
 
Restricted Stock Units
 
Weighted Average Grant Date Fair Value
 
Performance Stock Units
 
Weighted Average Grant Date Fair Value
Outstanding - December 30, 2017
94

 
$
27.11

 
86

 
$
27.63

Units granted
62

 
44.51

 
72

 
46.80

Units vested
(31
)
 
27.12

 
(14
)
 
26.25

Units canceled
(19
)
 
31.19

 
(15
)
 
31.65

Outstanding - September 29, 2018
106

 
$
36.58

 
129

 
$
40.74

The fair value of the Company’s RSUs and PSUs is based on the closing market price of the stock on the date of grant. The RSUs granted during the thirty-nine weeks ended September 29, 2018 vest over a three year service period. As of September 29, 2018, total unrecognized compensation expense related to unvested RSUs was $3.0 million, which is expected to be recognized over a weighted-average period of 2.0 years.
The Company granted 72,130 PSUs during the thirty-nine weeks ended September 29, 2018 that are based on the outcome of certain performance criteria. Of the total PSUs granted, 56,840 are subject to a service condition and a performance vesting condition based on the achievement of certain adjusted EBITDA targets, as defined by the plan, over a performance period of one to three years. The compensation expense related to these PSUs is recognized over the vesting period when the achievement of the performance conditions becomes probable. The 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. The remaining 15,290 PSUs granted are subject to a service condition and a performance vesting condition based on the level of new sales growth achieved over the performance period. The maximum vesting percentage that could be realized for each of the PSUs is 500% based on the level of performance achieved for the respective awards, as well as a market vesting condition linked to the level of total stockholder return received by the Companys stockholders during the performance period measured against the companies in the S&P 600 Restaurant Index (“TSR PSUs”). The TSR PSUs were valued based on a Monte Carlo simulation model to reflect the impact of the total stockholder return market condition, resulting in a grant-date fair value range of $0.00 to $179.27 per unit based on the outcome of the performance condition. The probability of satisfying a market condition is considered in the estimation of the grant-date fair value for TSR PSUs and the compensation cost is not reversed if the market condition is not achieved, provided the requisite service has been provided.
As of September 29, 2018, total unrecognized compensation expense related to unvested PSUs was $4.5 million, which is expected to be recognized over a weighted-average period of 1.9 years.
Restricted Stock Awards
The fair value of the unvested restricted stock awards is based on the closing price on the date of grant. As of September 29, 2018, total unrecognized compensation expense related to unvested restricted stock awards was $0.5 million, which will be recognized over a weighted average period of approximately 1.9 years.
(9)    Business Segments
The Company’s business operates in two segments: the “Franchise” segment and the “Company” segment. The Franchise segment consists of domestic and international franchise restaurants, which represent the majority of our system-wide restaurants. As of September 29, 2018, the Franchise segment consisted of 1,189 restaurants operated by Wingstop franchisees in the United States and nine countries outside of the United States, compared to 1,065 franchised restaurants in operation as of September 30, 2017. Franchise segment revenue consists primarily of franchise royalty revenue, advertising fee revenue, franchise and development fees revenue, and international territory fees.
As of September 29, 2018, the Company segment consisted of 26 company-owned restaurants located in the United States, compared to 23 company-owned restaurants as of September 30, 2017. Company segment sales are comprised of food and beverage sales at company-owned restaurants. Company segment expenses consist of operating expenses at company-owned restaurants and include food, beverage, labor, benefits, utilities, rent, and other operating costs.

15

WINGSTOP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

The following table reflects revenue and profit information with respect to each segment and reconciles segment profits to income before taxes (in thousands):
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
 
 
 
As adjusted*
 
 
 
As adjusted*
Revenue:
 
 
 
 
 
 
 
Franchise segment
$
26,401

 
$
23,451

 
$
78,346

 
$
71,048

Company segment
11,845

 
9,672

 
34,326

 
27,063

Total segment revenue
$
38,246

 
$
33,123

 
$
112,672

 
$
98,111

 
 
 
 
 
 
 
 
Segment Profit:
 
 
 
 
 
 
 
Franchise segment
$
7,663

 
$
7,763

 
$
23,418

 
$
22,317

Company segment
2,693

 
933

 
7,892

 
3,090

Total segment profit
10,356

 
8,696

 
31,310

 
25,407

Corporate and other (1)

 

 
1,462

 

