| Item 1A. | Risk Factors | ||||
Risks Related to Our Business and Our Industry
If we fail to successfully implement our growth strategy, which includes opening new restaurants, our ability to increase our revenue and operating profits could be materially adversely affected.
Our growth strategy relies substantially upon new restaurant development by existing and new franchisees and we are continuously seeking to identify target markets where we can enter or expand, taking into account numerous factors such as the location of our current restaurants, demographics, traffic patterns and information gathered from local employees. While we believe there is opportunity for our brand to grow to up to approximately 2,500 domestic restaurants over the long term, we do not currently target a specific number of annual new restaurant openings over a multi-year period.expand. We and our franchisees face many challenges in opening new restaurants, including:
•availability of financing;
•selection and availability of and competition for suitable restaurant locations;
•negotiation of acceptable lease and financing terms;
•securing required governmental permits and approvals, including zoning approvals;
•employment and training of and wage rates for qualified personnel in local markets;personnel;
•general economic and business conditions;
•unanticipated increases in construction and development costs; and
•the general legal and regulatory landscape in which we andrequirements applicable to our restaurants operate.industry.
In particular, because the majoritysubstantially all of our new restaurant development is funded by franchisee investment, our growth strategy is dependent on our franchisees’ (or prospective franchisees’) ability to access funds to finance such development. We do not provide our franchisees with direct financing and therefore their ability to access borrowed funds generally depends on their independent relationships with various financial institutions. Some of our existing franchisees utilize loans guaranteed by the U.S. Small Business Administration (“SBA”) which guarantees loans made by financial institutions to small businesses in the U.S., including franchisees. If SBA guaranteed loans are no longer available to our franchisees (or potential franchisees), their ability to obtain the requisite financing at attractive rates, or at all, could be adversely affected. Moreover, if our franchisees (or prospective franchisees) are not able to obtain independent financing from any source at commercially reasonable rates, or at all, they may be unwilling or unable to invest in the development of new restaurants, and our future growth could be adversely affected.
To the extent our franchisees are unable to open new restaurants asat the level that we anticipate, our revenue growth would come primarily from growth in same store sales. Our failure to add a significant number of new restaurants or grow domestic same store sales would adversely affect our ability to increase our revenue and operating income and could materially and adversely harmaffect our business and operating results. As a result of the foregoing, we cannot predict whether our growth strategy will be successful.
Changes in food and supply costs could materially adversely affect our results of operations.
Our profitability depends in part on our ability to anticipate and react to changes in food and supply costs. There are no established fixed price markets for bone-in chicken wings. As a result, we are subject to prevailing market conditions and remain susceptible to volatility in food costs. Any increase in the prices of the ingredients most critical to our menu, particularly chicken, could materially adversely affect our operating results. Bone-in chicken wing prices, which we do not effectively hedge, in our company-owned restaurants in 2017 averaged 18% higher than in 2016 as the average price per pound increased. If there is a significant rise in the price or size of bone-in chicken wings, and we are unable to successfully adjust menu prices or otherwise make operational adjustments to account for the higher wing prices, our operating results could be adversely affected. For example, bone-in chicken wings accounted for approximately 31% of ourFood costs of sales in fiscal 2017 and 2016. A hypothetical 10%may also increase in the bone-in chicken wing costs for fiscal 2017 would have increased cost of sales by approximately $0.9 million for fiscal 2017.
Our success depends in significant part on the future performance of existing and new franchise restaurants, and we are subject to a variety of additional risks associated with our franchisees.
A substantial portion of our revenue comes from royalties generated by our franchised restaurants. We anticipate that franchise royalties will represent a substantial part of our revenue in the future. As of December 30, 2017, we had 314 domestic franchisees operating 1,004 domestic restaurants and 8 international franchisees operating 106 international restaurants. Our largest franchisee operated 67 restaurants and our top 10 franchisees operated a total of 283 restaurants as of December 30, 2017. Accordingly, we are reliant on the performance of our franchisees in successfully operating their restaurants and paying royalties to us on a timely basis. Our franchise system subjects us to a number of risks, any one of which may impact our ability to collect royalty payments from our franchisees, may harm the goodwill associated with our franchise, and may materially adversely affect our business and results of operations.
Our franchisees are an integral part of our business. We may be unable to successfully implement our growth strategy without the participation of our franchisees and the adherence by our franchisees ofto our restaurant operation guidelines. Because our ability to control our franchisees is limited, our franchisees may fail to focus on the fundamentals of restaurant operations, such as quality, service, and cleanliness, which would have a negative impact on our success. In addition, our franchisees may fail to participate in our marketing initiatives, which could materially adversely affect their sales trends, average weekly sales, and
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results of operations. Although we provide frequent training opportunities to our franchisees to ensure consistency among our operations, there may be differences in productthe quality of operations at our franchised restaurants that impactsimpact the profitability of those restaurants.
In addition, if our franchisees fail to renew their franchise agreements, our royalty revenue may decrease, which in turn could materially and adversely affect our business and operating results. It also may be difficult for us to monitor our international franchisees’ implementation of our growth strategy due to our lack of personnel in the markets served by such franchisees.
Furthermore, a bankruptcy of any multi-unit franchisee could negatively impact our ability to collect payments due under such franchisee’s franchise agreements. In a franchisee bankruptcy, the bankruptcy trustee may reject its franchise agreements pursuant to Section 365 under the United Statesapplicable bankruptcy code, in which case there would be no further royalty payments from such franchisee. The amount of the proceeds, if any, that may ultimately be recovered in a bankruptcy proceeding of such franchisee may not be sufficient to satisfy a damage claim resulting from such rejection.
If we fail to identify, recruit and contract with a sufficient number of qualified franchisees, our ability to open new franchised restaurants and increase our revenue could be materially adversely affected.
The opening of additional franchised restaurants depends, in part, upon the availability of prospective franchisees who meet our criteria. We may not be able to identify, recruit or contract with suitable franchisees in our target markets on a timely basis or at all. Although we have developed criteria to evaluate and screen prospective franchisees, our franchisees may not ultimately have the business acumen or be able to access the financial or management resources that they need to open and successfully operate the restaurants contemplated by their agreements with us, or they may elect to cease restaurant development for other reasons and state franchise laws may limit our ability to terminate or modify these license agreements. If we are unable to recruit suitable franchisees or if franchisees are unable or unwilling to open new restaurants as planned,any of these situations occur, our growth may be slower than anticipated, which could materially adversely affect our ability to increase our revenue and materially adversely affect our business, financial condition and results of operations.
Our stated sales to investment ratio and target unlevered cash-on-cash return may not be indicative of future results of any new franchised restaurant.
Initial investment levels, AUV levels, restaurant-level operating costs and restaurant-level operating profit of any new restaurant may differ from average levels experienced by franchisees in prior periods due to a variety of factors, and these differences may be material. Accordingly, our stated sales to investment ratio and average unlevered cash-on-cash return may not be indicative of future results of any new franchised restaurant. In addition, estimated initial investment costs and restaurant-level operating costs are based on information self-reported by our franchisees and have not been verified by us. Furthermore, performance of new restaurants is impacted by a range of risks and uncertainties beyond our or our franchisees’ control, including those described by other risk factors described in this report.
Food safety and food-borne illness concerns may have a material adverse effect on our business.
Food safety is a top priority, and we dedicate substantial resources to ensure that our customers enjoy safe, quality food products. However, food-borne illnesses, such as salmonella, E. coli infection, or hepatitis A, and food safety issues, including food tampering or contamination, have occurred in the food industry in the past, and could occur in the future. Any report or publicity linking our restaurants to instances of food-borne illness or food safety issues could materially adversely affect our brand and reputation as well as our revenue and profits. Even instances of food-borne illness or food safety issues occurring solely at our competitors' restaurants could result in negative publicity about the food service industry or fast casual restaurants generally and adversely impact our restaurants.
In addition, our reliance on third-party food suppliers and distributors increases the risk that food-borne illness incidents could be caused by factors outside of our control and that multiple restaurants would be affected rather than a single restaurant. We cannot ensure that all food items are properly maintained during transport throughout the supply chain or that our employees and our franchisees and their employees will identify all products that may be spoiled and should not be used. Our industry has also long been subject to the threat of food tampering by suppliers, employees, and others such as the addition of foreign objects in the food that we sell. Reports, whether or not true, of injuries caused by food tampering have in the past severely injured the reputations and brands of restaurant chains in the quick service restaurant segment and could affect us in the future as well. If our customers become ill from food-borne illnesses or injured from food tampering, we could also be forced to
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temporarily close some restaurants. Moreover, any instances of food contamination, whether or not at our restaurants, could subject our restaurants or our suppliers to a food recall pursuant to the Food and Drug Administration Food Safety Modernization Act.
Public health epidemics or outbreaks, such as COVID-19, could materially adversely impact our business.
Federal, state and local government responses to a pandemic, such as COVID-19, and our Company’s response to the pandemic have in the past disrupted and in the future may disrupt our business. Because of COVID-19, in the United States and throughout much of the world, individuals are currently being encouraged to practice social distancing, restricted from gathering in groups and, in some areas, placed on complete restriction from non-essential movements outside of their homes. In response to the COVID-19 pandemic and these changing conditions, we closed the dining rooms in all of our domestic restaurants, which at the time represented approximately 20% of our domestic system sales, and also closed the dining rooms in some of our international restaurants. We also incurred additional operating expenses at our company-owned restaurants due to the payment of increased incentive compensation to our full-time team members and increased selling, general and administrative expense due to COVID-19-related support provided to international franchisees. The COVID-19 pandemic and these responses to date have adversely affected and will continue to adversely affect our international guest traffic and sales and operating costs for our company-owned restaurants, and we cannot predict how long the pandemic will last or what other government responses may occur.
Continuing disruptions in operations due to pandemics, such as COVID-19-related social distancing, or other movement restricting policies put in place, could impact our revenues or result in our providing payment relief or other forms of support to franchisees, and could materially adversely affect our business and results of operations. Restaurant operations could be further disrupted if any employees are diagnosed with a pandemic illness, such as COVID-19, since this could require some or all of a restaurant’s employees to be quarantined and restaurant facilities to be closed to disinfect. If a significant percentage of the workforce is unable to work, whether because of illness, quarantine, limitations on travel, or other government restrictions in connection with a pandemic, including COVID-19, operations may be negatively impacted, potentially materially adversely affecting our liquidity, financial condition or results of operations. In addition, any report or publicity linking our restaurants to instances of pandemic illness exposure could adversely impact our brand and reputation as well as our revenue and profits. Our suppliers could also be adversely impacted by a pandemic, such as COVID-19. If our suppliers’ employees are unable to work or our suppliers' operations are disrupted, we and our franchisees could face shortages of food items or other supplies, and our and our franchisees' operations and sales could be materially adversely impacted by such supply interruptions.
If the business interruptions caused by a pandemic, including COVID-19, last longer than we expect, we or our franchisees may need to seek additional sources of liquidity. There can be no guarantee that additional liquidity, whether through the credit markets or government programs, will be readily available or available on favorable terms to our franchisees or us. The ultimate impact of the COVID-19 pandemic, or pandemics in the future, on the Company’s operations is unknown and will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 or other pandemic, the rate at which vaccinations become available, and any additional preventative and protective actions that governments, or the Company, may direct, which may result in an extended period of continued business disruption, reduced customer traffic, and reduced operations.
Our expansion into new and existing markets may present increased risks.
Some of our new restaurants are located in markets where there may be limited or no market recognition of our brand. Those markets may have competitive conditions, consumer tastes and discretionary spending patterns that are different from those in our existing markets, and we may encounter well-established competitors with substantially greater financial resources than us. As a result, those new restaurants may be less successful than restaurants in our existing markets.
We may need to build brand awareness in new markets through greater investments in advertising and promotional activity than we originally planned, which could negatively impact the profitability of our operations in such new markets. Our franchisees may find it more difficult in new markets to hire, motivate and keep qualified employees who can project our vision, passion and culture. In addition, we may have difficulty finding reliable suppliers or distributors or ones that can provide us, either initially or over time, with adequate supplies of ingredients meeting our quality standards. Restaurants opened in new markets may also have lower average restaurant sales than restaurants opened in existing markets and may take longer to, or fail to, ramp up and reach expected sales and profit levels. Additionally, new markets may have higher rents and labor rates. These factors could negatively impact our unit economics and overall profitability.
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We also intend to continue opening new franchised restaurants in our existing markets as a core part of our growth strategy. As a result, the opening of a new restaurant in or near markets in which our restaurants already exist could adversely affect the sales of our existing restaurants.
Our success depends on our ability to compete with many other restaurants.
The restaurant industry in general, and the fast casual category in particular, are intensely competitive, and we compete with many well-established restaurant companies on the basis of food taste and quality, price, service, value, location, convenience, and overall customer experience. Our competitors include individual restaurants and restaurant chains that range from independent local operators to well-capitalized national and regional restaurant companies, including restaurants offering chicken wing products, as well as dine-in, carry-out, and delivery services offering other types of food.
As our competitors expand their operations or as new competitors enter the industry, we expect competition to intensify. Should our competitors increase their spending on advertising and promotions or if their advertising and promotions are more effective, we could experience a loss of customer traffic to our competitors and a material adverse effect on our results of operations. We compete with other restaurant chains and other retail businesses for quality site locations, management, hourly employees, and qualified franchisees. We also face the risk that new or existing competitors will copy our business model, menu options, presentation, or ambiance, among other things. Consumer tastes, nutritional and dietary trends, traffic patterns, and the type, number, and location of competing restaurants often affect the restaurant business, and our competitors may react more efficiently and effectively to those conditions.
Moreover, we may also compete with companies outside the fast casual, quick service, and casual dining segments of the restaurant industry, such as deli sections and in-store cafés of several major grocery store chains and from home delivery meal plan services, as well as from convenience stores and other dining outlets. These competitors may have, among other things, a more diverse menu, lower operating costs, better locations, better facilities, better management, more effective marketing, more efficient operations, stronger brand recognition, loyal customer base and more convenient offerings than we have. If we are unable to compete effectively, it could decrease our traffic, sales and profit margins, which could materially adversely affect our business, financial condition, and results of operations.
Interruptions in the supply of product to company-owned restaurants and franchisees could materially adversely affect our revenue.
In order to maintain quality-control standards and consistency among restaurants, we require through our franchise agreements that our franchisees obtain food and other supplies from preferred suppliers approved by us in advance. In this regard, we and our franchisees depend on a group of suppliers for food ingredients, beverages, paper goods, and distribution. We and our franchisees bear risks associated with the timeliness, solvency, reputation, labor relations, freight costs, price of raw materials, and compliance with health and safety standards of each supplier. We have little control over such suppliers. Disruptions in these relationships may reduce company-owned restaurant and franchisee sales and, in the case of reduced franchisee sales, our royalty income. Overall difficulty of suppliers meeting restaurant product demand, interruptions in the supply chain, obstacles or delays in the process of renegotiating or renewing agreements with preferred suppliers, financial difficulties experienced by suppliers, or the deficiency, lack, or poor quality of alternative suppliers could adversely impact company-owned restaurant and franchisee sales, which could materially adversely affect our business and operating results and, in the case of reduced franchisee sales, would reduce our royalty income and revenue. In addition, our focus on a limited menu could make these consequences more severe.
Our operating results may fluctuate significantly and could fall below the expectations of securities analysts and investors due to certain factors, some of which are beyond our control, resulting in a decline in our stock price.
Our operating results may fluctuate significantly because of a number of factors, including:
•the timing of new restaurant openings;
•profitability of our restaurants, especially in new markets;
•changes in interest rates;
•increases and decreases in average weekly sales and same store sales, including due to the timing and popularity of sporting and other events;
•macroeconomic conditions, globally, nationally and locally;
•changes in consumer preferences and competitive conditions;
•increases in infrastructure costs; and
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•fluctuations in commodity prices.
Accordingly, results for any one fiscal quarter or year are not necessarily indicative of results to be expected for any other fiscal quarter or year and our results for any particular future period may decrease compared to the prior period. In the future, operating results may fall below the expectations of securities analysts and investors. In that event, the price of our common stock would likely decrease.
Cyber incidents or deficiencies in cybersecurity could negatively impact our business by causing data loss, a disruption to our operations, a compromise or corruption of confidential or personal information, damage to our employee and business relationships and reputation, and/or litigation and liability, all of which could subject us to loss and harm our brand.
As our reliance on technology has increased, so have the risks posed to our systems, both internal and those we have outsourced. Additionally, there has been an increase in data integration and complexity of our technology systems, particularly in our international markets. The use of electronic payment methods and the collection and storage of personal information from individuals expose us and our franchisees to increased risk of cyber incidents, privacy and/or security breaches, and other risks. We rely on commercially available systems, software, tools and monitoring to provide security for processing, transmitting, and storing such information. The use of personally identifiable information by us is regulated by foreign, federal, and state laws, which continue to evolve, as well as by certain third-party agreements. As privacy and information security laws and regulations change, we may incur additional costs to ensure that we remain in compliance with those laws and regulations. See “Changing regulations relating to privacy, information security, and data protection could increase our costs, affect or limit how we collect and use personal information” below for a further discussion on privacy, information security, and data protection regulations.
Our franchisees, contractors and third parties with whom we do business have experienced cyber incidents and security breaches in which confidential or personal information could have been stolen and we, our franchisees, contractors and third parties with whom we do business may experience cyber incidents and security breaches in which confidential or personal information is stolen in the future. Third parties may have the technology or know-how to breach the security of confidential or personal information collected, stored or transmitted by us or our franchisees, and our and their security measures and those of third parties with whom we do business, including technology vendors, solution providers, software manufacturers and supply chain vendors, may not effectively prohibit others from obtaining improper access to this information. Third parties also may be able to develop and deploy viruses, worms and other malicious software programs, such as ransomware, that attack our, our franchisees’ and third parties with whom we do business’s systems or otherwise exploit any security vulnerabilities.The techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and are often difficult to detect for long periods of time, which may cause a breach to go undetected for an extensive period of time. Advances in computer and software capabilities, technology, new tools, and other developments may increase the risk of such a breach. If a person is able to circumvent the security measures of our business, our franchisees’ businesses or those of other third parties, he or she could destroy or steal valuable information or disrupt the operations of our business. In addition, our franchisees, contractors or third parties with whom we do business or to whom we outsource business operations may attempt to circumvent our security measures in order to misappropriate confidential information and may purposefully or inadvertently cause a breach involving such information. Furthermore, due to the COVID-19 pandemic, we have allowed our team members in our corporate headquarters to work from home. The significant increase in remote working, particularly for an extended period of time, could increase certain risks to our business, including an increased risk of cybersecurity events, vulnerability of our systems and improper dissemination of confidential or personal information, if our physical and cybersecurity measures or our corporate policies are not effective. The costs to us to eliminate any of the foregoing cybersecurity vulnerabilities or to address a cyber incident could be significant and have material adverse impact on our financial condition, results of operations and cash flows.
If our employees, franchisees, or vendors fail to comply with applicable laws, regulations, or contract terms, and this information is obtained by unauthorized persons, used inappropriately, or destroyed, it could adversely affect our reputation, could disrupt our operations and result in costly litigation, judgments, or penalties resulting from violation of laws and payment card industry regulations. Any such claim or proceeding could cause us to incur significant unplanned expenses and significantly harm our reputation, which could have a material adverse impact on our financial condition, results of operations and cash flows. A cyber incident could also require us to provide notifications, result in adverse publicity, loss of sales and profits, increase fees payable to third parties, and result in penalties or remediation and other costs that could materially adversely affect the operation of our business and results of operations. In addition, our cyber liability coverage may be inadequate or may not be available in the future on acceptable terms, or at all, and defending a suit, regardless of its merit, could be costly and divert management’s attention.
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Our increasing reliance on debit or credit cards for payment increases the risk of regulatory compliance and security breaches, which could materially adversely impact our business or results of operations.
The majority of our restaurant sales are paid by credit or debit cards. In connection with credit or debit card transactions in-restaurant, we and our franchisees collect and transmit confidential information to card processors. The systems currently used for transmission and approval of electronic payment transactions, and the technology utilized in electronic payments themselves, all of which can put electronic payment at risk, are determined and controlled by the payment card industry, not by us, through enforcement of compliance with the Payment Card Industry - Data Security Standards (as modified from time to time, "PCI DSS"). We and our franchisees must abide by the PCI DSS in order to accept electronic payment transactions. If we or our franchisees fail to abide by the PCI DSS, we or our franchisees could be subject to fines, penalties or litigation, which could adversely impact our results of operations. Furthermore, the payment card industry is requiring vendors to become compatible with smart chip technology for payment cards, or EMV-Compliant, or else bear full responsibility for certain fraud losses, referred to as the EMV Liability Shift. To become EMV-Compliant, merchants often utilize EMV-Compliant payment card terminals at the POS and obtain a variety of certifications. At present, many of our company-owned and franchised restaurants have not upgraded their POS systems to include such EMV-Compliant payment card terminals and as a result, may be at increased risk for breaches, which could materially adversely affect our business and operating results. We may become subject to claims for purportedly fraudulent transactions arising out of the actual or alleged theft of credit or debit card information, and we may also be subject to lawsuits or other proceedings relating to these types of incidents.