Interest expense, net
2,545

 
1,302

 
6,623

 
3,908

Income before taxes
$
7,811

 
$
7,394

 
$
23,225

 
$
21,499

 
(1) Corporate and other includes corporate related items not allocated to reportable segments and consists primarily of expenses associated with the refinancing of the 2016 Facility and payment of a special dividend.
* See Note 1.
(10)    Restaurant Acquisitions
On February 19, 2018, April 16, 2018 and May 1, 2018, the Company acquired one existing restaurant each from three separate franchisees (the “Acquisitions”). The total purchase prices were $1.9 million, $1.9 million, and $2.2 million, respectively, which were funded by cash flows from operations.
The following table summarizes the preliminary allocations of the purchase prices to the estimated fair values of assets acquired and liabilities assumed in connection with the Acquisitions, at the respective dates of such acquisitions (in thousands): 
 
Purchase Price Allocation
 
February 19, 2018
 
April 16, 2018
 
May 1, 2018
 
Acquisition
 
Acquisition
 
Acquisition
Working capital
$
4

 
$
20

 
$
7

Property and equipment
26

 
160

 
28

Reacquired franchise rights
541

 
1,277

 
887

Goodwill
1,331

 
458

 
1,309

Gift card liability
(2
)
 

 

Total purchase price
$
1,900

 
$
1,915

 
$
2,231

The results of operations of the acquired restaurants beginning as of their respective dates of acquisition are included in our Consolidated Statements of Operations. The Acquisitions were accounted for as business combinations.
The estimates of fair value are preliminary, and are therefore subject to further refinement. 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 Acquisitions, including sales and unit growth opportunities. As of September 29, 2018, $3.1 million of the goodwill from the Acquisitions is expected to be deductible for federal income tax purposes.
Pro-forma financial information for the Acquisitions is not presented due to the immaterial impact of the financial results of the acquired restaurants on our consolidated financial statements.

16

WINGSTOP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

The fair value measurements of tangible and intangible assets and liabilities as of the respective dates of acquisition are based on significant inputs not observed in the market and thus represent Level 3 fair value measurements. Fair value measurements for reacquired franchise rights were determined using the income approach. Fair value measurements for property and equipment were determined using the cost approach.
(11)    Revenue from Contracts with Customers
Revenue from contracts with customers consists primarily of royalties, Ad Fund contributions, initial and renewal franchise fees, and upfront fees from development agreements and international territory agreements. These performance obligations under franchise agreements consist of (a) a franchise license, (b) pre-opening services, such as training, and (c) ongoing services, such as management of the Ad Fund, development of training materials and menu items, and restaurant monitoring. These performance obligations are highly interrelated, so they are not considered to be individually distinct and therefore are accounted for as a single performance obligation, which is satisfied by providing a right to use our intellectual property over the term of each franchise agreement.
Royalties, including franchisee contributions to the Ad Fund, are calculated as a percentage of franchise restaurant sales over the term of the franchise agreement. Initial and renewal franchise fees are payable by the franchisee prior to the restaurant opening or at the time of a renewal of an existing franchise agreement. Franchise agreement royalties, inclusive of Ad Fund contributions, represent sales-based royalties that are related entirely to the performance obligation under the franchise agreement and are recognized as franchise sales occur. Additionally, initial and renewal franchise fees are recognized as revenue on a straight-line basis over the term of the respective agreement. The performance obligation under development agreements and international territory agreements generally consists of an obligation to grant exclusive development rights over a stated term. These development rights are not distinct from franchise agreements, so upfront fees paid by franchisees for development rights are deferred and apportioned to each franchise restaurant opened by the franchisee. The pro rata amount apportioned to each restaurant is accounted for as an initial franchise fee.
The following table represents a disaggregation of revenue from contracts with customers for the thirteen and thirty-nine weeks ended September 29, 2018 and September 30, 2017 (in thousands):
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
September 29, 2018
 
September 30, 2017
 
September 29, 2018
 
September 30, 2017
 
 
 
As adjusted*
 
 
 
As adjusted*
Royalty revenue
$
15,461

 
$
13,415

 
$
45,797

 
$
39,239

Advertising fees and related income
8,614

 
7,579

 
25,574

 
22,313

Franchise fees
656

 
598

 
1,959

 
1,865

* See Note 1.
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. Approximately $9.6 million and $10.1 million of deferred revenue as of September 29, 2018 and December 30, 2017, 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 7.6 years. The Company does not have any material contract assets as of September 29, 2018.