Changing regulations relating to privacy, information security and data protection could increase our costs and affect or limit how we collect and use personal information.
The United States, the European Union, and other countries in which we operate are increasingly adopting or revising privacy, information security, and data protection laws and regulations that could have a significant impact on our current and planned privacy, data protection, and information security-related practices, our collection, use, sharing, retention, and safeguarding of consumer and/or employee information, and some of our current or planned business activities. In the United States, these include rules and regulations promulgated under the authority of the FTC, the Health Insurance Portability and Accountability Act of 1996, federal and state labor and employment laws, state data breach notification laws, and state privacy laws such as the California Consumer Privacy Act of 2018. Many of these laws and regulations provide consumers and employees with a private right of action if a covered company suffers a data breach related to a failure to implement reasonable data security measures. In the European Union, this includes the General Data Protection Regulation. The legal framework around privacy issues is rapidly evolving, as various federal and state government bodies are considering adopting new privacy laws and regulations. These laws and regulations could result in significant limitations on or changes to the ways in which we can collect, use, host, store, or transmit personal information and other data. Compliance with privacy, data protection, and information security laws to which we are subject could result in additional costs, and our failure to comply with such laws could result in potentially significant regulatory investigations or government actions, penalties or remediation, and other costs, as well as adverse publicity, loss of sales and profits, and an increase in fees payable to third parties. Each of these implications could materially adversely affect our revenues, results of operations, business, and financial condition.
We and our franchisees rely on computer systems to process transactions and manage our business, and a disruption or a failure of such systems or technology could harm our ability to effectively manage our business.
Network and information technology systems are integral to our business. We utilize various computer systems, including our franchisee reporting system, by which our franchisees report their weekly sales and pay their corresponding royalty fees and required Ad Fund contributions. This system is critical to our ability to accurately track sales and compute and receive royalties and Ad Fund contributions due from our franchisees. We also rely on computer systems and network infrastructure across other areas of our operations, including marketing programs, employee engagement, management of our supply chain and POS processing in our restaurants.
Our operations depend upon our ability to protect our computer equipment and systems against damage from physical theft, fire, power loss, computer, network and telecommunications failure or other catastrophic events, as well as from internal and external security breaches, viruses and other disruptive software, worms, improper usage by employees and other disruptive problems. Any damage or failure of our computer systems or network infrastructure that causes an interruption in our operations could have a material adverse effect on our business and subject us to litigation or actions by regulatory authorities. In addition, such events could result in a need for a costly repair, upgrade or replacement of systems, or a decrease in, or in the collection of, royalties and Ad Fund contributions paid to us by our franchisees. To the extent that any disruption or security breach were to result in a loss of, or damage to, our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability which could materially affect our results of operations. It is also critical that we
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establish and maintain certain licensing and software agreements for the software we use in our day-to-day operations. A failure to procure or maintain these licenses could have a material adverse effect on our business operations.
There are risks associated with our increasing dependence on digital commerce platforms to maintain and grow sales, and limitations, disruptions or unavailability of our digital commerce platforms, or our ability to distribute our apps, could harm our ability to compete and conduct our business.
Customers are increasingly using e-commerce websites and apps, both domestically and internationally, like wingstop.com and our mobile ordering application, to order and pay for our products and select optional delivery and curbside services. As a result, we and our franchisees are increasingly reliant on digital ordering and payment for such sales, and portions of our digital commerce platforms depend on third party services, including cloud-based technologies and platforms. Our apps and other digital ordering and payment platforms could be damaged or interrupted by power loss, technological failures, cyber-attacks, other forms of sabotage or acts of God. In addition, the availability, distribution and functionality of our apps and updates to our apps are dependent on mobile app stores and their related policies, terms and conditions. Because we and our franchisees rely on digital orders for a significant portion of our sales, any limitations in functionality, interruptions or unavailability of any of our digital ordering or payment platforms could limit or delay customers’ ability to order through such platforms. Further, if our digital ordering and payment platforms do not meet customers’ expectations in terms of security, speed, attractiveness, or ease of use, customers may be less inclined to return to such platforms. Any such limitation, damage, interruption or unavailability of our digital commerce platforms or failure of those platforms to meet customers’ expectations could materially adversely affect our and our franchisees' sales and our results of operations and financial condition.
Any failure by us or our third-party delivery providers to provide timely and reliable delivery services may materially adversely affect our business and reputation.
As of December 26, 2020, delivery services were available at substantially all Wingstop restaurants throughout the United States. Interruptions or failures in our delivery services could prevent the timely or successful delivery of our products. These interruptions may be due to unforeseen events that are beyond our control or the control of our delivery providers, such as inclement weather, natural disasters, transportation disruptions, sabotage by an outside party, civil protests or labor unrest. In addition, changes in business practices of our delivery providers and governmental regulations could materially adversely impact delivery services and/or profitability.
If our products are not delivered on time and in safe and proper condition, customers may refuse to accept our products and have less confidence in our services, in which case our business and reputation may suffer. If our third-party delivery service providers fail to follow the quality standards or other terms that they agreed to with us, it could result in harm to our business and reputation and could force us to pursue arrangements with alternative delivery service providers, which could result in an interruption to our delivery services. These factors may materially adversely impact our sales and our brand reputation. We also incur additional costs associated with delivery orders, and it is possible that these orders could cannibalize more profitable carry-out or in-restaurant orders.
Uncertainty in the law with respect to the assignment of liabilities in the franchise business model could materially adversely impact our profitability.
One of the legal foundations fundamental to the franchise business model has been that, absent special circumstances, a franchisor is generally not responsible for the acts, omissions, or liabilities of its franchisees, whether with respect to the franchisees’ employees or otherwise. In the last several years, this principle has been the subject of differing and inconsistent interpretations at the National Labor Relations Board and in the courts, and the question of whether a franchisor can be held liable for the actions or liabilities of a franchisee under a vicarious liability theory, sometimes called “joint employer,” has become highly fact dependent and generally uncertain. A determination that we are a “joint employer” with our franchisees or that our franchisees are part of one unified system subject to joint and several liability could subject us and/or our franchisees to liability for employment-related and other liabilities of our franchisees and could cause us to incur other costs that have a material adverse effect on our results of operations.
Our business activities subject us and our franchisees to litigation risk that could subject us to significant money damages and other remedies or by increasing our and our franchisees' litigation expense.
We and our franchisees are, from time to time, the subject of, or potentially the subject of, complaints or litigation, including customer claims, class-action lawsuits, personal-injury claims, environmental claims, intellectual property claims, employee allegations of improper termination and discrimination and claims related to violations of laws, such as the Americans with
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Disabilities Act of 1990 ("ADA"), religious freedom laws, the Fair Labor Standards Act, other employment-related laws, the Occupational Safety and Health Act, the Employee Retirement Income Security Act of 1974, as amended, advertising laws and state and local “dram shop” laws. Each of these claims may increase our and our franchisees’ costs, limit the funds of our franchisees available to make royalty payments and reduce the execution of new franchise agreements. Litigation against a franchisee or its affiliates by third parties or regulatory agencies, whether in the ordinary course of business or otherwise, may also include claims against us by virtue of our relationship with the defendant-franchisee, whether under vicarious liability, joint employer, or other theories.
Regardless of whether any claim brought against us or a franchisee in the future is valid or whether we or they are liable, such a claim would be expensive to defend and may divert time, money and other valuable resources away from our or their operations and, thereby, hurt our business. In addition, the ability of a defendant-franchisee to make royalty payments in the event of such claims may be decreased and adverse publicity resulting from such allegations may materially adversely affect us and our brand, regardless of whether these allegations are valid or whether we or they are liable. Our international business may be subject to additional risks related to litigation, including difficulties in enforcement of contractual obligations governed by foreign law due to differing interpretations of rights and obligations, compliance with multiple and potentially conflicting laws, new and potentially untested laws and judicial systems, and reduced or diminished protection of intellectual property. A substantial judgment against us could materially adversely affect our business and operating results. Insurance may not be available at all or in sufficient amounts to cover any liabilities with respect to any of these or other matters. A substantial judgment, or judgment or other liability in excess of our or our franchisees’ insurance coverage, resulting from claims could materially adversely affect our business and results of operations.
We may engage in litigation with our franchisees.
Although we believe we generally enjoy a positive working relationship with the vast majority of our franchisees, the nature of the franchisor-franchisee relationship may give rise to litigation with our franchisees. In the ordinary course of business, we are the subject of complaints or litigation from franchisees, usually related to alleged breaches of contract or wrongful termination under the franchise arrangements. We may also engage in future litigation with franchisees to enforce the terms of our franchise agreements and compliance with our brand standards as determined necessary to protect our brand, the consistency of our products and the customer experience, or to enforce our contractual indemnification rights if we are brought into a matter involving a third party due to the franchisee’s alleged acts or omissions. In addition, we may be subject to claims by our franchisees relating to our Franchise Disclosure Document ("FDD"), including claims based on financial information contained in our FDD. Engaging in such litigation may be costly and time-consuming and may distract management and materially adversely affect our relationships with franchisees and our ability to attract new franchisees. Any negative outcome of these or any other claims could materially adversely affect our results of operations as well as our ability to expand our franchise system and may damage our reputation and brand. Furthermore, existing and future franchise-related legislation could subject us to additional litigation risk in the event we terminate or fail to renew a franchise relationship.
Our success depends in part upon effective advertising and marketing campaigns, which may not be successful, and franchisee support of such advertising and marketing campaigns.
We believe the Wingstop brand is critical to our business and expend resources in our marketing efforts using a variety of media outlets. We expect to continue to conduct brand awareness programs and customer initiatives to attract and retain customers. Should our advertising and promotions not be effective, our business, financial condition and results of operations could be materially adversely affected.
The support of our franchisees is critical for the success of the advertising and marketing campaigns we seek to undertake, and the successful execution of these campaigns will depend on our ability to maintain alignment with our franchisees. Our franchisees are currently required to contribute specified percentages of their gross sales to certain advertising funds and programs. There can be no assurances that these funds will be sufficient to meet our marketing needs or that additional funds will be provided by our franchisees in the future. The lack of continued financial support for our advertising activities could hinder our marketing efforts, which may adversely affect our business and operating results. While we maintain control over advertising and marketing materials and can mandate certain strategic initiatives pursuant to our franchise agreements, we need the active support of our franchisees if the implementation of these initiatives is to be successful. If our initiatives are not successful, resulting in expenses incurred without the benefit of higher revenue, our business, financial condition and results of operations could be materially adversely affected.
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We are vulnerable to changes in consumer preferences and regulation of consumer eating habits that could harm our business, financial condition, results of operations and cash flow.
Consumer preferences and eating habits often change rapidly and without warning, moving from one trend to another among many product or retail concepts. We depend on some of these trends, including the trend regarding away-from-home or take-out dining. Consumer preferences towards away-from-home and take-out dining or certain food products might shift as a result of, among other things, new information, attitudes regarding diet and health concerns or dietary trends related to cholesterol, carbohydrate, fat and salt content of certain food items, including chicken wings, in favor of foods that are perceived as healthier. Our menu is currently comprised primarily of chicken wings and fries, and a change in consumer preferences away from these offerings would have a material adverse effect on our business. Negative publicity over the health aspects of, or animal welfare or other social or environmental concerns related to, the food items we sell may adversely affect demand for our menu items and could have a material adverse effect on traffic, sales and results of operations.
Regulations may also continue to change as a result of new information and attitudes regarding diet and health. These changes may include regulations that impact the ingredients and nutritional content of our menu items. The federal government and a number of states, counties and cities, have enacted laws requiring multi-unit restaurant operators to make certain nutritional information available to customers and/or legislation prohibiting the sales of certain types of ingredients in restaurants. If our customers perceive our menu items to contain unhealthy caloric, sugar, sodium, or fat content, our results of operations could be adversely affected. The success of our restaurant operations depends, in part, upon our ability to effectively respond to changes in consumer preferences and eating habits, negative publicity and consumer health and disclosure regulations and to adapt our menu offerings to fit the dietary needs, preferences and eating habits of our customers without sacrificing flavor. To the extent we are unable to respond with appropriate changes to our menu offerings, it could materially adversely affect customer traffic and our results of operations. Furthermore, any change in our menu could result in a decrease in existing customer traffic.
Because many of our restaurants are concentrated in certain geographic areas, we are susceptible to economic and other trends and developments, including adverse weather conditions, in these areas.
As of December 26, 2020, 55% of our 1,359 domestic restaurants were spread across Texas (28%), California (21%) and Illinois (6%). Given our geographic concentrations, economic conditions and other unforeseen events, including but not limited to negative publicity, local strikes, terrorist attacks, increases in energy prices, natural or man-made disasters, adverse weather conditions or the enactment of more stringent state and local laws and regulations in these areas, could have a disproportionate adverse effect on our business and results of operations.
Our business is subject to various laws and regulations and changes in such laws and regulations, and/or our failure to comply with existing or future laws and regulations, could materially adversely affect us.
We are subject to certain state franchise registration requirements, the rules and regulations of the FTC and various state laws regulating the offer and sale of franchises in the United States through the provision of franchise disclosure documents containing certain mandatory disclosures, various state laws regulating the franchise relationship, and certain rules and requirements regulating franchising arrangements in foreign countries. Noncompliance with applicable laws, regulatory requirements and governmental guidelines regulating franchising could reduce anticipated royalty income, which in turn could materially adversely affect our business and operating results.
We and our franchisees are subject to various existing U.S. federal, state, local, and foreign laws affecting the operation of restaurants and the sale of food and alcoholic beverages, including various license and permit requirements, health, sanitation, fire, and safety standards. We and our franchisees may in the future become subject to regulation (or further regulation) seeking to tax or regulate high-fat foods, to limit the serving size of beverages containing sugar, to ban the use of certain packaging materials, or to require the display of detailed nutrition information. Each of these regulations would be costly to comply with and/or could result in reduced demand for our products. The failure of our restaurants to comply with applicable regulations and obtain and maintain required licenses, permits, and approvals (including those for the sale of alcoholic beverages) could adversely affect our existing restaurants and delay or result in our decision to cancel the opening of new restaurants, which would materially adversely affect our results of operations.
We and our franchisees may also have a substantial number of hourly employees who are required to be paid pursuant to applicable federal or state minimum wage laws. From time to time, various federal and state legislators have proposed or approved changes to the minimum wage requirements, especially for fast-food workers. These and any future similar increases in other regions in which our restaurants operate will increase the cost of labor and may negatively affect our and our franchisees profit margins as we and our franchisees may be unable to increase our menu prices in order to pass future
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increased labor costs on to our guests. Also, reduced margins of franchisees could make it more difficult to sell franchises. If menu prices are increased by us and our franchisees to cover increased labor costs, the higher prices could adversely affect transactions which could lower sales and thereby reduce our margins and the royalties that we receive from franchisees.
Although we require all workers in our company-owned restaurants and in our corporate support office to provide us with government-specified documentation evidencing their employment eligibility, some of our employees may, without our knowledge, be unauthorized workers. We currently participate in the “E-Verify” program, an Internet-based, free program run by the U.S. government to verify employment eligibility, in all of our company-owned restaurants and in our corporate support office. However, use of the “E-Verify” program does not guarantee that we will successfully identify all applicants who are ineligible for employment. Unauthorized workers may subject us to fines or penalties, and if any of our workers are found to be unauthorized, we could experience adverse publicity that negatively impacts our brand and it may be more difficult to hire and keep qualified employees. We could also become subject to fines, penalties and other costs related to claims that we did not fully comply with all recordkeeping obligations of federal and state employment eligibility or immigration compliance laws. Failure by our franchisees to comply with employment eligibility or immigration laws may also result in adverse publicity and reputational harm to our brand and could subject them to fines, penalties and other costs. These factors could materially adversely affect our business, financial condition or results of operations.
The impact of current laws and regulations, the effect of future changes in laws or regulations that impose additional requirements and the consequences of litigation relating to current or future laws and regulations, or our inability to respond effectively to significant regulatory or public policy issues, could increase our compliance and other costs of doing business and therefore have an adverse effect on our results of operations. Failure to comply with the laws and regulatory requirements of federal, state, local and foreign authorities could result in, among other things, revocation of required licenses, administrative enforcement actions, fines and civil and criminal liability. In addition, certain laws, including the ADA, could require us or our franchisees to expend significant funds to make modifications to our restaurants if we fail to comply with applicable standards. Compliance with all of these laws and regulations can be costly and can increase our exposure to litigation or governmental investigations or proceedings.
Our current insurance and the insurance of our franchisees may not provide adequate levels of coverage against claims.
We currently maintain insurance customary for businesses of our size and type. However, there are types of losses we may incur that cannot be insured against or that we believe are not economically reasonable to insure. Such losses could have a material adverse effect on our business and results of operations.
Our franchise agreements require each franchisee to maintain certain insurance types and levels. Certain extraordinary hazards, however, may not be covered, and insurance may not be available (or may be available only at prohibitively expensive rates) with respect to many other risks. Moreover, any loss incurred could exceed policy limits and policy payments made to franchisees may not be made on a timely basis. Any such loss or delay in payment could have a material adverse effect on a franchisee’s ability to satisfy obligations under the franchise agreement, including the ability to make royalty payments.
We also require franchisees to maintain general liability insurance coverage to protect against the risk of product liability and other risks and demand strict franchisee compliance with health and safety regulations. However, franchisees may receive or produce defective food or beverage products, which may materially adversely affect our brand’s goodwill and our business. Further, a franchisee’s failure to comply with health and safety regulations, including requirements relating to food quality or preparation, could subject them, and possibly us, to litigation. Any litigation, including the imposition of fines or damage awards, could exceed or be excluded from insurance coverage, and, as a result, adversely affect the ability of a franchisee to make royalty payments or could generate negative publicity or otherwise adversely affect us.
Damage to our reputation could negatively impact our business, financial condition and results of operations.
We believe we have built our reputation on the high quality and bold, distinctive, and craveable flavors of our food, value, and service, and we must protect and grow the value of our brand to continue to be successful in the future. Any incident that erodes consumer affinity for our brand could significantly reduce its value and damage our business. For example, our brand value could suffer and our business could be adversely affected if customers perceive a reduction in the quality of our food, value, or service or otherwise believe we have failed to deliver a consistently positive experience. We may also be adversely affected by customers’ experiences with third-party delivery from our restaurants.
We may be adversely affected by news reports or other negative publicity, regardless of their accuracy, regarding food quality issues, public health concerns, illness, safety, injury, security breaches of confidential guest or employee information, employee related claims relating to alleged employment discrimination, wage and hour violation, labor standards or health care and
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benefit issues, or government or industry findings concerning our restaurants, restaurants operated by other food service providers, or others across the food industry supply chain. The risks associated with such negative publicity cannot be eliminated or completely mitigated and may materially affect our business.
The availability of information on social media platforms is virtually immediate as is its impact. Many social media platforms immediately publish the content their subscribers and participants can post, often without filters or checks on accuracy of the content posted. The opportunity for dissemination of information, including inaccurate information, is seemingly limitless and readily available. Information concerning us may be posted on such platforms at any time. Information posted may be adverse to our interests and may be inaccurate, each of which may harm our performance, prospects, brand, or business. The harm may be immediate without affording us an opportunity for redress or correction. Negative publicity or incorrect information may materially adversely affect our reputation, business, financial condition and results of operations.
Our expansion into international markets exposes us to a number of risks that may differ in each country where we have franchise restaurants.
As of December 26, 2020, we have franchised restaurants in nine international countries and plan to continue to grow internationally. However, international operations are in early stages. Expansion in international markets may be affected by local economic, market and cultural conditions. Therefore, as we expand internationally, our franchisees may not experience the operating margins we expect, and our results of operations and growth may be materially adversely affected. Our financial condition and results of operations may be adversely affected if the global markets in which our franchised restaurants compete are affected by changes in political, economic, or other factors. These factors, over which neither our franchisees nor we have control, may include:
•recessionary or expansive trends in international markets;
•changing labor conditions and difficulties in staffing and managing our foreign operations;
•increases in the taxes we pay and other changes in applicable tax laws;
•legal and regulatory changes, and the burdens and costs of our compliance with a variety of foreign laws;
•changes in inflation rates;
•changes in exchange rates and the imposition of restrictions on currency conversion or the transfer of funds;
•difficulty in protecting our brand, reputation, and intellectual property;
•difficulty in collecting our royalties and longer payment cycles;
•expropriation of private enterprises;
•anti-American sentiment in certain locations and the identification of the Wingstop brand as an American brand;
•the impact of the United Kingdom’s exit from the European Union;
•political and economic instability;
•the U.S. Foreign Corrupt Practices Act and other similar anti-bribery and anti-kickback laws; and
•other external factors.