17

WINGSTOP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

(12)    Subsequent Events
Subsequent to the fiscal third quarter of 2018, the Company announced its intention to complete a refinancing transaction. A wholly owned subsidiary of the Company intends to issue approximately $300 million of new, fixed rate notes and use the proceeds to prepay and retire all of the Company’s existing debt, to pay transaction costs associated with the transaction, and for general corporate purposes. In connection therewith, the Company also expects to enter into a new $25 million variable funding note facility. The Company anticipates that the refinancing transaction will close during the fiscal fourth quarter of 2018.

18


Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of the financial condition and results of operations of Wingstop Inc. (collectively with its direct and indirect subsidiaries on a consolidated basis, “Wingstop,” the “Company,” “we,” “our,” or “us”) should be read in conjunction with the accompanying unaudited consolidated financial statements and related notes in Part I, Item 1 of this Quarterly Report on Form 10-Q (this “Quarterly Report”) and with the audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year ended December 30, 2017 (our “Annual Report”). The statements in this discussion regarding industry outlook, our expectations regarding our future performance, liquidity, and capital resources, and other non-historical statements are forward-looking statements. These forward-looking statements are subject to risks and uncertainties, including, but not limited to, the risks and uncertainties described in “Special Note Regarding Forward-Looking Statements,” below, and “Risk Factors” on page 15 of our Annual Report. Our actual results may differ materially from those contained in or implied by any forward-looking statements.
We operate on a 52 or 53 week fiscal year ending on the last Saturday of each calendar year. Our fiscal quarters are comprised of 13 weeks, with the exception of the fourth quarter of a 53 week year, which contains 14 weeks. Fiscal years 2018 and 2017 each contain 52 weeks.
Amounts presented in this Part I, Item 2 for the thirteen and thirty-nine weeks ended September 30, 2017 have been retrospectively adjusted to reflect the adoption of ASU 2014-09. See Note 1 to our consolidated financial statements, Basis of Presentation, for more information regarding such adjustment.
Overview
Wingstop is a high-growth franchisor and operator of restaurants that offer cooked-to-order, hand-sauced and tossed chicken wings.

We believe we pioneered the concept of wings as a “center-of-the-plate” item for all of our meal occasions. While other concepts include wings as add-on menu items or focus on wings in a bar or sports-centric setting, we are singularly focused on wings, fries, and sides, which generate approximately 92% of our system-wide sales.

We offer 11 bold, distinctive, and craveable flavors on our bone-in and boneless chicken wings, paired with hand-cut, seasoned fries and sides made fresh daily. Our menu is highly-customizable for different dining occasions, and we believe it delivers a compelling value proposition for groups, families, and individuals. We have broad and growing consumer appeal anchored by a sought after core demographic of 18-34 year old Millennials, which we believe is a loyal consumer group that dines at fast casual restaurants more frequently than other groups.

Wingstop is the largest fast casual chicken wings-focused restaurant chain in the world and has demonstrated strong, consistent growth. As of September 29, 2018, we had a total of 1,215 restaurants across ten countries in our global system (including 43 states in the United States). Our restaurant base is 98% franchised, with 1,189 franchised locations (including 130 international locations) and 26 company-owned restaurants as of September 29, 2018.

19


Key Performance Indicators
Key measures that we use in evaluating our restaurants and assessing our business include the following:
Number of restaurants. 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 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
Domestic Franchised Activity:
 
 
 
 
 
 
 
Beginning of period
1,040

 
946

 
1,004

 
901

Openings
21

 
28

 
64

 
79

Closures
(2
)
 
(1
)
 
(6
)
 
(7
)
Acquired by Company

 
(2
)
 
(3
)
 
(2
)
Restaurants end of period
1,059

 
971

 
1,059

 
971

 
 
 
 
 
 
 
 
Domestic Company-Owned Activity:
 
 
 
 
 
 
 
Beginning of period
26

 
21

 
23

 
21

Openings

 

 

 

Closures

 

 

 

Acquired from franchisees

 
2

 
3

 
2

Restaurants end of period
26

 
23

 
26

 
23

 
 
 
 
 
 
 
 
Total Domestic Restaurants
1,085

 
994

 
1,085

 
994

 
 
 
 