Our international expansion efforts may require considerable management time as well as start-up expenses for market development before any significant revenues and earnings are generated. Operations in new foreign markets may achieve low margins or may be unprofitable, and expansion in existing markets may be affected by local economic and market conditions. Therefore, as we continue to expand internationally, we or our franchisees may not experience the operating margins we expect, our results of operations may be negatively impacted, and our common stock price may decline.
We depend upon our executive officers and other key employees and may not be able to retain or replace these individuals or recruit additional personnel, which could harm our business.
We believe that we have already benefited and expect to benefit substantially in the future from the leadership and experience of our executive officers and management team. Additionally, our business strategy includes successfully attracting and retaining talented employees. The market for highly skilled employees and leaders in the restaurant industry is extremely competitive. Our inability to successfully recruit and retain highly-skilled and talented executive officers and other key employees, or successfully execute succession planning, could have a material adverse effect on our business and prospects and impair our growth, as we may not be able to find suitable individuals to replace such personnel on a timely basis. In addition, the departure of any of our executive officers or key employees could be viewed in a negative light by investors and analysts, which could cause the price of our common stock to decline.
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Our failure or inability to enforce our trademarks or other proprietary rights could adversely affect our competitive position or the value of our brand.
We believe that our trademarks and other proprietary rights are important to our success and our competitive position, and, therefore, we devote resources to the protection of our trademarks and proprietary rights. The protective actions that we take, however, may not be enough to prevent unauthorized use or imitation by others, which could harm our image, brand or competitive position. If we commence litigation to enforce our rights, we will incur significant legal fees.
We cannot assure you that third parties will not claim infringement by us of their proprietary rights in the future. Any such claim, whether or not it has merit, could be time-consuming and distracting for executive management, result in costly litigation, cause changes to existing menu items or delays in introducing new menu items, or require us to enter into royalty or licensing agreements. As a result, any such claim could have a material adverse effect on our business, results of operations, and financial condition.
The terms of our securitized debt financing through certain of our wholly-owned subsidiaries include restrictive terms, and other anti-corruption laws or trade control laws, as well as other laws governing our operations. If we fail to comply with these laws, we could be subject to civil or criminal penalties, other remedial measures, and legal expenses, which could adversely affect our business, financial condition and results of operations.
Unless and until we repay all outstanding borrowings under our securitized debt facility, we will remain subject to the related indebtedness to become duerestrictive terms of these borrowings. The securitized debt facility, under which certain of our wholly-owned subsidiaries issued and payableguaranteed fixed rate notes and variable funding notes, contain a number of covenants, with the most significant financial covenant being a debt service coverage calculation. These covenants limit our ability to incur additional debt.
•incur additional indebtedness;
•alter the business we conduct;
•make certain changes to the composition of our management team;
•pay dividends and make other restrictive payments beyond specified levels;
•create or permit liens;
•dispose of certain assets;
•make certain investments;
•engage in certain transactions with affiliates; and
•consolidate, merge or transfer all or substantially all of our assets.
The securitized debt facility also requires us to maintain specified financial ratios. Our ability to make scheduled paymentsmeet these financial ratios can be affected by events beyond our control, and comply with financialwe may not satisfy such a test. A breach of these covenants will depend on our operatingcould result in a rapid amortization event or default under the securitized debt facility. If amounts owed under the securitized debt facility are accelerated because of a default and financial performance,we are unable to pay such amounts, the investors may have the right to assume control of substantially all of the securitized assets. In the event that a rapid amortization event occurs under the indenture governing the securitized debt (including, without limitation, upon an event of default under the indenture or the failure to repay the securitized debt at the end of the applicable term), the funds available to us would be reduced or eliminated, which would in turn reduce our ability to operate or grow our business and materially adversely affect our results of operations.
If we are unable to refinance or repay amounts under the securitized debt facility prior to the expiration of the applicable term, our cash flow would be directed to the repayment of the securitized debt and, other than management fees sufficient to cover minimal selling, general and administrative expenses, would not be available for operating our business. No assurance can be given that any refinancing or additional financing will be possible when needed or that we will be able to negotiate acceptable terms. In addition, our access to capital is subject toaffected by prevailing economic conditions in the financial and to other financial, businesscapital markets and other factors beyond our control described herein.
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We may continue to place, a considerable strain on our financial and management systems, processes and controls, as well as on our personnel. In addition, as a public company we are required to document and test our internal controls over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act so that our management can certify as to the effectiveness of our internal controls over financial reporting by the time our second annual report is filed with the SEC and thereafter, which will require us to document and make significant changes to our internal controls over financial reporting. Likewise, our independent registered public accounting firm will be required to provide an attestation report on the effectiveness of our internal control over financial reporting.
Risks Related to Ownership of our Common Stock
Our stock price may be volatile or may decline regardless of our operating performance.
The market price of our common stock may fluctuate significantly in response to a number of factors, most of which we cannot control, including those described under “Risks Related to Our Business and Our Industry” and the following:
•potential fluctuation in our annual or quarterly operating results;
•changes in capital market conditions that could affect valuations of restaurant companies in general or our goodwill in particular or other adverse economic conditions;
•changes in financial estimates by any securities analysts who follow our common stock, our failure to meet these estimates or failure of those analysts to initiate or maintain coverage of our common stock;
•downgrades by any securities analysts who follow our common stock;
•future sales of our common stock by our officers, directors and significant stockholders;
•global economic, legal and regulatory factors unrelated to our performance;
•investors’ perceptions of our prospects;
•announcements by us or our competitors of significant contracts, acquisitions, joint ventures or capital commitments; and
•investor perceptions of the investment opportunity associated with our common stock relative to other investment alternatives.
In addition, the stock markets, and in particular Nasdaq, have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many food service companies. In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were involved in securities litigation, we could incur substantial costs and our resources and the attention of management could be diverted from our business.
Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of us more difficult, limit attempts by our stockholders to replace or remove our current management and limit the market price of our common stock.
Provisions in our amended and restated certificate of incorporation and amended and restated bylaws may have the effect of delaying or preventing a change of control or changes in our management. Our amended and restated certificate of incorporation and amended and restated bylaws include provisions that:
•authorize our board of directors to issue, without further action by the stockholders, up to 15,000,000 shares of undesignated preferred stock;
•require that any action to be taken by our stockholders be effected at a duly called annual or special meeting and not by written consent;
•specify that special meetings of our stockholders can be called only upon the request of a majority of our board of directors or by the chairman of the board of directors;
•establish an advance notice procedure for stockholder proposals to be brought before an annual meeting, including proposed nominations of persons for election to our board of directors;
•establish that our board of directors is divided into three classes, with each class serving staggered three-year staggered terms; and
•prohibit cumulative voting in the election of directors.
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These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management, and may discourage, delay or prevent a transaction involving a change of control of our company that is in the best interest of our minority stockholders. Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our common stock if stockholders view them as discouraging future takeover attempts. In addition, we have opted out of the Delaware General Corporation Law (“DGCL”) Section 203, relating to business combinations with interested stockholders, but our amended and restated certificate of incorporation provides that engaging in any of a broad range of business combinations with any “interested” stockholder (any stockholder with 15% or more of our capital stock) for a period of three years following the date on which the stockholder became an “interested” stockholder is prohibited, subject to certain exceptions.
Our amended and restated certificate of incorporation designates the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.
Our amended and restated certificate of incorporation provides that, unless we consent in writing to an alternative forum, the Court of Chancery of the State of Delaware will be the sole and exclusive forum, to the fullest extent permitted by law, for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers and employees to us or our stockholders, (iii) any action asserting a claim arising pursuant to any provision of the DGCL, our amended and restated certificate of incorporation or our amended and restated bylaws or (iv) any action asserting a claim that is governed by the internal affairs doctrine, in each case subject to the Court of Chancery having personal jurisdiction over the indispensable parties named as defendants therein. Any person purchasing or otherwise acquiring any interest in any shares of our capital stock shall be deemed to have notice of and to have consented to this provision of our amended and restated certificate of incorporation. This choice of forum provision may limit our stockholders’ ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or employees, which may discourage such lawsuits against us and our directors, officersandemployees even though an action, if successful, might benefit our stockholders. Stockholders who do bring a claim in the Court of Chancery could face additional litigation costs in pursuing any such claim, particularly if they do not reside in or near Delaware.claim. The Court of Chancery may also reach different judgments or results than would other courts, including courts where a stockholder considering an action may be located or would otherwise choose to bring the action, and such judgments or results may be more favorable to us than to our stockholders. Alternatively, ifIn addition, the enforceability of similar choice of forum provisions in other companies’ certificates of incorporation has been challenged in legal proceedings, and it is possible that, in connection with any applicable action brought against us, a court were tocould find this provisionthe choice of forum provisions contained in our amended and restated certificate of incorporation to be inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs which could have a material adverse effect on our business, financial condition or results of operations.such action.
We may not continue to declare cash dividends in the future.
In August 2017, we announced that our board of directors authorized a regular dividend program under which we have paid, and intend to paycontinue paying, quarterly dividends on our common stock, subject to quarterly declarations by our Boardboard of Directors.directors. In addition, in July 2016 and February 2018, we have paid special cash dividends of $2.90 per share and $3.17 per share, respectively, in connection with refinancings of our credit facilities.indebtedness. Any future declarations of dividends, as well as the amount and timing of such dividends, are subject to capital availability and the discretion of our Boardboard of Directors,directors, which must evaluate, among other things, whether cash dividends are in the best interest of our stockholders and are in compliance with all applicable laws and any agreements containing provisions that limit our ability to declare and pay cash dividends.
Our ability to pay dividends in the future will depend upon, among other factors, our cash balances and potential future capital requirements, debt service requirements, earnings, financial condition, the general economic and regulatory climate and other factors beyond our control that our Boardboard of Directorsdirectors may deem relevant. Our dividend payments may change from time to time, and we may not continue to declare dividends in the future. A reduction in or elimination of our dividend payments could have a negative effect on our stock price.
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| Item 1B. | Unresolved Staff Comments | ||||
None.
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| Item 2. | Properties | ||||
| State | Franchise restaurants | Company-owned restaurants | Total restaurants | ||||||
| Alabama | 4 | — | 4 | ||||||
| Alaska | 1 | — | 1 | ||||||
| Arizona | 30 | — | 30 | ||||||
| Arkansas | 8 | — | 8 | ||||||
| California | 241 | — | 241 | ||||||
| Colorado | 23 | — | 23 | ||||||
| Connecticut | 3 | — | 3 | ||||||
| Florida | 49 | — | 49 | ||||||
| Georgia | 29 | — | 29 | ||||||
| Hawaii | 2 | — | 2 | ||||||
| Idaho | 3 | — | 3 | ||||||
| Illinois | 61 | — | 61 | ||||||
| Indiana | 8 | — | 8 | ||||||
| Iowa | 2 | — | 2 | ||||||
| Kansas | 4 | — | 4 | ||||||
| Kentucky | 4 | — | 4 | ||||||
| Louisiana | 21 | — | 21 | ||||||
| Maryland | 17 | — | 17 | ||||||
| Massachusetts | 4 | — | 4 | ||||||
| Michigan | 6 | — | 6 | ||||||
| Minnesota | 2 | — | 2 | ||||||
| Mississippi | 10 | — | 10 | ||||||
| Missouri | 16 | — | 16 | ||||||
| Nebraska | 2 | — | 2 | ||||||
| Nevada | 9 | 5 | 14 | ||||||
| New Jersey | 10 | — | 10 | ||||||
| New Mexico | 8 | — | 8 | ||||||
| New York | 9 | — | 9 | ||||||
| North Carolina | 9 | — | 9 | ||||||
| Ohio | 20 | — | 20 | ||||||
| Oklahoma | 13 | — | 13 | ||||||
| Oregon | 3 | — | 3 | ||||||
| Pennsylvania | 6 | — | 6 | ||||||
| South Carolina | 8 | — | 8 | ||||||
| South Dakota | 1 | — | 1 | ||||||
| Tennessee | 15 | — | 15 | ||||||
| Texas | 299 | 18 | 317 | ||||||
| Utah | 4 | — | 4 | ||||||
| Virginia | 17 | — | 17 | ||||||
| Washington | 12 | — | 12 | ||||||
| West Virginia | 1 | — | 1 | ||||||
| Wisconsin | 10 | — | 10 | ||||||
| Domestic Total | 1,004 | 23 | 1,027 | ||||||
| International | |||||||||
| Colombia | 2 | — | 2 | ||||||
| Indonesia | 21 | — | 21 | ||||||
| Malaysia | 2 | — | 2 | ||||||
| Mexico | 60 | — | 60 | ||||||
| Philippines | 11 | — | 11 | ||||||
| Saudi Arabia | 1 | — | 1 | ||||||
| Singapore | 5 | — | 5 | ||||||
| United Arab Emirates | 4 | — | 4 | ||||||
| International Total | 106 | — | 106 | ||||||
| Worldwide Total | 1,110 | 23 | 1,133 | ||||||
Due to lower square footage requirements, our restaurants can be located in a variety of locations. They tend to be located primarily in shopping centers, as in-line or end-cap locations. Our restaurants generally occupy approximately 1,700 square feet of leased retail space. As of December 26, 2020, we and our franchisees operated 1,538 restaurants in 44 states and 10 countries.
| Item 3. | Legal Proceedings | ||||
From time to time we may be involved in claims and legal actions that arise in the ordinary course of business. To our knowledge, there are no material pending legal proceedings to which we are a party or of which any of our property is the subject.
| Item 4. | Mine Safety Disclosures | ||||
Not applicable.
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PART II
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | ||||
| Common Stock Price Range | |||||||
| High | Low | ||||||
| Fiscal Year 2016 | |||||||
| First quarter (December 27, 2015 - March 26, 2016) | $ | 26.42 | $ | 20.73 | |||
| Second quarter (March 27, 2016 - June 25, 2016) | $ | 28.67 | $ | 22.01 | |||
| Third quarter (June 26, 2016 - September 24, 2016) | $ | 33.10 | $ | 25.24 | |||
| Fourth quarter (September 25, 2016 - December 31, 2016) | $ | 33.42 | $ | 26.06 | |||
| Fiscal Year 2017 | |||||||
| First quarter (January 1, 2017 - April 1, 2017) | $ | 30.04 | $ | 24.74 | |||
| Second quarter (April 2, 2017 - July 1, 2017) | $ | 33.25 | $ | 27.29 | |||
| Third quarter (July 2, 2017 - September 30, 2016) | $ | 35.91 | $ | 29.54 | |||
| Fourth quarter (October 1, 2017 - December 30, 2017) | $ | 43.25 | $ | 31.53 | |||
.
As of February 23, 2018,16, 2021, there were 4 shareholders5 stockholders of record of our common stock. This number excludes stockholders whose stock is held in nominee or street name by brokers.
Recent Sales of Unregistered Securities
There were no sales of unregistered securities during the fiscal year ended December 30, 201726, 2020 that were not previously reported on a Quarterly Report on Form 10-Q or a Current Report on Form 8-K.
Issuer Purchases of Equity Securities
We did not repurchase any of our equity securities during the fourth quarter of the fiscal year ended December 30, 2017.
26, 2020.
Performance Graph
The following performance graph compares the dollar change in the cumulative shareholderstockholder return on our common stock with the cumulative total returns of the NASDAQ Composite Index and the S&P 600 Restaurants Index. This graph assumes a $100 investment in our common stock on June 12, 2015 (the date when our common stock first started trading) and in each of the foregoing indices on June 12,December 26, 2015, and assumes the reinvestment of dividends, if any. The indices are included for comparative purposes only. They do not necessarily reflect management’s opinion that such indices are an appropriate measure of the relative performance of our common stock, and historical stock price performance should not be relied upon as an indication of future stock price performance. This graph is furnished and not “filed” with the Securities and Exchange CommissionSEC and it is not “soliciting material”, and should not be incorporated by reference in any of our filings under the Securities Act of 1933, as amended, or the Securities Exchange Act, of 1934, as amended, whether made before or after the date hereof and irrespective of any general incorporation language in such filing.
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Dividends on Common Stock
On February 16, 2021, the fiscal year endedCompany’s board of directors declared a quarterly dividend of $0.14 per share of common stock, to be paid on December 31, 2016 included 53 weeks. The first three quartersMarch 26, 2021 to stockholders of record as of March 5, 2021, totaling approximately $4.2 million.
We evaluate dividend payments on common stock within the context of our fiscal year consistoverall capital allocation strategy with our board of 13 weeksdirectors on an ongoing basis, giving consideration to our current and our fourth quarter consists of 13 weeks for 52-week fiscal years and 14 weeks for 53-week fiscal years.
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| Item 6. | Selected Financial Data | ||||
Pursuant to the early adoption of SEC Final Rule Release No. 33-10890, Management’s Discussion and Analysis, ofSelected Financial ConditionData, and Results of Operations,” and our audited consolidated financial statements andSupplementary Financial Information, the related notes thereto included elsewhere in this report. Our historical consolidated financial data may not be indicative of our future performance.Company has elected to omit Item 6. Selected Financial Data.
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| Year ended | |||||||||||||||||||
| (in thousands) | December 30, 2017 | December 31, 2016 | December 26, 2015 | December 27, 2014 | December 28, 2013 | ||||||||||||||
| Consolidated Statements of Income Data: | |||||||||||||||||||
| Revenue: | |||||||||||||||||||
| Royalty revenue and franchise fees | $ | 68,483 | $ | 57,071 | $ | 46,688 | $ | 38,032 | $ | 30,202 | |||||||||
| Company-owned restaurant sales | 37,069 | 34,288 | 31,281 | 29,417 | 28,797 | ||||||||||||||
| Total revenue | 105,552 | 91,359 | 77,969 | 67,449 | 58,999 | ||||||||||||||
| Cost and expenses: | |||||||||||||||||||
Cost of sales | 28,745 | 25,308 | 22,219 | 20,473 | 22,176 | ||||||||||||||
| Selling, general and administrative | 37,151 | 33,840 | 33,350 | 26,006 | 18,913 | ||||||||||||||
| Depreciation and amortization | 3,376 | 3,008 | 2,682 | 2,904 | 3,030 | ||||||||||||||
| Total costs and expenses | 69,272 | 62,156 | 58,251 | 49,383 | 44,119 | ||||||||||||||
| Operating income | 36,280 | 29,203 | 19,718 | 18,066 | 14,880 | ||||||||||||||
| Interest expense, net | 5,131 | 4,396 | 3,477 | 3,684 | 2,863 | ||||||||||||||
| Other expense (income), net | — | 254 | 396 | 84 | (6 | ) | |||||||||||||
| Income before income taxes | 31,149 | 24,553 | 15,845 | 14,298 | 12,023 | ||||||||||||||
| Income tax expense | 3,845 | 9,119 | 5,739 | 5,312 | 4,493 | ||||||||||||||
| Net income | $ | 27,304 | $ | 15,434 | $ | 10,106 | $ | 8,986 | $ | 7,530 | |||||||||
| Consolidated Statement of Cash Flows Data: | |||||||||||||||||||
| Net cash provided by operating activities | $ | 27,049 | $ | 23,329 | $ | 13,860 | $ | 15,119 | $ | 11,481 | |||||||||
| Net cash provided by (used in) investing activities | (6,484 | ) | (2,056 | ) | (1,915 | ) | (363 | ) | (2,144 | ) | |||||||||
| Net cash provided by (used in) financing activities | (20,252 | ) | (28,213 | ) | (10,978 | ) | (8,206 | ) | (10,417 | ) | |||||||||
| Net increase (decrease) in cash and cash equivalents | $ | 313 | $ | (6,940 | ) | $ | 967 | $ | 6,550 | $ | (1,080 | ) | |||||||
| Year ended | |||||||||||||||||||
| (in thousands) | December 30, 2017 | December 31, 2016 | December 26, 2015 | December 27, 2014 | December 28, 2013 | ||||||||||||||
| Per Share data: | |||||||||||||||||||
| Earnings per share | |||||||||||||||||||
| Basic | $ | 0.94 | $ | 0.54 | $ | 0.37 | $ | 0.35 | $ | 0.30 | |||||||||
| Diluted | $ | 0.93 | $ | 0.53 | $ | 0.36 | $ | 0.34 | $ | 0.29 | |||||||||
| Weighted average shares outstanding | |||||||||||||||||||
| Basic | 29,025 | 28,637 | 27,497 | 25,846 | 25.168 | ||||||||||||||
| Diluted | 29,424 | 28,983 | 27,816 | 26,204 | 25.648 | ||||||||||||||
| Dividends per share | $ | 0.14 | $ | 2.90 | $ | 1.83 | $ | — | $ | — | |||||||||
Selected Other Data (1): | |||||||||||||||||||
| Number of system-wide restaurants open at end of period | 1,133 | 998 | 845 | 712 | 614 | ||||||||||||||
| Number of domestic company restaurants open at end of period | 23 | 21 | 19 | 19 | 24 | ||||||||||||||
| Number of domestic franchise restaurants open at end of period | 1,004 | 901 | 767 | 652 | 569 | ||||||||||||||
| Number of international franchise restaurants open at end of period | 106 | 76 | 59 | 41 | 21 | ||||||||||||||
System-wide sales(2) | $ | 1,087,434 | $ | 972,270 | $ | 821,248 | $ | 678.771 | $ | 549.904 | |||||||||
Domestic restaurant AUV(3) | $ | 1,100 | $ | 1,113 | $ | 1,126 | $ | 1,073 | $ | 974 | |||||||||
Company-owned domestic AUV(3) | $ | 1,712 | $ | 1,729 | $ | 1,646 | $ | 1,504 | $ | 1,206 | |||||||||
| Number of restaurants opened (during period) | 147 | 159 | 142 | 102 | 74 | ||||||||||||||
| Number of restaurants closed (during period) | 12 | 6 | 9 | 4 | 6 | ||||||||||||||
| Company-owned restaurants refranchised (during period) | (2 | ) | — | — | 5 | — | |||||||||||||
EBITDA (4) | $ | 39,656 | $ | 31,957 | $ | 22,004 | $ | 20,886 | $ | 17,916 | |||||||||
Adjusted EBITDA (4) | $ | 41,507 | $ | 35,576 | $ | 28,879 | $ | 24,378 | $ | 19,495 | |||||||||
Same Store Sales Data(5): | |||||||||||||||||||
| System-wide domestic same store sales base (end of period) | 904 | 779 | 667 | 589 | 527 | ||||||||||||||
| System-wide domestic same store sales growth | 2.6 | % | 3.2 | % | 7.9 | % | 12.5 | % | 9.9 | % | |||||||||
| As of | |||||||||||||||||||
| (in thousands) | December 30, 2017 | December 31, 2016 | December 26, 2015 | December 27, 2014 | December 28, 2013 | ||||||||||||||
| Consolidated Balance Sheet Data: | |||||||||||||||||||
| Cash and cash equivalents | $ | 4,063 | $ | 3,750 | $ | 10,690 | $ | 9,723 | $ | 3,173 | |||||||||
| Working capital | (2,971 | ) | (5,616 | ) | 7,050 | 276 | (3,308 | ) | |||||||||||
| Total assets | 119,836 | 111,800 | 120,650 | 118,827 | 113,451 | ||||||||||||||
| Total debt | 133,750 | 151,250 | 95,500 | 93,721 | 102,500 | ||||||||||||||
| Total shareholders’ deficit | (48,252 | ) | (74,628 | ) | (9,673 | ) | (8,994 | ) | (20,262 | ) | |||||||||
| Year ended | |||||||||||||||||||
| (in thousands) | December 30, 2017 | December 31, 2016 | December 26, 2015 | December 27, 2014 | December 28, 2013 | ||||||||||||||
| Net income | $ | 27,304 | $ | 15,434 | $ | 10,106 | $ | 8,986 | $ | 7,530 | |||||||||
| Interest expense, net | 5,131 | 4,396 | 3,477 | 3,684 | 2,863 | ||||||||||||||
| Income tax expense | 3,845 | 9,119 | 5,739 | 5,312 | 4,493 | ||||||||||||||
| Depreciation and amortization | 3,376 | 3,008 | 2,682 | 2,904 | 3,030 | ||||||||||||||
| EBITDA | $ | 39,656 | $ | 31,957 | $ | 22,004 | $ | 20,886 | $ | 17,916 | |||||||||
| Adjustments: | |||||||||||||||||||
| Management fees (a) | — | — | 237 | 449 | 436 | ||||||||||||||
| Management agreement termination fee (b) | — | — | 3,297 | — | — | ||||||||||||||
| Transaction costs (c) | — | 2,388 | 2,186 | 2,169 | 395 | ||||||||||||||
| Gains and losses on disposal of assets (d) | — | — | — | (86 | ) | — | |||||||||||||
| Stock-based compensation expense (e) | 1,851 | 1,231 | 1,155 | 960 | 748 | ||||||||||||||
| Adjusted EBITDA | $ | 41,507 | $ | 35,576 | $ | 28,879 | $ | 24,378 | $ | 19,495 | |||||||||
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | ||||
This Management's Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the accompanying audited consolidated financial statements and notes. Forward-looking statements in this MD&A are not guarantees of future performance and may involve risks and uncertainties that could cause actual results to differ materially from those projected. Refer to "Cautionary Note Regarding Forward-Looking Statements" elsewhere in this report and Item 1A. Risk Factors for a discussion of these risks and uncertainties.
A comparison of our results of operations and cash flows for fiscal year 2019 compared to fiscal year 2018 can be found under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Wingstop is the largest fast casual chicken wings-focused restaurant chain in the world and has demonstrated strong, consistent growth. As of December 30, 2017,26, 2020, we had a total 1,1331,538 restaurants across 42 states and nine countries in our system. Our restaurant base is 98% franchised, with 1,1101,506 franchised locations (including 106179 international locations) and 2332 company-owned restaurants as of December 26, 2020. We generate revenues by charging royalties, advertising fees and franchise fees to our franchisees and by operating a number of our own restaurants.
Historically, the Company had two reporting segments: franchise operations and company restaurant operations. In accordance with Accounting Standards Codification 280 “Segment Reporting”, the Company uses the management approach for determining its reportable segments. The management approach is based upon the way management reviews performance and allocates resources. During the second fiscal quarter of 2020, the Company reevaluated its operating segments and determined it has one operating segment and one reporting segment due to changes in how the Company’s chief operating decision maker assesses the Company’s performance and allocates resources.
We plan to grow our business by opening new franchised restaurants and increasing our same store sales, while leveraging our franchise model to create shareholder value.
Domestic same store sales have increased for 1417 consecutive years beginning in 2004, which includes 5-year cumulative domestic same stores sales growth of 36.1%44.8% since the beginning of fiscal 2013. We anticipate further increases in domestic same store sales through improvements in brand awareness from national advertising, flavor innovation, increases in digital expansion, and the rollout of delivery.
year 2016. We believe our asset-light, highly-franchised business model generates strong operating margins and requires low capital expenditures, creating shareholder value through strong and consistent free cash flow and capital-efficient growth.
Impact of COVID-19
In March 2020, the novel coronavirus ("COVID-19") outbreak was declared a pandemic by the World Health Organization, significantly changing consumer behaviors as individuals are being encouraged to practice social distancing. This pandemic led to restaurants reducing restaurant seating capacity, and in some cases restaurant closures, due to various restrictions mandated by governments around the world. As of March 16, 2020, we made the decision to close our domestic dining rooms and limit our service to carryout and delivery only. Several of our international franchisees also closed their dining rooms as a result of the outbreak. Our domestic business was well-positioned for the transition to largely off-premise dining that has resulted from the outbreak. As a result of the required changes to consumer behavior to largely off-premise dining, as well as promotional activities associated with delivery, we experienced an increase in domestic same store sales growth through the end of the fourth quarter of 2020. Our international markets, which have historically had a higher mix of dine-in sales, have seen an overall decline in same store sales growth due to the required closure of dining rooms and, in some cases, temporary restaurant closures.
Highlights for Fiscal Year 2017:2020:
•System-wide restaurant count increased 13.5%11.0% over the prior fiscal year to a total of 1,1331,538 worldwide locations, driven by 135153 net unit openings;
•Domestic same store sales increased 2.6%21.4% over the prior fiscal year;
•Company-owned restaurant same store sales increased 1.6%14.2% over the prior fiscal year;
•Digital sales increased to 62.5% over the prior fiscal year;
•Domestic restaurant AUV increased to approximately $1.5 million;
•System-wide sales increased 11.8%28.8% over the prior fiscal year to $1.1approximately $2.0 billion;
•Total revenue increased 15.5%24.6% over the prior fiscal year to $105.6$248.8 million; and
•Net income increased 76.9%13.8% over the prior fiscal year to $27.3 million;$23.3 million, or $0.78 per diluted share, compared to $20.5 million, or $0.69 per diluted share in the prior fiscal year. Adjusted net income and adjusted earnings per diluted share
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increased 49.7% over the prior fiscal year to $32.5 million, or $1.09 per diluted share, compared to $21.7 million and $0.73 per diluted share in the prior fiscal year.
•Adjusted EBITDA increased 16.7%26.1% over the prior fiscal year to $41.5 million;
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, system-wide sales, royalty and franchise fee revenue and company-owned restaurant sales.
| Year Ended | |||||||||||
| December 26, 2020 | December 28, 2019 | ||||||||||
| Domestic Franchised Activity: | |||||||||||
| Beginning of period | 1,200 | 1,095 | |||||||||
| Openings | 131 | 114 | |||||||||
| Closures | (5) | (8) | |||||||||
| Acquired by Company | (6) | (1) | |||||||||
| Re-franchised by Company | 7 | — | |||||||||
| Restaurants end of period | 1,327 | 1,200 | |||||||||
| Domestic Company-Owned Activity: | |||||||||||
| Beginning of period | 31 | 29 | |||||||||
| Openings | 2 | 1 | |||||||||
| Closures | — | — | |||||||||
| Acquired from franchisees | 6 | 1 | |||||||||
| Re-franchised to franchisees | (7) | — | |||||||||
| Restaurants end of period | 32 | 31 | |||||||||
| Total Domestic Restaurants | 1,359 | 1,231 | |||||||||
| International Franchised Activity: | |||||||||||
| Beginning of period | 154 | 128 | |||||||||
| Openings | 26 | 31 | |||||||||
| Closures | (1) | (5) | |||||||||
| Restaurants end of period | 179 | 154 | |||||||||
| Total System-wide Restaurants | 1,538 | 1,385 | |||||||||
| Year Ended | |||||
| December 30, 2017 | December 31, 2016 | ||||
| Domestic Franchised Activity: | |||||
| Beginning of period | 901 | 767 | |||
| Openings | 115 | 137 | |||
| Closures | (10 | ) | (3 | ) | |
| Acquired by Company | (2 | ) | — | ||
| Restaurants end of period | 1,004 | 901 | |||
| Domestic Company-Owned Activity: | |||||
| Beginning of period | 21 | 19 | |||
| Openings | — | 2 | |||
| Closures | — | — | |||
| Acquired from franchisees | 2 | — | |||
| Restaurants end of period | 23 | 21 | |||
| Total Domestic Restaurants | 1,027 | 922 | |||
| International Franchised Activity: | |||||
| Beginning of period | 76 | 59 | |||
| Openings | 32 | 20 | |||
| Closures | (2 | ) | (3 | ) | |
| Restaurants end of period | 106 | 76 | |||
| Total System-wide Restaurants | 1,133 | 998 | |||
System-wide sales. System-wide sales represents net sales for all of our company-owned and franchised restaurants. 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.
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domestic company-owned restaurants as well as system-wide domestic restaurants. SameDomestic same store sales growth is driven by increases in transactions and average transaction size. Transaction size increases are driven by price increases or favorable mix shift from either an increase in items purchased or shifts into higher priced items.
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 net income before interest expense, net, income tax expense, and depreciation and amortization, with further adjustments for managementlosses on debt extinguishment and refinancing transactions, transaction costs, costs and fees and expense reimbursement,transaction costs,associated with investments in our strategic initiatives, gains and losses on the disposal of assets, and stock-based compensation expense. Adjusted EBITDA may not be comparable to other similarly titled captions of other companies due to differences in methods of calculation. 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.
Adjusted Net Income and Adjusted Earnings Per Diluted Share. We define Adjusted net income as net income adjusted for losses on debt extinguishment and refinancing transactions, transaction costs, costs and fees associated with investments in our strategic initiatives, gains and losses on the disposal of assets, and related tax adjustments. We define Adjusted earnings per diluted share as Adjusted net income divided by weighted average diluted share count. For a reconciliation of net income to Adjusted net income and afor further discussion of Adjusted net income and Adjusted earnings per diluted share as non-GAAP measures and how we utilize this non-GAAP financial measure,them, see “Selected Historical Consolidated Financial and Other Data.”footnote 3 below.
The following table sets forth our key performance indicators for the fiscal years ended December 30, 2017, December 31, 201626, 2020 and December 26, 201528, 2019 (in thousands, except unit data):
| Year ended | |||||||||||
| December 26, 2020 | December 28, 2019 | ||||||||||
| Number of system-wide restaurants at period end | 1,538 | 1,385 | |||||||||
System-wide sales(1) | $ | 1,950,570 | $ | 1,514,590 | |||||||
| Domestic restaurant AUV | $ | 1,489 | $ | 1,246 | |||||||
| Domestic same store sales growth | 21.4 | % | 11.1 | % | |||||||
| Company-owned domestic same store sales growth | 14.2 | % | 9.8 | % | |||||||
| Total revenue | $ | 248,811 | $ | 199,676 | |||||||
| Net income | $ | 23,306 | $ | 20,476 | |||||||
Adjusted EBITDA(2) | $ | 71,882 | $ | 56,989 | |||||||
Adjusted net income (3) | $ | 32,500 | $ | 21,716 | |||||||
(1) The percentage of system-wide sales attributable to company-owned restaurants was 3.2% and 3.7% for the fiscal years ended December 26, 2020 and December 28, 2019, 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 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 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.
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| Year ended | |||||||||||
| December 30, 2017 | December 31, 2016 | December 26, 2015 | |||||||||
| Number of system-wide restaurants at period end | 1,133 | 998 | 845 | ||||||||
| System-wide sales | $ | 1,087,434 | $ | 972,270 | $ | 821,248 | |||||
| Domestic restaurant AUV | $ | 1,100 | $ | 1,113 | $ | 1,126 | |||||
| System-wide domestic same store sales growth | 2.6 | % | 3.2 | % | 7.9 | % | |||||
| Company-owned domestic same store sales growth | 1.6 | % | 5.4 | % | 9.4 | % | |||||
| Total revenue | $ | 105,552 | $ | 91,359 | $ | 77,969 | |||||
| Net income | $ | 27,304 | $ | 15,434 | $ | 10,106 | |||||
| Adjusted EBITDA | $ | 41,507 | $ | 35,576 | $ | 28,879 | |||||
•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
•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 losses on debt extinguishment and refinancing transactions, transaction costs, costs and fees associated with investments in our strategic initiatives, gains and losses on the disposal of assets, and stock-based compensation expense. It is reasonable to expect that these items will occur in future periods. However, we believe these adjustments are appropriate because the amounts recognized can vary significantly from period to period, do not directly relate to the ongoing operations of our restaurants, and complicate comparisons of our internal operating results and operating results of other restaurant companies over time. 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.
33
The following table reconciles net income to EBITDA and Adjusted EBITDA for the fiscal years ended December 26, 2020 and December 28, 2019 (in thousands):
| Year ended | |||||||||||
| December 26, 2020 | December 28, 2019 | ||||||||||
| Net income | $ | 23,306 | $ | 20,476 | |||||||
| Interest expense, net | 16,782 | 17,136 | |||||||||
| Income tax expense | 3,637 | 5,289 | |||||||||
| Depreciation and amortization | 7,518 | 5,484 | |||||||||
| EBITDA | $ | 51,243 | $ | 48,385 | |||||||
| Additional adjustments: | |||||||||||
Loss on debt extinguishment and refinancing transactions (a) | 13,816 | — | |||||||||
Gain on disposal of assets, net (b) | (3,093) | — | |||||||||
Consulting fees (c) | 1,358 | 1,630 | |||||||||
Stock-based compensation expense (d) | 8,558 | 6,974 | |||||||||
| Adjusted EBITDA | $ | 71,882 | $ | 56,989 | |||||||
(a) Represents costs and expenses related to the refinancing of our securitized financing facility and payment of a special dividend; all transaction costs are included in Loss on debt extinguishment and refinancing transactions on the Consolidated Statements of Operations, with the exception of $151,000 during the year ended December 26, 2020 that is included in Selling, general and administrative expense on the Consolidated Statements of Operations.
(b) Represents a gain resulting from the re-franchise of company-owned restaurants to franchisees, which is included in Gain on sale of restaurants and other expenses, net on the Consolidated Statements of Operations.
(c) Represents costs and expenses related to consulting projects to support the Company's strategic initiatives, which are included in Selling, general and administrative expense on the Consolidated Statements of Operations.
(d) Includes non-cash, stock-based compensation.
(3) Adjusted net income and adjusted earnings per diluted share are supplemental measures of operating performance that do not represent and should not be considered alternatives to net income and earnings per share, as determined by GAAP. These measures have not been prepared in accordance with Article 11 of Regulation S-X promulgated under the Securities Act. Management believes adjusted net income and adjusted earnings per diluted share supplement GAAP measures and enable management to more effectively evaluate the Company’s performance period-over-period and relative to competitors.
34
The following table reconciles net income to Adjusted net income and calculates adjusted earnings per diluted share for the fiscal years ended December 26, 2020 and December 28, 2019 (in thousands):
| Year Ended | |||||||||||
| December 26, 2020 | December 28, 2019 | ||||||||||
| Numerator: | |||||||||||
| Net income | $ | 23,306 | $ | 20,476 | |||||||
| Adjustments: | |||||||||||
Loss on debt extinguishment and refinancing transactions (a) | 13,816 | — | |||||||||
Gain on disposal of assets, net (b) | (3,093) | — | |||||||||
Consulting fees (c) | 1,358 | 1,630 | |||||||||
Tax effect of adjustments (d) | (2,887) | (390) | |||||||||
| Adjusted net income | $ | 32,500 | $ | 21,716 | |||||||
| Denominator: | |||||||||||
| Weighted-average shares outstanding - diluted | 29,804 | 29,670 | |||||||||
| Adjusted earnings per diluted share | $ | 1.09 | $ | 0.73 | |||||||
(a) Represents costs and expenses related to the refinancing of our securitized financing facility and payment of a special dividend; all transaction costs are included in Loss on debt extinguishment and refinancing transactions with the exception of $151,000 during the year ended December 26, 2020 that is included in Selling, general and administrative expense on the Consolidated Statements of Operations.
(b) Represents a gain resulting from the re-franchise of company-owned restaurants to franchisees which is included in Gain on sale of restaurants and other expenses, net on the Consolidated Statements of Operations.
(c) Represents costs and expenses related to a consulting project to support the Company's strategic initiatives, which are included in Selling, general and administrative expense on the Consolidated Statements of Operations.
(d) Represents the tax effect of the aforementioned adjustments to reflect corporate income taxes at an assumed effective tax rate of 24% for the periods ended December 26, 2020 and December 28, 2019, which includes provisions for U.S. federal income taxes, and assumes the respective statutory rates for applicable state and local jurisdictions.