 
 
 
 
International Franchised Activity:
 
 
 
 
 
 
 
Beginning of period
122

 
89

 
106

 
76

Openings
8

 
5

 
24

 
20

Closures

 

 

 
(2
)
Restaurants end of period
130

 
94

 
130

 
94

 
 
 
 
 
 
 
 
Total System-wide Restaurants
1,215

 
1,088

 
1,215

 
1,088

System-wide sales. System-wide sales represents net sales for all of our company-owned and franchised restaurants, with franchised restaurant sales reported by franchisees. While we do not record franchised restaurant sales as revenue, our royalty revenue is calculated based on a percentage of franchised restaurant sales, which generally ranges from 5.0% to 6.0% of gross sales, net of discounts. This measure allows management to better assess changes in our royalty revenue, our overall store performance, the health of our brand, and the strength of our market position relative to competitors. Our system-wide sales growth is driven by new restaurant openings as well as increases in same store sales.
Average unit volume (“AUV”). AUV consists of the average annual sales of all restaurants that have been open for a trailing 52-week period or longer. This measure is calculated by dividing sales during the applicable period for all restaurants being measured by the number of restaurants being measured. Domestic AUV includes revenue from both company-owned and franchised restaurants. AUV allows management to assess our company-owned and franchised restaurant economics. Changes in AUV are primarily driven by increases in same store sales and are also influenced by opening new restaurants.
Same store sales. 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. We review same store sales for company-owned restaurants as well as franchised restaurants. Same store sales are driven by changes in transactions and average transaction size. Transaction size changes are driven by price changes or product mix shifts from either a change in the number of items purchased or shifts into higher or lower priced categories of items.
 

20


EBITDA and Adjusted EBITDA. We define EBITDA as net income before interest expense, net, income tax expense, and depreciation and amortization. We define Adjusted EBITDA as EBITDA further adjusted for transaction costs, gains and losses on the disposal of assets, and stock-based compensation expense. EBITDA and Adjusted EBITDA may not be comparable to other similarly titled measures of other companies due to differences in methods of calculation. For a reconciliation of net income to EBITDA and Adjusted EBITDA and for further discussion of EBITDA and Adjusted EBITDA as non-GAAP measures and how we utilize them, see footnote 2 below.
The following table sets forth our key performance indicators as well as our total revenue and net income for the thirteen and thirty-nine weeks ended September 29, 2018 and September 30, 2017 (dollars in thousands):
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
September 29, 2018
 