35
Results of Operations
Year ended December 26, 2020 compared to year ended December 28, 2019
The following table sets forth the Consolidated Statements of Operations for fiscal year 2020 and fiscal year 2019 (in thousands, except for percentages):
| Year ended | Increase / (Decrease) | ||||||||||||||||||||||
| December 26, 2020 | December 28, 2019 | $ | % | ||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Royalty revenue, franchise fees and other | $ | 108,883 | $ | 88,291 | $ | 20,592 | 23.3 | % | |||||||||||||||
| Advertising fees | 74,930 | 55,932 | 18,998 | 34.0 | % | ||||||||||||||||||
| Company-owned restaurant sales | 64,998 | 55,453 | 9,545 | 17.2 | % | ||||||||||||||||||
| Total revenue | 248,811 | 199,676 | 49,135 | 24.6 | % | ||||||||||||||||||
| Costs and expenses: | |||||||||||||||||||||||
Cost of sales (1) | 48,583 | 41,105 | 7,478 | 18.2 | % | ||||||||||||||||||
| Advertising expenses | 69,428 | 52,891 | 16,537 | 31.3 | % | ||||||||||||||||||
| Selling, general and administrative | 68,985 | 57,295 | 11,690 | 20.4 | % | ||||||||||||||||||
| Depreciation and amortization | 7,518 | 5,484 | 2,034 | 37.1 | % | ||||||||||||||||||
| Gain on sale of restaurants and other expenses, net | (3,093) | — | (3,093) | N/A | |||||||||||||||||||
| Total costs and expenses | 191,421 | 156,775 | 34,646 | 22.1 | % | ||||||||||||||||||
| Operating income | 57,390 | 42,901 | 14,489 | 33.8 | % | ||||||||||||||||||
| Interest expense, net | 16,782 | 17,136 | (354) | (2.1) | % | ||||||||||||||||||
| Loss on debt extinguishment and refinancing transactions | 13,665 | — | 13,665 | N/A | |||||||||||||||||||
| Income before income tax expense | 26,943 | 25,765 | 1,178 | 4.6 | % | ||||||||||||||||||
| Income tax expense | 3,637 | 5,289 | (1,652) | (31.2) | % | ||||||||||||||||||
| Net income | $ | 23,306 | $ | 20,476 | $ | 2,830 | 13.8 | % | |||||||||||||||
| (1) | Cost of sales includes all operating expenses of company-owned restaurants, including advertising expenses, and excludes depreciation and amortization, which are presented separately. | ||||
Total Revenue. OurTotal revenue is comprisedconsists of the collection of development fees, franchise fees, royalties, and other fees associated with franchise and development rights, contributions to the Ad Fund, and sales of wings and other food and beverage products by our company-owned restaurants. The following is a brief description of our components of revenue:
| Fiscal Year | ||||||||
| December 30, 2017 | December 31, 2016 | December 26, 2015 | ||||||
| Revenue: | ||||||||
| Royalty revenue and franchise fees | 64.9 | % | 62.5 | % | 59.9 | % | ||
| Company-owned restaurant sales | 35.1 | % | 37.5 | % | 40.1 | % | ||
| Total revenue | 100.0 | % | 100.0 | % | 100.0 | % | ||
| Costs and expenses: | ||||||||
Cost of sales (1) | 77.5 | % | 73.8 | % | 71.0 | % | ||
| Selling, general and administrative | 35.2 | % | 37.0 | % | 42.8 | % | ||
| Depreciation and amortization | 3.2 | % | 3.3 | % | 3.4 | % | ||
| Total costs and expenses | 65.6 | % | 68.0 | % | 74.7 | % | ||
| Operating income | 34.4 | % | 32.0 | % | 25.3 | % | ||
| Interest expense, net | 4.9 | % | 4.8 | % | 4.5 | % | ||
| Other (income) expense, net | — | % | 0.3 | % | 0.5 | % | ||
| Income before income taxes | 29.5 | % | 26.9 | % | 20.3 | % | ||
| Income tax expense | 3.6 | % | 10.0 | % | 7.4 | % | ||
| Net income | 25.9 | % | 16.9 | % | 13.0 | % | ||
| Year ended | Increase / (Decrease) | |||||||||||||
| December 30, 2017 | December 31, 2016 | $ | % | |||||||||||
| Revenue: | ||||||||||||||
| Royalty revenue and franchise fees | $ | 68,483 | $ | 57,071 | $ | 11,412 | 20.0 | % | ||||||
| Company-owned restaurant sales | 37,069 | 34,288 | 2,781 | 8.1 | % | |||||||||
| Total revenue | 105,552 | 91,359 | 14,193 | 15.5 | % | |||||||||
| Costs and expenses: | ||||||||||||||
Cost of sales (1) | 28,745 | 25,308 | 3,437 | 13.6 | % | |||||||||
| Selling, general and administrative | 37,151 | 33,840 | 3,311 | 9.8 | % | |||||||||
| Depreciation and amortization | 3,376 | 3,008 | 368 | 12.2 | % | |||||||||
| Total costs and expenses | 69,272 | 62,156 | 7,116 | 11.4 | % | |||||||||
| Operating income | 36,280 | 29,203 | 7,077 | 24.2 | % | |||||||||
| Interest expense, net | 5,131 | 4,396 | 735 | 16.7 | % | |||||||||
| Other expense, net | — | 254 | (254 | ) | (100.0 | )% | ||||||||
| Income before income tax expense | 31,149 | 24,553 | 6,596 | 26.9 | % | |||||||||
| Income tax expense | 3,845 | 9,119 | (5,274 | ) | (57.8 | )% | ||||||||
| Net income | $ | 27,304 | $ | 15,434 | $ | 11,870 | 76.9 | % | ||||||
Royalty revenue, franchise fees and franchise fees. other. Royalty revenue and franchise fees were $68.5$108.9 million in fiscal year 2017,2020, an increase of $11.4$20.6 million, or 20.0%23.3%, compared to $57.1$88.3 million in the prior fiscal year. Royalty revenue increased by $6.4$23.4 million primarily due to 147152 net franchise restaurant openings andsince December 28, 2019 as well as domestic same store sales growth of 2.6%, partially offset by revenue of approximately $0.9 million related to the 53rd week in 2016.21.4%. Other revenue increased $4.8decreased $2.4 million primarily due to contributions received for our franchisee convention that occurred in the fourth quarter of 2019.
Advertising fees. Ad Fund contributions are earned from domestic franchisees based on a percentage of gross sales net of discounts. Ad Fund contributions were equal to 4% in fiscal years 2019 and 2020.
Advertising fees were $74.9 million in fiscal year 2020, an increase in vendor rebates, including a one-time payment, based on system-wide volumes purchasedof $19.0 million, or 34.0%, compared to $55.9 million in the comparable period in 2019. Advertising fees increased primarily due to the increase in domestic system-wide sales in fiscal year 2020 compared to the prior year, received in conjunction with a new vendor agreement that was executed during the first quarter of 2017. The funding from this agreement was primarily used to support our national advertising campaign.fiscal year.
Company-owned restaurant sales.Company-owned restaurant sales were $37.1$65.0 million in fiscal year 2017,2020, an increase of $2.8$9.5 million, or 8.1%17.2%, compared to $34.3$55.5 million in the prior fiscal year. The increase iswas primarily due to an increase in company-owned same store sales of 14.2%, which was driven by both an increase in transaction size and transactions, as well as an
36
increase in the resultnumber of company-owned restaurants. Since the beginning of the acquisition of twoprior fiscal year period, we acquired seven company-owned restaurants from a franchisee in the third quarter of 2017franchisees, opened three new company-owned restaurants, and refranchised seven company-owned domestic same store sales growth of 1.6%, driven by an increase in transactions, partially offset by revenue of approximately $0.6 million relatedrestaurants to the 53rd week in 2016.franchisees.
Cost of sales. Cost of sales was $28.7 million in fiscal year 2017, an increase of $3.4 million, or 13.6%, compared to $25.3 million in the prior fiscal year. Cost of sales as a percentage of company-owned restaurant sales was 77.5% in fiscal year 2017 compared to 73.8% in the prior fiscal year.
The table below presents the major components of Cost of sales (in thousands)thousands, except for percentages):
| Year ended | As a % of company-owned restaurant sales | Year ended | As a % of company-owned restaurant sales | Year ended | As a % of company-owned restaurant sales | Year ended | As a % of company-owned restaurant sales | |||||||||||||||||||||||||||||
| December 30, 2017 | December 31, 2016 | December 26, 2020 | December 28, 2019 | |||||||||||||||||||||||||||||||||
| Cost of sales: | Cost of sales: | |||||||||||||||||||||||||||||||||||
| Food, beverage and packaging costs | 14,810 | 40.0 | % | 12,827 | 37.4 | % | Food, beverage and packaging costs | 23,303 | 35.9 | % | 20,317 | 36.6 | % | |||||||||||||||||||||||
| Labor costs | 8,878 | 23.9 | % | 7,680 | 22.4 | % | Labor costs | 15,801 | 24.3 | % | 12,582 | 22.7 | % | |||||||||||||||||||||||
| Other restaurant operating expenses | 6,004 | 16.2 | % | 5,760 | 16.8 | % | Other restaurant operating expenses | 10,821 | 16.6 | % | 9,794 | 17.7 | % | |||||||||||||||||||||||
| Vendor rebates | (947 | ) | (2.6 | )% | (959 | ) | (2.8 | )% | Vendor rebates | (1,342) | (2.1) | % | (1,588) | (2.9) | % | |||||||||||||||||||||
| Total cost of sales | $ | 28,745 | 77.5 | % | $ | 25,308 | 73.8 | % | Total cost of sales | $ | 48,583 | 74.7 | % | $ | 41,105 | 74.1 | % | |||||||||||||||||||
Food, beverage and packaging costs as a percentage of company-owned restaurant sales were 40.0%35.9% in fiscal year 20172020 compared to 37.4%36.6% in the prior fiscal year. The increasedecrease is primarily due to an 18.0% increasea 3.3% decrease in commodities rates forthe cost of bone-in chicken wings compared to the prior fiscal year.
Labor costs as a percentage of company-owned restaurant sales were 23.9%24.3% in fiscal year 20172020 compared to 22.4%22.7% in the prior fiscal year. The increase as a percentage of company-owned restaurant sales iswas primarily due to investmentsincentive pay provided to team members in roster sizes and staffing we maderesponse to the COVID-19 pandemic. This increase was partially offset by the increase in the third and fourth quarterscompany-owned domestic same store sales of fiscal year 2016 to support the continued sales growth in our company-owned restaurants.14.2%.
Other restaurant operating expenses as a percentage of company-owned restaurant sales were 16.2%16.6% in fiscal year 20172020 compared to 16.8%17.7% in the prior fiscal year. The decrease as a percentage of company-owned restaurant sales is primarilywas due to a decrease in repairs and maintenance expenses, as wellsales leverage achieved as a result of the increase in company-owned same store sales of 14.2%. This decrease was slightly offset by an increase in pre-openingdelivery fees payable to third-party delivery providers due to the growth in delivery mix as a percent of total sales during fiscal year 2020.
Advertising expenses. Advertising expenses associated with the openingwere $69.4 million in fiscal year 2020, an increase of two company-owned restaurants$16.5 million, or 31.3%, compared to $52.9 million in the prior fiscal year.year, primarily due to domestic system-wide sales growth. 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. administrative ("SG&A"). SG&A expense was $37.2$69.0 million in fiscal year 2017,2020, an increase of $3.3$11.7 million, or 9.8%20.4%, compared to $33.8$57.3 million in the prior fiscal year. The increase in SG&A expense iswas primarily due to an increaseapproximately $5.5 million in voluntary contributionshigher variable performance-based compensation expense, inclusive of $3.2stock-based compensation expense, and $1.9 million madein headcount-related expenses to support the advertising fund, including a one-time payment madegrowth in conjunction with a new vendor agreement executed during the first quarter of 2017, which provided support for the Company’s national advertising campaign. SG&A expense also increased due to planned headcount additionsour business, and an increase of $1.4 million associated with additional expenses to support our national advertising campaign, which has an equal and offsetting contribution in stock based compensationrevenue. We also incurred expenses of $2.8 million related to COVID-19 and travel expenses.support provided to international franchisees, $1.4 million in consulting fees related to support for strategic initiatives, and a one-time donation to the National Restaurant Employee Relief Fund of $1.0 million to support restaurant workers in times of need. These increases are partiallywere slightly offset by a $2.1 million decrease in nonrecurringtravel expenses, of $2.2as well as a $1.8 million related to the refinancing of our credit agreement anddecrease in convention expenses related to the special dividend, whichfranchisee convention that occurred in the prior fiscal year, as well as a decrease in incremental costsfourth quarter of approximately $0.6 million related to the 53rd week in 2016.2019.
Depreciation and amortization. Depreciation and amortization was $3.4$7.5 million in fiscal year 2017,2020, an increase of $0.4$2.0 million, or 12.2%, compared to $3.0 million in the prior fiscal year. The increase in depreciation is primarily due to the capital expenditures during the period, including the acquisition of two company-owned locations.
| Year Ended | Increase / (Decrease) | |||||||||||||
| December 30, 2017 | December 31, 2016 | $ | % | |||||||||||
| Revenue: | ||||||||||||||
| Franchise segment | $ | 68,483 | $ | 57,071 | $ | 11,412 | 20.0 | % | ||||||
| Company segment | 37,069 | 34,288 | 2,781 | 8.1 | % | |||||||||
| Total segment revenue | $ | 105,552 | $ | 91,359 | $ | 14,193 | 15.5 | % | ||||||
| Segment Profit: | ||||||||||||||
| Franchise segment | $ | 31,637 | $ | 25,850 | $ | 5,787 | 22.4 | % | ||||||
| Company segment | 4,643 | 5,526 | (883 | ) | (16.0 | )% | ||||||||
| Total segment profit | $ | 36,280 | $ | 31,376 | $ | 4,904 | 15.6 | % | ||||||
Gain on sale of restaurants and investments in roster sizesother expense, net. Gain on sale of restaurants and staffingother expense, net increased primarily due to support the continued sales growth in ourgain recognized due to the sale of seven company-owned restaurants. The decrease is partially offset by the company-owned comparable same store sales increase of 1.6%, as well as a decrease in repairs and maintenance and pre-opening expenses.restaurants to franchisees.
| Year ended | Increase / (Decrease) | |||||||||||||
| December 31, 2016 | December 26, 2015 | $ | % | |||||||||||
| Revenue: | ||||||||||||||
| Royalty revenue and franchise fees | $ | 57,071 | $ | 46,688 | $ | 10,383 | 22.2 | % | ||||||
| Company-owned restaurant sales | 34,288 | 31,281 | 3,007 | 9.6 | % | |||||||||
| Total revenue | 91,359 | 77,969 | 13,390 | 17.2 | % | |||||||||
| Costs and expenses: | ||||||||||||||
Cost of sales (1) | 25,308 | 22,219 | 3,089 | 13.9 | % | |||||||||
| Selling, general and administrative | 33,840 | 33,350 | 490 | 1.5 | % | |||||||||
| Depreciation and amortization | 3,008 | 2,682 | 326 | 12.2 | % | |||||||||
| Total costs and expenses | 62,156 | 58,251 | 3,905 | 6.7 | % | |||||||||
| Operating income | 29,203 | 19,718 | 9,485 | 48.1 | % | |||||||||
| Interest expense, net | 4,396 | 3,477 | 919 | 26.4 | % | |||||||||
| Other expense, net | 254 | 396 | (142 | ) | (35.9 | )% | ||||||||
| Income before income tax expense | 24,553 | 15,845 | 8,708 | 55.0 | % | |||||||||
| Income tax expense | 9,119 | 5,739 | 3,380 | 58.9 | % | |||||||||
| Net income | $ | 15,434 | $ | 10,106 | $ | 5,328 | 52.7 | % | ||||||
| Year ended | As a % of company-owned restaurant sales | Year ended | As a % of company-owned restaurant sales | ||||||||||
| December 31, 2016 | December 26, 2015 | ||||||||||||
| Cost of sales: | |||||||||||||
| Food, beverage and packaging costs | 12,827 | 37.4 | % | 11,504 | 36.8 | % | |||||||
| Labor costs | 7,680 | 22.4 | % | 6,493 | 20.8 | % | |||||||
| Other restaurant operating expenses | 5,760 | 16.8 | % | 4,956 | 15.8 | % | |||||||
| Vendor rebates | (959 | ) | (2.8 | )% | (734 | ) | (2.3 | )% | |||||
| Total cost of sales | $ | 25,308 | 73.8 | % | $ | 22,219 | 71.0 | % | |||||
37
Loss on debt extinguishment and refinancing transactions. Loss on debt extinguishment and refinancing transactions was $13.7 million due to costs and fees associated with the refinancing of our securitized financing facility on October 30, 2020.
Income tax expense. Income tax expense was $9.1$3.6 million in fiscal year 2016,2020, yielding an effective tax rate of 37.1%13.5%, compared to an effective tax rate of 36.2% in the prior fiscal year. The increase in the rate is largely driven by an increase in the effective state rate, driven by a shift in state apportionment rates and total revenue mix.
| Year Ended | Increase / (Decrease) | |||||||||||||
| December 31, 2016 | December 26, 2015 | $ | % | |||||||||||
| Revenue: | ||||||||||||||
| Franchise segment | $ | 57,071 | $ | 46,688 | $ | 10,383 | 22.2 | % | ||||||
| Company segment | 34,288 | 31,281 | 3,007 | 9.6 | % | |||||||||
| Total segment revenue | $ | 91,359 | $ | 77,969 | $ | 13,390 | 17.2 | % | ||||||
| Segment Profit: | ||||||||||||||
| Franchise segment | $ | 25,850 | $ | 19,701 | $ | 6,149 | 31.2 | % | ||||||
| Company segment | 5,526 | 5,737 | (211 | ) | (3.7 | )% | ||||||||
| Total segment profit | $ | 31,376 | $ | 25,438 | $ | 5,938 | 23.3 | % | ||||||
Liquidity and Capital Resources
General. Our primary sources of liquidity and capital resources are cash provided from operating activities, cash and cash equivalents on hand, and proceeds from the incurrence of debt. Our primary requirements for liquidity and capital are working capital and general corporate needs. Historically, we have operated with minimal positive working capital or with negative working capital. We have in the past, and may in the future, refinance our existing indebtedness with new debt arrangements and utilize a portion of borrowings to return capital to our stockholders. We believe that our sources of liquidity and capital will be sufficient to finance our continued operations and growth strategy.strategy for at least the next twelve months.
The following table shows summary cash flows information for the fiscal years 2017, 20162020 and 20152019 (in thousands):
| Year ended | |||||||||||
| December 26, 2020 | December 28, 2019 | ||||||||||
| Net cash provided by (used in): | |||||||||||
| Operating activities | $ | 65,530 | $ | 38,583 | |||||||
| Investing activities | (7,987) | (23,731) | |||||||||
| Financing activities | (19,448) | (14,617) | |||||||||
| Net change in cash and cash equivalents | $ | 38,095 | $ | 235 | |||||||
| Year ended | |||||||||||
| December 30, 2017 | December 31, 2016 | December 26, 2015 | |||||||||
| Net cash provided by (used in): | |||||||||||
| Operating activities | 27,049 | 23,329 | 13,860 | ||||||||
| Investing activities | (6,484 | ) | (2,056 | ) | (1,915 | ) | |||||
| Financing activities | (20,252 | ) | (28,213 | ) | (10,978 | ) | |||||
| Net change in cash and cash equivalents | $ | 313 | $ | (6,940 | ) | $ | 967 | ||||
Operating activities. Our cash flows from operating activities are principally driven by sales at both franchise restaurants and company-owned restaurants, as well as franchise and development fees. We collect franchise royalties from our franchise owners on a weekly basis. Restaurant-level operating costs at our company-owned restaurants, unearned franchise and development fees, and corporate overhead costs also impact our cash flows from operating activities.
Net cash provided by operating activities was $27.0$65.5 million in fiscal year 2017,2020, an increase of $3.7$26.9 million from $23.3cash provided by operating activities of $38.6 million in the prior fiscal year. The increase is primarily due to the timing of changes in working capital as well as an increase in royalties and advertising fees due to the increase in system-wide sales.
Investing activities. Our net cash used in investing activities was $8.0 million in fiscal year 2016.2020, a decrease of $15.7 million, from $23.7 million in fiscal year 2019. The decrease in cash used in investing activities was primarily due to the purchase of a new corporate headquarters building for $18.3 million during fiscal year 2019.
Financing activities. Our net cash used in financing activities was $19.4 million in fiscal year 2020, an increase of $4.8 million, from cash used in financing activities of $14.6 million in fiscal year 2019. The increase was primarily due to an increase in net income, offset by timing of changes in working capital.
38
The 2018 Facility bears2020 Class A-2 Notes are generally subject to 1% annual amortization, bear interest at our option, at eithera fixed rate of 2.84% per annum, and have an anticipated repayment date of December 2027.
Dividends. We paid quarterly cash dividends of $0.11 per share of common stock aggregating $6.5 million for the prime rate plus an applicable margin ranging from 0.75% to 1.75% or at an adjusted LIBOR rate plus an applicable margin ranging from 1.75% to 2.75%, in each case based on our lease adjusted leverage ratio. Failure to comply with these covenants infirst two quarters of 2020. We paid quarterly cash dividends of $0.14 per share of common stock aggregating $8.3 million for the future could cause an accelerationthird and fourth quarters of outstanding amounts under2020. On February 16, 2021, the term loan and revolver and restrict us from borrowing under the revolving credit facility to fund our liquidity requirements.
Separate from our regular dividend program, in July 2016 and February 2018,December 2020, we paid a special cash dividendsdividend of $2.90$5.00 per share and $3.17 per share, respectively, in connection with refinancingsthe refinancing of our credit facilities.
existing securitized financing facility in October of 2020.
We do not currently expect the restrictions in the 2018 Facilityour debt instruments to impact our ability to make regularly quarterly dividends pursuant to our quarterly dividend program. However, any future declarations of dividends, as well as the amount and timing of such dividends, is subject to capital availability and the discretion of our board of directors, which must evaluate, among other things, whether cash dividends are in the best interest of our stockholders.
Impact of Inflation
Historically, inflation has not had a material effect on our results of operations. However, increases in food and beverage, labor and energy costs, as well as the costs and materials used in the construction of new restaurants could affect our results. Our restaurant operations are subject to federal and state minimum wage laws governing such matters as working conditions, overtime and tip credits. Significant numbers of our and our franchisees’ restaurant personnel are paid at rates related to the federal and/or state minimum wage and, accordingly, increases in the minimum wage increase our and our franchisees’ labor costs. In addition, severe increases in inflation could affect the global and U.S. economies and could have an adverse impact on our business, financial condition, and results of operations. Further discussion on the impact of commodities and other cost pressures is included above as well as in “Item 7A. Quantitative and Qualitative Disclosures About Market Risk.”