September 30, 2017
 
September 29, 2018
 
September 30, 2017
Number of system-wide restaurants open at end of period
1,215

 
1,088

 
1,215

 
1,088

System-wide sales (1)
$
315,312

 
$
274,021

 
$
933,250

 
$
802,420

Domestic restaurant AUV
$
1,131

 
$
1,102

 
$
1,131

 
$
1,102

System-wide domestic same store sales growth
6.3
%
 
4.1
%
 
6.7
%
 
1.7
%
Company-owned domestic same store sales growth
5.0
%
 
5.5
%
 
6.8
%
 
0.5
%
Total revenue
$
38,246

 
$
33,123

 
$
112,672

 
$
98,111

Net income
$
6,293

 
$
4,704

 
$
19,300

 
$
15,868

Adjusted EBITDA (2)
$
12,246

 
$
9,930

 
$
36,485

 
$
28,708

 
(1) The percentage of system-wide sales attributable to company-owned restaurants was 3.8% and 3.5% for the thirteen weeks ended September 29, 2018 and September 30, 2017, respectively, and was 3.7% and 3.4% for the thirty-nine weeks ended September 29, 2018 and September 30, 2017, respectively. The remainder was generated by franchised restaurants, as reported by our franchisees.
(2) EBITDA and Adjusted EBITDA are supplemental measures of our performance that are not required by, or presented in accordance with, accounting principles generally accepted in the United States (“GAAP”). EBITDA and Adjusted EBITDA are not measurements of our financial performance under GAAP and should not be considered as an alternative to net income or any other performance measure derived in accordance with GAAP, or as an alternative to cash flows from operating activities as a measure of our liquidity.
We define “EBITDA” as net income before interest expense, net, income tax expense, and depreciation and amortization. We define “Adjusted EBITDA” as EBITDA further adjusted for transaction costs, gains and losses on the disposal of assets, and stock-based compensation expense. There were no gains or losses on disposal of assets during the thirteen and thirty-nine weeks ended September 29, 2018 and September 30, 2017. We caution investors that amounts presented in accordance with our definitions of EBITDA and Adjusted EBITDA may not be comparable to similar measures disclosed by our competitors, because not all companies and analysts calculate EBITDA and Adjusted EBITDA in the same manner. We present EBITDA and Adjusted EBITDA because we consider them to be important supplemental measures of our performance and believe they are frequently used by securities analysts, investors, and other interested parties in the evaluation of companies in our industry. Management believes that investors’ understanding of our performance is enhanced by including these non-GAAP financial measures as a reasonable basis for comparing our ongoing results of operations. Many investors are interested in understanding the performance of our business by comparing our results from ongoing operations on a period-over-period basis and would ordinarily add back non-cash expenses such as depreciation and amortization, as well as items that are not part of normal day-to-day operations of our business.
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;
for planning purposes, including the preparation of our internal annual operating budget and financial projections;
to evaluate the performance and effectiveness of our operational strategies;
to evaluate our capacity to fund capital expenditures and expand our business; and

21


to calculate incentive compensation payments for our employees, including assessing performance under our annual incentive compensation plan and determining the vesting of performance-based equity awards.
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. Some of the limitations are:
such measures do not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;
such measures do not reflect changes in, or cash requirements for, our working capital needs;
such measures do not reflect the interest expense or the cash requirements necessary to service interest or principal payments on our debt;
such measures do not reflect our tax expense or the cash requirements to pay our taxes;
although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future and such measures do not reflect any cash requirements for such replacements; and
other companies in our industry may calculate such measures differently than we do, limiting their usefulness as comparative measures.
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 transaction costs, gains and losses on disposal of assets, and stock-based compensation, among other items. 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. 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 29, 2018 and September 30, 2017 (in thousands):
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
Net income
$
6,293

 
$
4,704

 
$
19,300

 
$
15,868

Interest expense, net
2,545

 
1,302

 
6,623

 
3,908

Income tax expense
1,518

 
2,690

 
3,925

 
5,631

Depreciation and amortization
1,134

 
881

 
3,163

 
2,407

EBITDA
$
11,490

 
$
9,577

 
$
33,011

 
$
27,814

Additional adjustments:
 
 
 
 
 
 
 
Transaction costs (a)

 

 
1,462

 

Stock-based compensation expense (b)
756

 
353

 
2,012

 
894

Adjusted EBITDA
$
12,246

 
$
9,930

 
$
36,485

 
$
28,708

 
(a) Represents costs and expenses related to the refinancing of the senior secured credit facility dated June 30, 2016 (the “2016 Facility”) and payment of a special dividend; all transaction costs are included in selling, general and administrative expenses (“SG&A”).
(b) Includes non-cash, stock-based compensation.

22


Results of Operations
Thirteen Weeks Ended September 29, 2018 compared to Thirteen Weeks Ended September 30, 2017
The following table sets forth our results of operations for the thirteen weeks ended September 29, 2018 and September 30, 2017 (dollars in thousands):
 
Thirteen Weeks Ended
 
Increase / (Decrease)
 
September 29,
2018
 
September 30,
2017
 
$
 
%
Revenue:
 
 
 
 
 
 
 
Royalty revenue, franchise fees and other
$
17,787

 
$
15,872

 
$
1,915

 
12.1
 %
Advertising fees and related income
8,614

 
7,579

 
1,035

 
13.7
 %
Company-owned restaurant sales
11,845

 
9,672

 
2,173

 
22.5
 %
Total revenue
38,246

 
33,123

 
5,123

 
15.5
 %
Costs and expenses:
 
 
 
 
 
 
 
Cost of sales (1)
8,040

 
7,823

 
217

 
2.8
 %
Advertising expenses
8,431

 
7,665

 
766

 
10.0
 %
Selling, general and administrative
10,285

 
8,058

 
2,227

 
27.6
 %
Depreciation and amortization
1,134

 
881

 
253

 
28.7
 %
Total costs and expenses
27,890

 
24,427

 
3,463

 
14.2
 %
Operating income
10,356

 
8,696

 
1,660

 
19.1
 %
Interest expense, net
2,545

 
1,302

 
1,243

 
95.5
 %
Income before income tax expense
7,811

 
7,394

 
417

 
5.6
 %
Income tax expense
1,518

 
2,690

 
(1,172
)
 