Contractual Obligations
The following table sets forth our contractual obligations and commercial commitments as of December 30, 201726, 2020 (in thousands):
| Payments due by period | |||||||||||||||||||||||
| Fiscal year 2021 | Fiscal years 2022-2023 | Fiscal years 2024-2025 | Thereafter | ||||||||||||||||||||
| 2020 Notes | $ | 3,600 | $ | 9,600 | $ | 9,600 | $ | 457,200 | |||||||||||||||
Operating leases (a) | 2,614 | 3,636 | 1,633 | 594 | |||||||||||||||||||
| Interest payments | 15,060 | 27,054 | 13,323 | 25,963 | |||||||||||||||||||
| Total | $ | 21,274 | $ | 40,290 | $ | 24,556 | $ | 483,757 | |||||||||||||||
| Payments due by period | |||||||||||||||
| Fiscal year 2018 | Fiscal years 2019-2020 | Fiscal years 2021-2022 | Thereafter | ||||||||||||
| Senior credit facility | $ | 3,500 | $ | 6,125 | $ | 124,125 | $ | — | |||||||
Operating leases (a) | 1,783 | 2,997 | 2,508 | 4,037 | |||||||||||
| Interest payments | 4,926 | 8,309 | 2,293 | — | |||||||||||
| Total | $ | 10,209 | $ | 17,431 | $ | 128,926 | $ | 4,037 | |||||||
| (a) | Includes base lease terms and certain optional renewal periods that are included in the lease term in accordance with accounting guidance related to leases. | ||||
Indemnifications. We are parties to certain indemnifications to third parties in the ordinary course of business. TheWe believe the probability of incurring an actual liability under such indemnifications is sufficiently remote so that no liability has been recorded.
Off-Balance Sheet Arrangements
Critical Accounting Policies and Estimates
Our consolidated financial statements and accompanying notes are prepared in accordance with GAAP. Preparing consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities,
39
revenues and expenses. These estimates and assumptions are affected by the application of our accounting policies. Critical accounting estimates are those that require application of management’s most difficult, subjective or complex judgments, often as a result of matters that are inherently uncertain and may change in subsequent periods. While we apply our judgment based on assumptions believed to be reasonable under the circumstances, actual results could vary from these assumptions. It is possible that materially different amounts would be reported using different assumptions. Our critical accounting policies and estimates are more fully described in Note 1 to our consolidated financial statements. However, we believe the accounting policies described below are particularly important to the portrayal and understanding of our financial position and results of operations.
Revenue Recognition
Royalties, including franchisee contributions to the Ad Fund, are calculated as a percentage of franchise restaurant sales fromover the term of the franchise agreement. Initial and developmentrenewal franchise fees international territory fees,are payable by the franchisee prior to the restaurant opening or at the time of a renewal of an existing franchise agreement. Our franchise agreement royalties, inclusive of Ad Fund contributions, represent sales-based royalties that are related entirely to our performance obligation under the franchise agreement and company-owned stores. Franchiseare recognized as franchise sales occur. Additionally, initial and renewal franchise fees are recognized as revenue when all material services or conditions relatingon a straight-line basis over the term of the respective agreement. Our performance obligation under development agreements and international territory agreements generally consists of an obligation to the store have been substantially performed or satisfiedgrant exclusive development rights over a stated term. These development rights are not distinct from franchise agreements, so upfront fees paid by WRI, which is typically when a franchised store begins operations. Development feesfranchisees for the right to develop a store are recognized as revenue when all material services or conditions relating to the sale have been substantially performed, which is typically when the franchised store begins operations. International territory fees and development fees determined based on the number of stores to open in an arearights are deferred and recognized as revenue on aapportioned to each franchise restaurant opened by the franchisee. The pro rata basis at the same time the individual franchise feeamount apportioned to each restaurant is recognized, typically when individual stores are opened. Franchise fee, development fee and international territory fee payments received by WRI before the restaurant opens are recorded as deferred revenue in the Consolidated Balance Sheets.
| Item 7A. | Quantitative and Qualitative Disclosures of Market Risks | ||||
Commodity Price Risk. We are exposed to market risks from changes in commodity prices. Many of the food products purchased by us are affected by weather, production, availability, and other factors outside our control. Although we attempt to minimize the effect of price volatility by negotiating fixed price contracts for the supply of key ingredients, there are no established fixed price markets for bone-in chicken wings, soand as a result we are subject to prevailing market conditions. Bone-in chicken wings accounted for approximately 31.4%27.4% and 29.1%28.2% of our company-owned restaurant costs of sales in fiscal years 20172020 and 2016.2019. A hypothetical
10.0% increase in the bone-in chicken wing costs in fiscal year 20172020 would have increased costs of sales by approximately $0.9$1.3 million during the year. We do not engage in speculative financial transactions nor do we hold or issue financial instruments for trading purposes.
Interest Rate Risk. We are subjectOur long-term debt, including current portion, consisted entirely of the $480.0 million incurred under the 2020 Notes as of December 26, 2020 (excluding unamortized debt issuance costs). The Company’s predominantly fixed-rate debt structure has reduced its exposure to interest rate risk in connection with borrowings under our senior secured credit facility, which bear interest at variable rates. At December 30, 2017, we had $133.8 million outstanding under our credit facility. Derivative financial instruments, such as interest rate swap agreements and interest rate cap agreements, may be used for the purpose of managing fluctuating interest rate exposuresincreases that exist from our variable rate debt obligations that are expected to remain outstanding. Interest rate changes do notcould adversely affect the market value of such debt, but could impact the amount of our interest payments, and accordingly, our futureits earnings and cash flows, assuming other factors are held constant. A hypothetical 1.0% percentage point increase or decreasebut the Company remains exposed to changes in market interest rates reflected in the fair value of the debt and to the risk that the Company may need to refinance maturing debt with new debt at a higher rate. The Company is exposed to interest rate associated with ourincreases under the 2020 Variable Funding Notes; however, the Company had no outstanding borrowings under its 2020 Variable Funding Notes as of December 26, 2020, net of letters of credit facilities would have resulted in a $1.3 million impact on interest expense for the year ended December 30, 2017.issued of $4.9 million.
| Item 8. | Financial Statements and Supplementary Data | ||||
Information with respect to this Item is set forth beginning on page F-1. See “Item“Item 15 - Exhibits and Financial Schedule”Statement Schedules” below.
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | ||||
None.
| Item 9A. | Controls and Procedures | ||||
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures, pursuant to Rule 13a-15 under the Securities Exchange Act, of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this annualAnnual Report on Form 10-K. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 30, 201726, 2020 to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There have been no other changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control Overover Financial Reporting
The management of Wingstop Inc. is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting for external purposes in accordance with accounting principles generally accepted in the United States. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management, including our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting as of December 30, 2017.26, 2020. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in Internal Control-Integrated Framework (2013). Based on such assessment our management has concluded that, as of December 30, 2017,26, 2020, our internal control over financial reporting is effective based on those criteria.
41
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of
Wingstop Inc. and Subsidiaries:
Opinion on Internal Control overOver Financial Reporting
We have audited Wingstop Inc. and Subsidiaries’subsidiaries’ (the Company) internal control over financial reporting as of December 30, 2017,26, 2020, based on criteria established in Internal Control-IntegratedControl – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission 2013 framework, (the COSO criteria).Commission. In our opinion, Wingstop Inc. and Subsidiaries (the Company)the Company maintained, in all material respects, effective internal control over financial reporting as of December 30, 2017,26, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the COSO criteria.Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 30, 201726, 2020 and December 31, 2016, and28, 2019, the related consolidated statements of operations, stockholders’ deficit, and cash flows for each of the three fiscal years in the two-year period ended December 30, 2017,26, 2020, and the related notes (collectively, the consolidated financial statements), and our report dated February 23, 201817, 2021, expressed an unqualified opinion thereon.on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Overover Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, andrisk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ ERNST & YOUNGKPMG LLP
Dallas, Texas
February 23, 201817, 2021
42
43
PART III
| Item 10. | Directors, Executive Officers and Corporate Governance | ||||
Information regarding our directors, executive officers, audit committee and our audit committee financial expert required by this Item 10 will be included in our definitive Proxy Statement for the 20182021 Annual Meeting of ShareholdersStockholders and such disclosure is incorporated herein by reference.
| Item 11. | Executive Compensation | ||||
Information regarding executive compensation required by this Item 11 will be included in our definitive Proxy Statement for the 20182021 Annual Meeting of ShareholdersStockholders and such disclosure is incorporated herein by reference.
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | ||||
Information regarding security ownership of certain beneficial owners and management and related stockholder matters, including the disclosures required by Item 201(d) of Regulation S-K, required by this Item 12 will be included in our definitive Proxy Statement for the 20182021 Annual Meeting of Stockholders and such disclosure is incorporated herein by reference.
| Item 13. | Certain Relationships and Related Transactions, and Director Independence | ||||
Information regarding certain relationships and related transactions and director independence required by this Item 13 will be included in our definitive Proxy Statement for the 20182021 Annual Meeting of Stockholders and such disclosure is incorporated herein by reference.
| Item 14. | Principal Accounting Fees and Services | ||||
The Company’s independent registered public accounting firm is Ernst & YoungKPMG LLP. Information regarding principal accountant fees and services required by this Item 14 will be included in our definitive Proxy Statement for the 20182021 Annual Meeting of ShareholdersStockholders and such disclosure is incorporated herein by reference.
44
PART IV
| Item 15. | Exhibits and Financial Statement Schedules | ||||
| Refer to Index to Financial Statements appearing on page F-1. | |||||
| (b) | Financial Statement Schedules | ||||
| No financial statement schedules are provided because the information called for is not required or is shown in the financial statements or the notes thereto. | |||||
| (c) | Exhibits | ||||
| The exhibits listed below are filed or incorporated by reference as a part of this report. | |||||
| Exhibit No. | Description | ||||
| 3.1 | |||||
| 3.2 | |||||
| 4.1 | |||||
| 4.3 | |||||
| 4.4* | |||||
| 10.2 | |||||
| 10.3 | Amended and Restated Guarantee and Collateral Agreement, dated as of October 30, 2020, by and among Wingstop Guarantor LLC and Wingstop Franchising LLC, each as a Guarantor, in favor of Citibank, N.A., as Trustee, filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K (File No. 001-37425) on November 2, 2020 and incorporated herein by reference. | ||||
| 10.4 | |||||
| 10.5† | |||||
45
___________________
*Filed herewith.
** The certifications attached as Exhibits 32.1 and 32.2 are furnished herewith, are not deemed “filed” with the SEC and are not to be incorporated by reference into any filing of Wingstop Inc. under the Securities Act or the Exchange Act, whether made before or after the date of this Annual Report on Form 10-K, irrespective of any general incorporation language contained in such filing.
46
†Indicates management agreement.
| Item 16. | Form 10-K Summary | ||||
Signatures
| Wingstop Inc. | ||
| /s/ Charles R. Morrison | ||
| Charles R. Morrison | ||
| Chairman and Chief Executive Officer (Principal Executive | ||
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Name | Title | Date | ||||||||||||
| /s/ Charles R. Morrison | February | |||||||||||||
| Charles R. Morrison | Chairman and Chief Executive Officer (Principal Executive Officer) | |||||||||||||
| /s/ Michael J. Skipworth | February | |||||||||||||
| Michael J. Skipworth | Chief Financial Officer (Principal Financial and Accounting Officer) | |||||||||||||
| /s/ Lynn Crump-Caine | February | |||||||||||||
| Lynn Crump-Caine | Lead Independent Director | |||||||||||||
| /s/ Krishnan Anand | February 17, 2021 | |||||||||||||
| Krishnan Anand | Director | |||||||||||||
| /s/ David L. Goebel | February | |||||||||||||
| David L. Goebel | Director | |||||||||||||
| /s/ Michael J. Hislop | February | |||||||||||||
| Michael J. Hislop | Director | |||||||||||||
| /s/ Kate S. Lavelle | February 17, 2021 | |||||||||||||
| Kate S. Lavelle | Director | |||||||||||||
| /s/ Kilandigalu M. Madati | February | |||||||||||||
| Kilandigalu M. Madati | Director | |||||||||||||
| /s/ Wesley S. McDonald | February | |||||||||||||
| Wesley S. McDonald | Director | |||||||||||||
48
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Financial Statements
F-1
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of
Wingstop Inc. and Subsidiaries
:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Wingstop Inc. and Subsidiariessubsidiaries (the Company) as of December 30, 201726, 2020 and December 31, 2016, and28, 2019, the related consolidated statements of operations, stockholders’ deficit, and cash flows for each of the three fiscal years in the two-year period ended December 30, 2017,26, 2020, and the related notes (collectively, referred to as the “financial statements”)consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company atas of December 30, 201726, 2020 and December 31, 2016,28, 2019, and the consolidated results of its operations and its cash flows for each of the three years in the two-year period ended December 30, 2017,26, 2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company'sCompany’s internal control over financial reporting as of December 30, 2017,26, 2020, based on criteria established in Internal Control-IntegratedControl – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, (2013 framework), and our report dated February 23, 201817, 2021 expressed an unqualified opinion thereon.on the effectiveness of the Company’s internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for leases as of December 30, 2018, due to the adoption of Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842), as amended.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company'sCompany’s management. Our responsibility is to express an opinion on the Company’sthese consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Evaluation of the sufficiency of audit evidence obtained over royalty revenue and advertising fees
As discussed in Notes 1 and 16 to the consolidated financial statements, the Company recognized $98.6 million of royalty revenue and $74.9 million of advertising fees for the year ended December 26, 2020. Royalty revenue and advertising fees are calculated as a percentage of franchise restaurant sales over the term of the franchise agreement.
F-2
We identified the evaluation of the sufficiency of audit evidence obtained over royalty revenue and advertising fees as a critical audit matter. This evaluation required especially challenging auditor judgement because such revenue streams are dependent upon the franchise restaurant sales reported by the franchised restaurants through the franchisees’ point-of-sale systems.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s revenue process, including controls over (1) the royalty and advertising fund contribution rates and (2) the reconciliation of royalty revenue and advertising fees recognized with the amount of cash received from franchisees for royalty and advertising fees. We involved IT professionals with specialized skills and knowledge who assisted in testing the information systems used in the revenue process. We compared revenue recognized to cash received for the year for royalty revenue and advertising fees. We sent third-party confirmations to a sample of franchisees regarding the amount of royalties and advertising fees that they owed to the Company. In addition, we evaluated the overall sufficiency of the audit evidence obtained over royalty revenue and advertising fees.
/s/ KPMG LLP
We have served as the Company’s auditor since 2019.
Dallas, Texas
February 17, 2021
F-3
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Wingstop Inc. and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of operations, stockholders’ deficit and cash flows for the fiscal year ended December 29, 2018, and the related notes (collectively referred to as the “consolidated financial statements”) (not presented separately herein). In our opinion, the consolidated financial statements present fairly, in all material respects, the results of its operations and its cash flows for the fiscal year ended December 29, 2018, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our auditsaudit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provideaudit provides a reasonable basis for our opinion.
/s/ ERNST & YOUNG LLP
We have served as the Company’sCompany's auditor since 2012.from 2014 to 2019.
Dallas, Texas
February 23, 201817, 2021
F-4
WINGSTOP INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(amounts in thousands, except share and par value data)
| December 30, 2017 | December 31, 2016 | December 26, 2020 | December 28, 2019 | |||||||||||||||
| Assets | Assets | |||||||||||||||||
| Current assets | Current assets | |||||||||||||||||
| Cash and cash equivalents | $ | 4,063 | $ | 3,750 | Cash and cash equivalents | $ | 40,858 | $ | 12,849 | |||||||||
| Restricted cash | Restricted cash | 4,815 | 4,790 | |||||||||||||||
| Accounts receivable, net | 4,567 | 3,199 | Accounts receivable, net | 4,929 | 5,175 | |||||||||||||
| Prepaid expenses and other current assets | 4,334 | 1,634 | Prepaid expenses and other current assets | 5,532 | 2,449 | |||||||||||||
| Advertising fund assets, restricted | 2,944 | 2,533 | Advertising fund assets, restricted | 16,486 | 4,927 | |||||||||||||
| Total current assets | 15,908 | 11,116 | Total current assets | 72,620 | 30,190 | |||||||||||||
| Property and equipment, net | 5,826 | 4,999 | Property and equipment, net | 27,948 | 27,842 | |||||||||||||
| Goodwill | 46,557 | 45,128 | Goodwill | 53,690 | 50,188 | |||||||||||||
| Trademarks | 32,700 | 32,700 | Trademarks | 32,700 | 32,700 | |||||||||||||
| Customer relationships, net | 15,567 | 16,914 | Customer relationships, net | 11,600 | 12,910 | |||||||||||||
| Other non-current assets | 3,278 | 943 | Other non-current assets | 13,007 | 12,283 | |||||||||||||
| Total assets | $ | 119,836 | $ | 111,800 | Total assets | $ | 211,565 | $ | 166,113 | |||||||||
| Liabilities and stockholders' deficit | Liabilities and stockholders' deficit | |||||||||||||||||
| Current liabilities | Current liabilities | |||||||||||||||||
| Accounts payable | $ | 1,752 | $ | 1,458 | Accounts payable | $ | 3,658 | $ | 3,348 | |||||||||
| Other current liabilities | 10,683 | 9,241 | Other current liabilities | 26,729 | 21,454 | |||||||||||||
| Current portion of debt | 3,500 | 3,500 | Current portion of debt | 3,600 | 3,200 | |||||||||||||
| Advertising fund liabilities, restricted | 2,944 | 2,533 | ||||||||||||||||
| Advertising fund liabilities | Advertising fund liabilities | 16,486 | 4,927 | |||||||||||||||
| Total current liabilities | 18,879 | 16,732 | Total current liabilities | 50,473 | 32,929 | |||||||||||||
| Long-term debt, net | 129,841 | 147,217 | Long-term debt, net | 466,933 | 307,669 | |||||||||||||
| Deferred revenues, net of current | 8,427 | 7,868 | Deferred revenues, net of current | 24,962 | 22,343 | |||||||||||||
| Deferred income tax liabilities, net | 8,799 | 12,304 | Deferred income tax liabilities, net | 4,480 | 4,485 | |||||||||||||
| Other non-current liabilities | 2,142 | 2,307 | Other non-current liabilities | 6,027 | 8,115 | |||||||||||||
| Total liabilities | 168,088 | 186,428 | Total liabilities | 552,875 | 375,541 | |||||||||||||
| Commitments and contingencies (see note 11) | ||||||||||||||||||
| Commitments and contingencies (see Note 12) | Commitments and contingencies (see Note 12) | 0 | 0 | |||||||||||||||
| Stockholders' deficit | Stockholders' deficit | |||||||||||||||||
| Common stock, $0.01 par value; 100,000,000 shares authorized; 29,092,669 and 28,747,392 shares issued and outstanding as of December 30, 2017 and December 31, 2016, respectively | 291 | 287 | ||||||||||||||||
| Common stock, $0.01 par value; 100,000,000 shares authorized; 29,687,123 and 29,457,228 shares issued and outstanding as of December 26, 2020 and December 28, 2019, respectively | Common stock, $0.01 par value; 100,000,000 shares authorized; 29,687,123 and 29,457,228 shares issued and outstanding as of December 26, 2020 and December 28, 2019, respectively | 297 | 295 | |||||||||||||||
| Additional paid-in-capital | 262 | 1,194 | Additional paid-in-capital | 421 | 552 | |||||||||||||
| Accumulated deficit | (48,805 | ) | (76,109 | ) | Accumulated deficit | (342,028) | (210,275) | |||||||||||
| Total stockholders' deficit | (48,252 | ) | (74,628 | ) | Total stockholders' deficit | (341,310) | (209,428) | |||||||||||
| Total liabilities and stockholders' deficit | $ | 119,836 | $ | 111,800 | Total liabilities and stockholders' deficit | $ | 211,565 | $ | 166,113 | |||||||||
See accompanying notes to consolidated financial statementsstatements.
F-5
WINGSTOP INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(amounts in thousands, except per share data)
| Fiscal Year Ended | |||||||||||||||||
| December 26, 2020 | December 28, 2019 | December 29, 2018 | |||||||||||||||
| Revenue: | |||||||||||||||||
| Royalty revenue, franchise fees and other | $ | 108,883 | $ | 88,291 | $ | 71,858 | |||||||||||
| Advertising fees | 74,930 | 55,932 | 34,484 | ||||||||||||||
| Company-owned restaurant sales | 64,998 | 55,453 | 46,839 | ||||||||||||||
| Total revenue | 248,811 | 199,676 | 153,181 | ||||||||||||||
| Costs and expenses: | |||||||||||||||||
Cost of sales (1) | 48,583 | 41,105 | 32,063 | ||||||||||||||
| Advertising expenses | 69,428 | 52,891 | 33,699 | ||||||||||||||
| Selling, general and administrative | 68,985 | 57,295 | 44,579 | ||||||||||||||
| Depreciation and amortization | 7,518 | 5,484 | 4,313 | ||||||||||||||
| Gain on sale of restaurants and other expenses, net | (3,093) | 0 | 0 | ||||||||||||||
| Total costs and expenses | 191,421 | 156,775 | 114,654 | ||||||||||||||
| Operating income | 57,390 | 42,901 | 38,527 | ||||||||||||||
| Interest expense, net | 16,782 | 17,136 | 10,123 | ||||||||||||||
| Loss on debt extinguishment and refinancing transactions | 13,665 | 0 | 1,477 | ||||||||||||||
| Income before income tax expense | 26,943 | 25,765 | 26,927 | ||||||||||||||
| Income tax expense | 3,637 | 5,289 | 5,208 | ||||||||||||||
| Net income | $ | 23,306 | $ | 20,476 | $ | 21,719 | |||||||||||
| Earnings per share | |||||||||||||||||
| Basic | $ | 0.79 | $ | 0.70 | $ | 0.74 | |||||||||||
| Diluted | $ | 0.78 | $ | 0.69 | $ | 0.73 | |||||||||||
| Weighted average shares outstanding | |||||||||||||||||
| Basic | 29,601 | 29,415 | 29,231 | ||||||||||||||
| Diluted | 29,804 | 29,670 | 29,587 | ||||||||||||||
| Dividends per share | $ | 5.50 | $ | 0.40 | $ | 6.54 | |||||||||||
| Fiscal Year Ended | |||||||||||
| December 30, 2017 | December 31, 2016 | December 26, 2015 | |||||||||
| Revenue: | |||||||||||
| Royalty revenue and franchise fees | $ | 68,483 | $ | 57,071 | $ | 46,688 | |||||
| Company-owned restaurant sales | 37,069 | 34,288 | 31,281 | ||||||||
| Total revenue | 105,552 | 91,359 | 77,969 | ||||||||
| Costs and expenses: | |||||||||||
Cost of sales (1) | 28,745 | 25,308 | 22,219 | ||||||||
| Selling, general and administrative | 37,151 | 33,840 | 33,350 | ||||||||
| Depreciation and amortization | 3,376 | 3,008 | 2,682 | ||||||||
| Total costs and expenses | 69,272 | 62,156 | 58,251 | ||||||||
| Operating income | 36,280 | 29,203 | 19,718 | ||||||||
| Interest expense, net | 5,131 | 4,396 | 3,477 | ||||||||
| Other expense, net | — | 254 | 396 | ||||||||
| Income before income tax expense | 31,149 | 24,553 | 15,845 | ||||||||
| Income tax expense | 3,845 | 9,119 | 5,739 | ||||||||
| Net income | $ | 27,304 | $ | 15,434 | $ | 10,106 | |||||
| Earnings per share | |||||||||||
| Basic | $ | 0.94 | $ | 0.54 | $ | 0.37 | |||||
| Diluted | $ | 0.93 | $ | 0.53 | $ | 0.36 | |||||
| Weighted average shares outstanding | |||||||||||
| Basic | 29,025 | 28,637 | 27,497 | ||||||||
| Diluted | 29,424 | 28,983 | 27,816 | ||||||||
| Dividends per share | $ | 0.14 | $ | 2.90 | $ | 1.83 | |||||
(1) exclusive of depreciation and amortization, shown separately | |||||||||||
See accompanying notes to consolidated financial statements.
F-6
WINGSTOP INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Deficit
(amounts in thousands, except share data)
| Common Stock | ||||||||||||||||||
| Shares | Amount | Additional Paid-In Capital | Accumulated Deficit | Total Stockholders’ Deficit | ||||||||||||||
| Balance at December 27, 2014 | 26,101,755 | $ | 261 | $ | 2,313 | $ | (11,568 | ) | $ | (8,994 | ) | |||||||
| Net income | — | — | — | 10,106 | 10,106 | |||||||||||||
| Issuance of common stock in connection with the IPO, net of transaction expenses | 2,150,000 | 21 | 34,967 | — | 34,988 | |||||||||||||
| Exercise of stock options | 329,427 | 4 | 474 | — | 478 | |||||||||||||
| Stock-based compensation expense | — | — | 1,155 | — | 1,155 | |||||||||||||
| Excess tax benefit of stock-based compensation | — | — | 593 | — | 593 | |||||||||||||
| Dividends paid | — | — | (2,632 | ) | (45,367 | ) | (47,999 | ) | ||||||||||
| Balance at December 26, 2015 | 28,581,182 | 286 | 36,870 | (46,829 | ) | (9,673 | ) | |||||||||||
| Net income | — | — | — | 15,434 | 15,434 | |||||||||||||
| Exercise of stock options | 166,210 | 1 | 484 | — | 485 | |||||||||||||
| Stock-based compensation expense | — | — | 1,231 | — | 1,231 | |||||||||||||
| Excess tax benefit of stock-based compensation | — | — | 1,163 | — | 1,163 | |||||||||||||
| Dividends paid | — | — | (38,554 | ) | (44,714 | ) | (83,268 | ) | ||||||||||
| Balance at December 31, 2016 | 28,747,392 | 287 | 1,194 | (76,109 | ) | (74,628 | ) | |||||||||||
| Net income | — | — | — | 27,304 | 27,304 | |||||||||||||
| Issuance of common stock, net | 19,168 | 1 | (1 | ) | — | — | ||||||||||||
| Exercise of stock options | 326,109 | 3 | 1,315 | — | 1,318 | |||||||||||||
| Stock-based compensation expense | — | — | 1,851 | — | 1,851 | |||||||||||||
| Dividends paid | — | — | (4,097 | ) | — | (4,097 | ) | |||||||||||
| Balance at December 30, 2017 | 29,092,669 | $ | 291 | $ | 262 | $ | (48,805 | ) | $ | (48,252 | ) | |||||||
| Common Stock | |||||||||||||||||||||||||||||
| Shares | Amount | Additional Paid-In Capital | Accumulated Deficit | Total Stockholders’ Deficit | |||||||||||||||||||||||||
| Balance at December 30, 2017 | 29,092,669 | 291 | 262 | (58,971) | (58,418) | ||||||||||||||||||||||||
| Net income | — | — | — | 21,719 | 21,719 | ||||||||||||||||||||||||
| Shares issued under stock plans | 208,261 | 2 | 515 | — | 517 | ||||||||||||||||||||||||
| Tax payments for restricted stock upon vesting | (3,991) | — | — | (183) | (183) | ||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 3,725 | — | 3,725 | ||||||||||||||||||||||||
| Dividends declared on common stock and equivalents | — | — | (3,466) | (188,724) | (192,190) | ||||||||||||||||||||||||
| Balance at December 29, 2018 | 29,296,939 | 293 | 1,036 | (226,159) | (224,830) | ||||||||||||||||||||||||
| Adjustment for ASC 842 adoption | — | — | — | 154 | 154 | ||||||||||||||||||||||||
| Net income | — | — | — | 20,476 | 20,476 | ||||||||||||||||||||||||
| Shares issued under stock plans | 176,201 | 2 | 687 | — | 689 | ||||||||||||||||||||||||
| Tax payments for restricted stock upon vesting | (15,912) | — | — | (1,149) | (1,149) | ||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 6,974 | — | 6,974 | ||||||||||||||||||||||||
| Dividends declared on common stock and equivalents | — | — | (8,145) | (3,597) | (11,742) | ||||||||||||||||||||||||
| Balance at December 28, 2019 | 29,457,228 | 295 | 552 | (210,275) | (209,428) | ||||||||||||||||||||||||
| Net income | — | — | — | 23,306 | 23,306 | ||||||||||||||||||||||||
| Shares issued under stock plans | 233,051 | 2 | 923 | — | 925 | ||||||||||||||||||||||||
| Tax payments for restricted stock upon vesting | (3,156) | — | — | (340) | (340) | ||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 8,558 | — | 8,558 | ||||||||||||||||||||||||
| Dividends declared on common stock and equivalents | — | — | (9,612) | (154,719) | (164,331) | ||||||||||||||||||||||||
| Balance at December 26, 2020 | 29,687,123 | 297 | 421 | (342,028) | (341,310) | ||||||||||||||||||||||||
See accompanying notes to consolidated financial statements.
F-7
WINGSTOP INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(amounts in thousands)
| Fiscal Year Ended | Fiscal Year Ended | |||||||||||||||||||||||||||
| December 30, 2017 | December 31, 2016 | December 26, 2015 | December 26, 2020 | December 28, 2019 | December 29, 2018 | |||||||||||||||||||||||
| Operating activities | Operating activities | |||||||||||||||||||||||||||
| Net income | $ | 27,304 | $ | 15,434 | $ | 10,106 | Net income | $ | 23,306 | $ | 20,476 | $ | 21,719 | |||||||||||||||
| Adjustments to reconcile net income to cash provided by operating activities: | Adjustments to reconcile net income to cash provided by operating activities: | |||||||||||||||||||||||||||
| Depreciation and amortization | 3,376 | 3,008 | 2,682 | Depreciation and amortization | 7,518 | 5,484 | 4,313 | |||||||||||||||||||||
| Deferred income taxes | (3,505 | ) | (714 | ) | (1,046 | ) | Deferred income taxes | (4) | (426) | (1,054) | ||||||||||||||||||
| Stock-based compensation expense | 1,851 | 1,231 | 1,155 | Stock-based compensation expense | 8,558 | 6,974 | 3,725 | |||||||||||||||||||||
| (Gain)/Loss on disposal of assets | (Gain)/Loss on disposal of assets | (3,093) | 0 | 0 | ||||||||||||||||||||||||
| Loss on debt extinguishment and refinancing transactions | Loss on debt extinguishment and refinancing transactions | 13,665 | 0 | 1,477 | ||||||||||||||||||||||||
| Amortization of debt issuance costs | 292 | 437 | 330 | Amortization of debt issuance costs | 1,567 | 1,586 | 506 | |||||||||||||||||||||
| Changes in operating assets and liabilities: | Changes in operating assets and liabilities: | |||||||||||||||||||||||||||
| Accounts receivable | (1,368 | ) | 205 | (1,004 | ) | Accounts receivable | 246 | 496 | (1,197) | |||||||||||||||||||
| Prepaid expenses and other assets | (503 | ) | (171 | ) | (196 | ) | Prepaid expenses and other assets | 1,089 | 323 | (178) | ||||||||||||||||||
| Advertising fund assets and liabilities, net | Advertising fund assets and liabilities, net | 10,061 | (449) | 1,657 | ||||||||||||||||||||||||
| Accounts payable and other current liabilities | (876 | ) | 3,648 | 1,169 | Accounts payable and other current liabilities | 1,507 | 3,086 | 6,996 | ||||||||||||||||||||
| Deferred revenue | 645 | 48 | 450 | Deferred revenue | 3,198 | 881 | 977 | |||||||||||||||||||||
| Other non-current liabilities | (167 | ) | 203 | 214 | Other non-current liabilities | (2,088) | 152 | (171) | ||||||||||||||||||||
| Cash provided by operating activities | 27,049 | 23,329 | 13,860 | Cash provided by operating activities | 65,530 | 38,583 | 38,770 | |||||||||||||||||||||
| Investing activities | Investing activities | |||||||||||||||||||||||||||
| Purchases of property and equipment | (2,535 | ) | (2,056 | ) | (1,915 | ) | Purchases of property and equipment | (6,052) | (22,486) | (3,982) | ||||||||||||||||||
| Acquisition of restaurants from franchisees | (3,949 | ) | — | — | ||||||||||||||||||||||||
| Acquisitions of restaurants from franchisees | Acquisitions of restaurants from franchisees | (6,735) | (1,245) | (6,516) | ||||||||||||||||||||||||
| Proceeds from sales of assets | Proceeds from sales of assets | 4,800 | 0 | 0 | ||||||||||||||||||||||||
| Cash used in investing activities | (6,484 | ) | (2,056 | ) | (1,915 | ) | Cash used in investing activities | (7,987) | (23,731) | (10,498) | ||||||||||||||||||
| Financing activities | Financing activities | |||||||||||||||||||||||||||
| Proceeds from issuance of common stock, net of expenses | — | — | 34,988 | |||||||||||||||||||||||||
| Proceeds from exercise of stock options | 1,318 | 485 | 478 | Proceeds from exercise of stock options | 925 | 689 | 517 | |||||||||||||||||||||
| Borrowings of long-term debt | 3,500 | 165,000 | 40,000 | Borrowings of long-term debt | 496,000 | 5,000 | 551,108 | |||||||||||||||||||||
| Repayments of long-term debt | (21,000 | ) | (109,250 | ) | (38,218 | ) | Repayments of long-term debt | (333,600) | (7,400) | (364,858) | ||||||||||||||||||
| Payment of deferred financing costs | — | (1,180 | ) | (227 | ) | |||||||||||||||||||||||
| Payment of deferred financing costs and other debt-related costs | Payment of deferred financing costs and other debt-related costs | (18,641) | (15) | (9,571) | ||||||||||||||||||||||||
| Tax payments for restricted stock upon vesting | Tax payments for restricted stock upon vesting | (340) | (1,149) | (183) | ||||||||||||||||||||||||
| Dividends paid | (4,070 | ) | (83,268 | ) | (47,999 | ) | Dividends paid | (163,792) | (11,742) | (190,737) | ||||||||||||||||||
| Cash used in financing activities | (20,252 | ) | (28,213 | ) | (10,978 | ) | Cash used in financing activities | (19,448) | (14,617) | (13,724) | ||||||||||||||||||
| Net change in cash and cash equivalents | 313 | (6,940 | ) | 967 | ||||||||||||||||||||||||
| Cash and cash equivalents at beginning of period | 3,750 | 10,690 | 9,723 | |||||||||||||||||||||||||
| Cash and cash equivalents at end of period | $ | 4,063 | $ | 3,750 | $ | 10,690 | ||||||||||||||||||||||
| Net increase in cash, cash equivalents, and restricted cash | Net increase in cash, cash equivalents, and restricted cash | 38,095 | 235 | 14,548 | ||||||||||||||||||||||||
| Cash, cash equivalents, and restricted cash at beginning of period | Cash, cash equivalents, and restricted cash at beginning of period | 21,175 | 20,940 | 6,392 | ||||||||||||||||||||||||
| Cash, cash equivalents, and restricted cash at end of period | Cash, cash equivalents, and restricted cash at end of period | $ | 59,270 | $ | 21,175 | $ | 20,940 | |||||||||||||||||||||
| Supplemental information: | Supplemental information: | |||||||||||||||||||||||||||
| Cash paid for interest | $ | 4,842 | $ | 4,775 | $ | 3,409 | Cash paid for interest | $ | 14,549 | $ | 16,929 | $ | 7,601 | |||||||||||||||
| Cash paid for taxes | $ | 10,096 | $ | 7,230 | $ | 5,362 | Cash paid for taxes | $ | 7,262 | $ | 5,407 | $ | 2,951 | |||||||||||||||
See accompanying notes to consolidated financial statements.
F-8
WINGSTOP INC. AND SUBSIDIARIES
| (1) | Basis of Presentation and Summary of Significant Accounting Policies | ||||
Overview
Wingstop Inc. was incorporated in Delaware on March 18, 2015 (“Wingstop”, together with its consolidated subsidiaries (collectively, “Wingstop” or the “Company”). Wing Stop Holding Corporation was merged with and into Wingstop Inc. pursuant to the reorganization that occurred on May 18, 2015 as described below. Wing Stop Holding Corporation was originally formed on March 16, 2010 to purchase 100% of the equity interests of Wingstop Holdings, Inc. (“WHI”). WHI owns 100% of the common stock of Wingstop Restaurants Inc. (“WRI”). Wingstop, through its primary operating subsidiary, WRI, collectively referred to as the “Company”, is in the business of franchising and operating Wingstop restaurants. As of December 30, 2017, 1,00426, 2020, the Company had a total of 1,538 restaurants in its system. The Company's restaurant base is 98% franchised, with 1,506 franchised locations (including 179 international locations) and 32 company-owned restaurants were in operation domestically and 106 international franchised restaurants were in operation across eight countries. Asas of December 30, 2017, WRI owned and operated 23 restaurants.
Summary of Significant Accounting Policies
| (a) | Principles of Consolidation | ||||
The accompanying consolidated financial statements include the accounts of Wingstop Inc. and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
| (b) | Fiscal Year End | ||||
The Company uses a 52/53-week fiscal year that ends on the last Saturday of the calendar year. Fiscal years 20172020, 2019, and 20152018 each consisted of 52 weeks, and fiscal year 2016 consisted of 53 weeks.
| (c) | Use of Estimates | ||||
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions, primarily related to long-lived asset (valuation),valuation, indefinite and finite lived intangible asset valuation, income taxes, leases, stock-based compensation, contingencies, and common stock equity valuations. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the period. Although management bases its estimates on historical experience and assumptions that are believed to be reasonable under the circumstances, actual results could differ from those estimates.
| (d) | Comprehensive Income (Loss) | ||||
Comprehensive income (loss) is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. Comprehensive income is the same as net income for all periods presented. Therefore, a separate statement of comprehensive income (loss) is not included in the accompanying consolidated financial statements.
| (e) | Cash, Cash Equivalents, and Restricted Cash | ||||
The Company continually monitors its positions with, and Cash Equivalents
F-9
Restricted cash includes cash and cash equivalents are carried at cost which approximates fair value.held for future principal and interest payments as required by the Company's debt agreements (see Note 10). The Company maintains itsalso has Advertising fund restricted cash, which can only be used for activities that promote the Wingstop brand. Cash, cash equivalents, and restricted cash within the Consolidated Balance Sheets that are included in bank deposit accounts that, at times, may exceed federally insured limits; however, the Company has not experienced any losses in these accounts. The Company believes it is not exposed to any significant credit risk.Consolidated Statements of Cash Flows as of December 26, 2020 and December 28, 2019 were as follows (in thousands):
| December 26, 2020 | December 28, 2019 | ||||||||||
| Cash and cash equivalents | $ | 40,858 | $ | 12,849 | |||||||
| Restricted cash | 4,815 | 4,790 | |||||||||
| Restricted cash, included in Advertising fund assets, restricted | 13,597 | 3,536 | |||||||||
| Total cash, cash equivalents, and restricted cash | $ | 59,270 | $ | 21,175 | |||||||
| (f) | Accounts Receivable | ||||
Accounts receivable, net of allowance for doubtful accounts, consists primarily of accrued royalty fee receivables, collected weekly in arrears, and vendor rebates. Management determines the allowance for doubtful accounts based on historical losses and current economic conditions. On a continuing basis, management analyzes delinquent receivables, which are charged off against the existing allowance account when determined to be uncollectible.
| (g) | Inventories | ||||
Inventories, which consist of food and beverage products, paper goods and supplies, are valued at the lower of cost (first-in, first-out) or market.
| (h) | Property and Equipment | ||||
Property and equipment is recorded at cost less accumulated depreciation. Property and equipment is depreciated based on the straight-line method over the following estimated useful lives:
| Property and Equipment | Estimated Useful Lives | ||||
| Building | 40 years | ||||
| Leasehold and other improvements | Lesser of the expected lease term or useful life | ||||
| Equipment, furniture and fixtures | 3 to 7 years | ||||
| Computer software | 3 years | ||||
At the time property and equipment are retired, the asset and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in earnings. The Company expenses repair and maintenance costs that maintain the appearance and functionality of the restaurant but do not extend the useful life of any restaurant asset. Improvements to leased properties are depreciated over the shorter of their useful life or the lease term, which includes a fixed, non-cancelable lease term plus any reasonably assured renewal periods.
| (i) | Impairment or Disposal of Long-Lived Assets | ||||
Property and equipment and finite-life intangible assets are reviewed for impairment periodically and whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. The Company’s assessment of recoverability of property and equipment and finite-lived intangible assets is performed at the component level, which is generally an individual restaurant and requires judgment and an estimate of future restaurant generated cash flows. The Company’s estimates of fair values are based on the best information available and require the use of estimates, judgments, and projections. The actual results may vary significantly from the estimates.Company did 0t record any impairment losses on long-lived assets in fiscal years 2020, 2019, or 2018.
| (j) | Goodwill and Indefinite-Lived Intangible Assets | ||||
The Company’s indefinite-lived intangible assets consist of goodwill and trademarks, which are not subject to amortization. On an annual basis (October 1st of theeach fiscal year) and whenever events or changes in circumstances indicate that the carrying
F-10
amounts may not be recoverable, the Company reviews the recoverability of goodwill and indefinite-lived intangible assets. NoNaN indications of impairment were identified during fiscal years 2017, 20162020, 2019, or 2015.2018.
management’s judgments, assumptions and estimates could result in an impairment charge of a portion or all of its goodwill or other intangible assets.
| (k) | Revenue Recognition | ||||
Revenues consist primarily of salesroyalties, national advertising fund (the "Ad Fund") contributions, initial and renewal franchise fees, and upfront fees from franchisedevelopment agreements and development fees, international territory fees,agreements. The Company's performance obligations under its franchise royaltiesagreements consist of (a) a franchise license, (b) pre-opening services, such as training, and company-owned stores. Franchise fees(c) ongoing services, such as management of the Ad Fund contributions, development of training materials and menu items, and restaurant monitoring. These performance obligations are recognizedhighly interrelated, so they are not considered to be individually distinct and therefore are accounted for as revenue when all material services or conditions relating to the store have been substantially performed ora single performance obligation, which is satisfied by WRI, which is typically whenproviding a franchised store begins operations. Development fees for the right to develop a store are recognized as revenue when all material services or conditions relating touse the sale have been substantially performed, which is typically whenCompany's intellectual property over the franchised store begins operations. International territory fees and development fees determined based on the numberterm of stores to open in an area are deferred and recognized as revenue on a pro rata basis at the same time the individualeach franchise fee is recognized, typically when individual stores are opened.agreement. Franchise fee, development fee and international territory fee payments received by WRIthe Company before the restaurant opens are recorded as deferred revenue in the Consolidated Balance Sheets.