(43.6
)%
Net income
$
6,293

 
$
4,704

 
$
1,589

 
33.8
 %
 
(1) Cost of sales excludes depreciation and amortization, which are presented separately, and includes advertising expenses incurred at company-owned restaurants.
Total revenue. During the thirteen weeks ended September 29, 2018, total revenue was $38.2 million, an increase of $5.1 million, or 15.5%, compared to $33.1 million in the comparable period in 2017.
Royalty revenue, franchise fees and other. During the thirteen weeks ended September 29, 2018, royalty revenue, franchise fees and other was $17.8 million, an increase of $1.9 million, or 12.1%, compared to $15.9 million in the comparable period in 2017. The increase is due to 124 net franchise restaurant openings since September 30, 2017 and domestic same store sales growth of 6.3%.
Advertising fees and related income. During the thirteen weeks ended September 29, 2018, advertising fees and related income was $8.6 million, an increase of $1.0 million, or 13.7%, compared to $7.6 million in the comparable period in 2017. Advertising fees increased primarily due to the increase in system-wide sales in the thirteen weeks ended September 29, 2018 compared to the thirteen weeks ended September 30, 2017.
Company-owned restaurant sales. During the thirteen weeks ended September 29, 2018, company-owned restaurant sales were $11.8 million, an increase of $2.2 million, or 22.5%, compared to $9.7 million in the comparable period in 2017. The increase was primarily due to the acquisition of three franchised restaurants since the prior year comparable period resulting in additional sales of $1.5 million and company-owned domestic same store sales growth of 5.0%, which was driven by both an increase in transactions and an increase in average transaction size.
Cost of sales. During the thirteen weeks ended September 29, 2018, cost of sales was $8.0 million, an increase of $0.2 million, or 2.8%, compared to $7.8 million in the comparable period in 2017. Cost of sales as a percentage of company-owned restaurant sales was 67.9% in the thirteen weeks ended September 29, 2018, compared to 80.9% in the comparable period in 2017.


23


The table below presents the major components of cost of sales (dollars in thousands):
 
 
Thirteen Weeks Ended
 
 
September 29,
2018
 
As a % of company-owned restaurant sales
 
September 30,
2017
 
As a % of company-owned restaurant sales
 
 
Cost of sales:
 
 
 
 
 
 
 
 
Food, beverage and packaging costs
$
3,926

 
33.1
 %
 
$
4,136

 
42.8
 %
 
Labor costs
2,621

 
22.1
 %
 
2,295

 
23.7
 %
 
Other restaurant operating expenses
1,795

 
15.2
 %
 
1,634

 
16.9
 %
 
Vendor rebates
(302
)
 
(2.5
)%
 
(242
)
 
(2.5
)%
 
Total cost of sales
$
8,040

 
67.9
 %
 
$
7,823

 
80.9
 %
Food, beverage and packaging costs as a percentage of company-owned restaurant sales were 33.1% in the thirteen weeks ended September 29, 2018, compared to 42.8% in the comparable period in 2017. The decrease was primarily due to a 29.8% decrease in the cost of bone-in chicken wings as compared to the prior year period.
Labor costs as a percentage of company-owned restaurant sales were 22.1% for the thirteen weeks ended September 29, 2018, compared to 23.7% in the comparable period in 2017. 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 5.0%.
Other restaurant operating expenses as a percentage of company-owned restaurant sales were 15.2% for the thirteen weeks ended September 29, 2018, compared to 16.9% in the comparable period in 2017. 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 5.0%.
Advertising expenses. During the thirteen weeks ended September 29, 2018, advertising expenses were $8.4 million, an increase of $0.8 million compared to $7.7 million in the comparable period in 2017. Under the new accounting guidance, 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. During the thirteen weeks ended September 29, 2018, SG&A expense was $10.3 million, an increase of $2.2 million compared to $8.1 million in the comparable period in 2017. The increase in SG&A expense was primarily due to an increase in payroll and benefit expenses related to planned headcount additions.
Depreciation and amortization. During the thirteen weeks ended September 29, 2018, depreciation expense was $1.1 million, an increase of $0.3 million compared to $0.9 million in the comparable period in 2017. The increase in depreciation and amortization was primarily due to additional amortization associated with reacquired franchise rights resulting from the acquisition of franchised restaurants.
Interest expense, net. During the thirteen weeks ended September 29, 2018, interest expense was $2.5 million, an increase of $1.2 million compared to $1.3 million in the comparable period in 2017. The increase was primarily due to an increase in the principal amount of indebtedness and applicable interest rate related to the refinancing of the 2016 Facility in January 2018.
Income tax expense. Income tax expense was $1.5 million in the thirteen weeks ended September 29, 2018, yielding an effective tax rate of 19.4%, compared to an effective tax rate of 36.4% in the prior year. The decrease in the effective tax rate was due to the reduction in the federal statutory rate for the thirteen weeks ended September 29, 2018 from 35% to 21% effective the first day of fiscal 2018, as well as $0.3 million in tax benefits resulting from the recognition of excess tax benefits from stock-based compensation in income tax expense compared to $0.1 million of excess tax benefits in the prior year period.

24


Segment results. The following table sets forth our revenue and operating profit for each of our segments for the period presented (dollars in thousands):
 
Thirteen Weeks Ended
 
Increase / (Decrease)
 
September 29,
2018
 
September 30,
2017
 
$
 
%
Revenue:
 
 
 
 
 
 
 
Franchise segment
$
26,401

 
$
23,451

 
$
2,950

 
12.6
 %
Company segment
11,845

 
9,672

 
2,173

 
22.5
 %
Total segment revenue
$
38,246

 
$
33,123

 
$
5,123

 
15.5
 %
 
 
 
 
 
 
 
 
Segment Profit:
 
 
 
 
 
 
 
Franchise segment
$
7,663

 
$
7,763

 
$
(100
)
 
(1.3
)%
Company segment
2,693

 
933

 
1,760

 
188.6
 %
Total segment profit
$
10,356

 
$
8,696

 
$
1,660

 
19.1
 %
Franchise segment. During the thirteen weeks ended September 29, 2018, franchise segment revenue was $26.4 million, an increase of $3.0 million, or 12.6%, compared to $23.5 million in the comparable period in 2017. Royalty revenue increased $2.0 million due to 124 net franchise restaurant openings since September 30, 2017 and domestic same store sales growth of 6.3%. Advertising fees and related income increased $1.0 million due to the increase in system-wide sales from September 30, 2017 to September 29, 2018.
During the thirteen weeks ended September 29, 2018, franchise segment profit was $7.7 million, a decrease of $0.1 million, or 1.3%, compared to $7.8 million in the comparable period in 2017, primarily due to increases in SG&A, primarily related to planned headcount additions.
Company segment. During the thirteen weeks ended September 29, 2018, company-owned restaurant sales were $11.8 million, an increase of $2.2 million, or 22.5%, compared to $9.7 million in the comparable period in 2017. The increase was primarily due to the acquisition of three franchised restaurants since the prior year comparable period, resulting in additional sales of $1.5 million and an increase in company-owned domestic same store sales of 5.0%, which was driven by both an increase in transactions and an increase in average transaction size.
During the thirteen weeks ended September 29, 2018, company segment profit was $2.7 million, an increase of $1.8 million, or 188.6%, compared to $0.9 million in the comparable period in 2017. The increase was due to the leveraging of fixed costs due to company-owned same store sales growth of 5.0%, as well as a 29.8% decrease in the cost of bone-in chicken wings. Additionally, a combined profit of $0.5 million from the three additional company-owned locations acquired from franchisees in the periods subsequent to September 30, 2017, further increased company segment profit in the thirteen weeks ended September 29, 2018 compared to the prior year period.

25


Thirty-Nine Weeks Ended September 29, 2018 compared to Thirty-Nine Weeks Ended September 30, 2017
The following table sets forth our results of operations for the thirty-nine weeks ended September 29, 2018 and September 30, 2017 (dollars in thousands):
 
Thirty-Nine Weeks Ended
 
Increase / (Decrease)
 
September 29,
2018
 
September 30,
2017
 
$
 
%
Revenue:
 
 
 
 
 
 
 
Royalty revenue, franchise fees and other
$
52,772

 
$
48,735

 
$
4,037

 
8.3
 %
Advertising fees and related income
25,574

 
22,313

 
3,261

 
14.6
 %
Company-owned restaurant sales
34,326

 
27,063

 
7,263

 
26.8
 %
Total revenue
112,672

 
98,111

 
14,561

 
14.8
 %