The Company records food and beverage revenues from company-owned storesrestaurants upon sale to the customer. The Company collects and remits sales, food and beverage, alcoholic beverage, and hospitality taxes on transactions with customers and reports such amounts under the net method in its Consolidated Statements of Operations. Accordingly, these taxes are not included in gross revenue.
The Company records a liability in the period in which a gift card is sold and recognizes costs associated with our administration of the gift card program as prepaid assets when the costs are incurred.sold. As gift cards are redeemed, the liability and prepaid asset areis reduced. When gift cards are redeemed at a franchisee-operated restaurant, the revenue and related administrative costs are recognized by the franchisee. The Company recognizes revenue and related administrative costs when gift cards are redeemed at company-operatedcompany-owned restaurants.
| (l) | Consideration from Vendors | ||||
The Company has entered into food and beverage supply agreements with certain major vendors. Pursuant to the terms of these arrangements, rebates are provided to the Company from the vendors based upon the dollar volume of purchases for company-operatedcompany-owned restaurants and franchised restaurants. Additionally, the Company receives certain incentives from vendors to sponsor its annual franchisee convention. These incentives are recognized as earned throughout the year and are classified as a reduction in Cost of sales with any consideration received in excess of the total expense of the vendor’s products included within Royalty revenue, and franchise fees and other within the Consolidated Statements of Operations. The incentives recognized were approximately $11.2$7.9 million, $6.5$10.6 million, and $4.8$8.2 million, during fiscal years 2017, 20162020, 2019, and 2015,2018, respectively, of which $0.9$1.3 million, $1.0$1.6 million, and $0.7$1.2 million was classified as a reduction in Cost of sales during fiscal years 2017, 20162020, 2019, and 2015,2018, respectively.
| (m) | Advertising Expenses | ||||
F-11
The Company administers and directs the development of all advertising and promotion programs in the advertising fundAd Fund for which it collects advertising contributions in accordance with the provisions of its franchise agreements. WRIThe Company has a contractual obligation with regard to these advertising contributions. The Company consolidates and reports all assets and liabilities of the advertising fundAd Fund as restricted assets of the advertising fundAd Fund and restricted liabilities of the advertising fundAd Fund within current assets and current liabilities, respectively, in the Consolidated Balance Sheets. The assets and liabilities of the advertising fundAd Fund consist primarily of cash, receivables, accrued expenses, and other liabilities, and any cumulative surplus related specificallyliabilities. Pursuant to the advertising fund. The revenues, expenses and cash flows of the advertising fund are not included in the Consolidated Statements of Operations or the Consolidated Statements of Cash Flows because the Company does not have complete discretion over the usage of the funds. Rather, under theCompany’s franchise agreements, use of Ad Fund contributions to the advertising fund areis 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 whichthat are directly associated with administering the advertising fund,Ad Fund, as outlined in the provisions of the applicable franchise agreements.
| (n) | Leases | ||||
The Company determines whether an arrangement is a lease at inception and $0.2 million for fiscal year 2015, which are included in Selling, general and administrative expenses in the Consolidated Statements of Operations.
| (o) | Stock-Based Compensation | ||||
The Company measures stock-based compensation cost at fair value on the date of grant for all share-based awards and recognizes compensation expense over the service period that the awards are expected to vest. The Company has elected to recognize compensation cost for graded-vesting awards subject only to a service condition over the requisite service period of the entire award. For performance awards, the Company recognizes expense in the period in which vesting becomes probable. The Company accounts for forfeitures as they occur.
| (p) | Income Taxes | ||||
Income taxes are accounted for under the asset and liability method. Under this method, a deferred tax asset or liability is recognized for the estimated future tax effects attributable to temporary differences between the financial statement basis and the tax basis of assets and liabilities as well as tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period of the change. The Company files a consolidated federal income tax return including all of its subsidiaries.
F-12
| (q) | Business Segments | ||||
Historically, the Company identifies itshad 2 reporting segments based on the organizational units used by management to monitor performance and make operating decisions. These reporting segments are as follows:segments: franchise operations and company restaurant operations.
| (r) | Recent Accounting Pronouncements | ||||
In May 2014,February 2016, the Financial Accounting Standards Board (“FASB”) issued new guidance for revenue recognition related to contracts with customers, except for contracts within the scope of other standards, which supersedes nearly all existing revenue recognition guidance. The new guidance provides 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.
| Fiscal Year 2017 | Fiscal Year 2016 | ||||||||||||||||||||||
| As reported | Effects of Adoption | Upon Adoption | As reported | Effects of Adoption | Upon Adoption | ||||||||||||||||||
| Royalty revenue and franchise fees | $ | 68,483 | $ | (2,407 | ) | $ | 66,076 | $ | 57,071 | $ | (2,596 | ) | $ | 54,475 | |||||||||
| Advertising fees and related income | — | 30,174 | 30,174 | — | 14,561 | 14,561 | |||||||||||||||||
| Advertising expenses | — | 32,427 | 32,427 | — | 13,849 | 13,849 | |||||||||||||||||
| Selling, general and administrative | 37,151 | (2,253 | ) | 34,898 | 33,840 | 712 | 34,552 | ||||||||||||||||
| Net income | $ | 27,304 | $ | (3,364 | ) | $ | 23,940 | $ | 15,434 | $ | (1,665 | ) | $ | 13,769 | |||||||||
| Basic EPS | $ | 0.94 | $ | (0.12 | ) | $ | 0.82 | $ | 0.54 | $ | (0.06 | ) | $ | 0.48 | |||||||||
| Diluted EPS | $ | 0.93 | $ | (0.11 | ) | $ | 0.82 | $ | 0.53 | $ | (0.06 | ) | $ | 0.47 | |||||||||
The adoption of the new standard resulted in the recording of a right-of-use asset of approximately $8.5 million and lease liabilities of approximately $10.3 million, and had an immaterial impact on retained earnings as of the beginning of fiscal year 2019. The standard did not materially impact our Consolidated Statements of Operations rather than Stockholders’ deficit in the Consolidated Balance Sheet for all periods after fiscal year 2016. This provision was required to be applied prospectively. For the fiscal year ended December 30, 2017, we recognized $2.5 million of excess tax benefits in income tax expense in the Consolidated Statements of Operations.and had no impact on cash flows.
| (2) | Earnings Per Share | ||||
Basic earnings per share is computed by dividing income available to common shareholdersstockholders by the weighted average number of shares of common sharesstock 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 net incomeearnings per share, the basic weighted average number of shares is increased by the dilutive effect of the exercise and vesting of stock options and restricted stock units, respectively, determined using the treasury stock method. We had approximately 6,000, 4,000 and 11,000 equity awards outstanding at December 30, 2017, December 31, 2016, and December 26, 2015, respectively, that were not included in the dilutive earnings per share calculation because the effect would have been anti-dilutive.
Basic weighted average shares outstanding is reconciled to diluted weighted average shares outstanding as follows (in thousands):
| Fiscal Year | |||||||||||||||||
| December 26, 2020 | December 28, 2019 | December 29, 2018 | |||||||||||||||
| Basic weighted average shares outstanding | 29,601 | 29,415 | 29,231 | ||||||||||||||
| Dilutive shares | 203 | 255 | 356 | ||||||||||||||
| Diluted weighted average shares outstanding | 29,804 | 29,670 | 29,587 | ||||||||||||||
We had approximately 1,000 equity awards outstanding at December 26, 2020 and 3,000 equity awards outstanding at December 28, 2019, and December 29, 2018, respectively, that were excluded from the dilutive earnings per share calculation because the effect would have been anti-dilutive.
| Fiscal Year | |||||||||
| December 30, 2017 | December 31, 2016 | December 26, 2015 | |||||||
| Basic weighted average shares outstanding | 29,025 | 28,637 | 27,497 | ||||||
| Dilutive shares | 399 | 346 | 319 | ||||||
| Diluted weighted average shares outstanding | 29,424 | 28,983 | 27,816 | ||||||
| (3) | Dividends | ||||
In connection with the Company's regular dividend program, the Company declared and paid dividends of $14.8 million, or $0.50 per common share, in fiscal year 2020, $11.7 million, or $0.40 per common share in fiscal year 2019, and $9.4 million, or $0.32 per common share in fiscal year 2018.
F-13
Separate from the Company's regular dividend program, the Company declared and paid on September 18, 2017, totaling $2.0 million. On November 2, 2017, the Company’s Boardspecial dividends of Directors declared a quarterly dividend of $0.07$148.4 million, or $5.00 per share of common stock, for shareholders of record as of December 4, 2017, to be paid on December 19, 2017, totaling approximately $2.0 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 | December 26, 2020 | December 28, 2019 | |||||||||||||||||||||||||||
Carrying Value | Fair Value | Carrying Value | Fair Value | ||||||||||||||||||||||||||
| Securitized Financing Facility: | |||||||||||||||||||||||||||||
2020-1 Class A-2 Senior Secured Notes (1) | Level 2 | $ | 480,000 | $ | 483,365 | $ | 0 | $ | 0 | ||||||||||||||||||||
2018-1 Class A-2 Senior Secured Notes (1) | Level 2 | $ | 0 | $ | 0 | $ | 317,600 | $ | 331,247 | ||||||||||||||||||||
Fair Value Hierarchy | December 30, 2017 | December 31, 2016 | |||||||||||||||
Carrying Value | Fair Value | Carrying Value | Fair Value | ||||||||||||||
| Senior Secured Credit Facility: | |||||||||||||||||
Term loan facility (1) | Level 2 | $ | 64,750 | $ | 64,750 | $ | 68,250 | $ | 68,250 | ||||||||
Revolving credit facility (1) | Level 2 | $ | 69,000 | $ | 69,000 | $ | 83,000 | $ | 83,000 | ||||||||
(1) The fair value of long-term debt was estimated using available market information.
| (5) | Accounts Receivable, net | ||||
Accounts receivables, net, consist of the following (in thousands):
| December 26, 2020 | December 28, 2019 | ||||||||||
| Vendor rebates receivable | $ | 1,944 | $ | 2,530 | |||||||
| Royalties receivable (net of allowance for doubtful accounts of $1,053 and $24, respectively) | 2,097 | 1,870 | |||||||||
| Gift card receivable | 78 | 477 | |||||||||
| Other receivables, net | 810 | 298 | |||||||||
| Accounts receivable, net | $ | 4,929 | $ | 5,175 | |||||||
F-14
| December 30, 2017 | December 31, 2016 | ||||||
| Vendor rebates receivable | $ | 2,145 | $ | 1,459 | |||
| Royalties receivable | 987 | 883 | |||||
| Gift card receivable | 1,184 | 672 | |||||
| Other receivables, net | 251 | 185 | |||||
| Accounts receivable, net | $ | 4,567 | $ | 3,199 | |||
| (6) | Property and Equipment | ||||
Property and equipment, net consisted of the following (in thousands):
| December 26, 2020 | December 28, 2019 | |||||||||||||||||
| December 30, 2017 | December 31, 2016 | |||||||||||||||||
| Building | Building | 15,405 | 0 | |||||||||||||||
| Construction in progress | Construction in progress | 2,853 | 16,188 | |||||||||||||||
| Equipment, furniture and fixtures | $ | 9,298 | $ | 7,682 | Equipment, furniture and fixtures | 14,633 | 15,568 | |||||||||||
| Leasehold improvements | 7,005 | 6,081 | ||||||||||||||||
| Construction in progress | 183 | 201 | ||||||||||||||||
| Leasehold and other improvements | Leasehold and other improvements | 9,876 | 9,021 | |||||||||||||||
| Land | Land | 2,828 | 2,828 | |||||||||||||||
| Property and equipment, gross | 16,486 | 13,964 | Property and equipment, gross | 45,595 | 43,605 | |||||||||||||
| Less: accumulated depreciation | (10,660 | ) | (8,965 | ) | Less: accumulated depreciation | (17,647) | (15,763) | |||||||||||
| Property and equipment, net | $ | 5,826 | $ | 4,999 | Property and equipment, net | $ | 27,948 | $ | 27,842 | |||||||||
Depreciation expense was $1.9$5.2 million, $1.6$3.1 million, and $1.3$2.1 million for the fiscal years ended December 30, 2017,26, 2020, December 31, 201628, 2019, and December 26, 2015,29, 2018, respectively.
In fiscal year 2019, the Company used cash on hand to purchase an office building for $18.3 million. The building is located in Addison, Texas and is currently undergoing renovation to prepare it for use as the Company's corporate headquarters. As of December 28, 2019, the building was included in construction in process within Property and equipment, net on the Consolidated Balance Sheets.
| (7) | Intangible Assets and Goodwill | ||||
The Company’s goodwill and other intangible assets arose from Wingstop’s acquisition of the equity interests of WHIWingstop Holdings, Inc. in April 2010, as well as the acquisition of restaurants from franchisees in 2017.2020 and 2019. Goodwill has been allocated to two reporting units, company-owned restaurants and franchised restaurants and represents the excess of purchase consideration transferred for the respective reporting unit over the fair value of the business at the time of the acquisition. See Note 16 for the allocation of goodwill among the two reporting units.
The following is a summary of goodwill balances and activity (in thousands):
| December 26, 2020 | December 28, 2019 | ||||||||||
| Balance, beginning of period | $ | 50,188 | $ | 49,655 | |||||||
| Acquisition of restaurants, net | 3,502 | 533 | |||||||||
| Balance, end of period | $ | 53,690 | $ | 50,188 | |||||||
F-15
| December 30, 2017 | December 31, 2016 | ||||||
| Balance, beginning of period | $ | 45,128 | $ | 45,128 | |||
| Acquisition of restaurants | 1,429 | — | |||||
| Balance, end of period | $ | 46,557 | $ | 45,128 | |||
Intangible assets, excluding goodwill, consisted of the following (in thousands):
| December 26, 2020 | December 28, 2019 | Weighted Average Amortization Period (in years) | |||||||||||||||
| Intangible assets: | |||||||||||||||||
| Trademarks | $ | 32,700 | $ | 32,700 | |||||||||||||
| Indefinite-lived assets | 32,700 | 32,700 | |||||||||||||||
| Customer relationships | 26,300 | 26,300 | 20.0 | ||||||||||||||
Franchise rights (1) | 8,121 | 5,638 | 6.3 | ||||||||||||||
Proprietary software (1) | 115 | 115 | 5.0 | ||||||||||||||
Noncompete agreements (1) | 250 | 250 | 2.8 | ||||||||||||||
| Less: accumulated amortization | (18,155) | (15,855) | |||||||||||||||
| Definite-lived assets | 16,631 | 16,448 | 16.7 | ||||||||||||||
| Intangible assets, net | $ | 49,331 | $ | 49,148 | |||||||||||||
| December 30, 2017 | December 31, 2016 | Weighted Average Amortization Period (in years) | |||||||
| Intangible assets: | |||||||||
| Trademarks | $ | 32,700 | $ | 32,700 | |||||
| Indefinite-lived assets | 32,700 | 32,700 | |||||||
| Customer relationships | 26,300 | 26,300 | 20.0 | ||||||
Franchise rights (1) | 2,323 | — | 7.5 | ||||||
Proprietary software (1) | 115 | 115 | 5.0 | ||||||
Noncompete agreements (1) | 250 | 250 | 2.8 | ||||||
| Less: accumulated amortization | (11,249 | ) | (9,751 | ) | |||||
| Definite-lived assets | 17,739 | 16,914 | 18.8 | ||||||
| Intangible assets, net | $ | 50,439 | $ | 49,614 | |||||
(1) Included within Other non-current assets net of associated accumulated amortization within the Consolidated Balance Sheets. | |||||||||
(1)Included within Other non-current assets net of associated accumulated amortization within the Consolidated Balance Sheets.
Amortization expense for definite-lived intangibles was $1.5$2.3 million, for fiscal year 2017$2.4 million, and $1.4$2.2 million for fiscal years 20162020, 2019, and 2015.2018, respectively. Estimated amortization expense, principally related to customer relationships, for the five succeeding fiscal years and the aggregate thereafter is (in thousands):
| Fiscal year 2021 | $ | 2,602 | |||
| Fiscal year 2022 | 2,385 | ||||
| Fiscal year 2023 | 2,095 | ||||
| Fiscal year 2024 | 1,817 | ||||
| Fiscal year 2025 | 1,683 | ||||
| Thereafter | 6,049 | ||||
| Total | $ | 16,631 | |||
| Fiscal year 2018 | $ | 1,661 | |
| Fiscal year 2019 | 1,649 | ||
| Fiscal year 2020 | 1,637 | ||
| Fiscal year 2021 | 1,625 | ||
| Fiscal year 2022 | 1,620 | ||
| Thereafter | 9,547 | ||
| Total | $ | 17,739 | |
| (8) | Prepaid Expenses and Other Current Assets and Other Current Liabilities | ||||
Prepaid expenses and other current assets consisted of the following (in thousands):
| December 26, 2020 | December 28, 2019 | ||||||||||
| Prepaid expenses | $ | 1,534 | $ | 1,467 | |||||||
| Federal income tax receivable | 3,602 | 667 | |||||||||
| Inventories | 396 | 315 | |||||||||
| Total | $ | 5,532 | $ | 2,449 | |||||||
F-16
| December 30, 2017 | December 31, 2016 | ||||||
| Prepaid expenses | $ | 946 | $ | 1,021 | |||
| Federal income tax receivable | 2,500 | — | |||||
| Prepaid gift card expenses | 672 | 387 | |||||
| Inventories | 216 | 226 | |||||
| Total | $ | 4,334 | $ | 1,634 | |||
Other current liabilities consisted of the following (in thousands):
| December 26, 2020 | December 28, 2019 | ||||||||||
| Accrued payroll and incentive compensation | $ | 11,175 | $ | 7,512 | |||||||
| Current portion of deferred revenues | 3,221 | 2,622 | |||||||||
| Short term lease liability | 2,385 | 1,806 | |||||||||
| Accrued interest | 2,222 | 1,055 | |||||||||
| Gift card liability | 1,363 | 1,758 | |||||||||
| Other accrued liabilities | 6,363 | 6,701 | |||||||||
| Total | $ | 26,729 | $ | 21,454 | |||||||
| December 30, 2017 | December 31, 2016 | ||||||
| Accrued payroll and bonuses | $ | 4,192 | $ | 3,880 | |||
| Current portion of deferred revenues | 1,795 | 1,547 | |||||
| Gift card liability | 2,074 | 936 | |||||
| Taxes payable | 163 | 895 | |||||
| Other accrued liabilities | 2,459 | 1,983 | |||||
| Total | $ | 10,683 | $ | 9,241 | |||
| (9) | Income Taxes | ||||
| Fiscal Year | Fiscal Year | |||||||||||||||||||||||||||
| December 30, 2017 | December 31, 2016 | December 26, 2015 | December 26, 2020 | December 28, 2019 | December 29, 2018 | |||||||||||||||||||||||
| Current expense | Current expense | |||||||||||||||||||||||||||
| Federal | $ | 6,204 | $ | 8,854 | $ | 5,813 | Federal | $ | 2,454 | $ | 4,286 | $ | 4,932 | |||||||||||||||
| State | 800 | 847 | 736 | State | 996 | 1,170 | 1,089 | |||||||||||||||||||||
| Foreign | 346 | 132 | 236 | Foreign | 191 | 259 | 241 | |||||||||||||||||||||
| Deferred expense (benefit) | Deferred expense (benefit) | |||||||||||||||||||||||||||
| Federal | (3,645 | ) | (662 | ) | (802 | ) | Federal | 42 | (579) | (946) | ||||||||||||||||||
| State | 140 | (52 | ) | (244 | ) | State | (46) | 153 | (108) | |||||||||||||||||||
| Income tax expense | $ | 3,845 | $ | 9,119 | $ | 5,739 | Income tax expense | $ | 3,637 | $ | 5,289 | $ | 5,208 | |||||||||||||||
A reconciliation of income tax at the United StatesU.S. federal statutory tax rate (using a statutory tax rate of 35%21%) to income tax expense for fiscal years 2017, 20162020, 2019, and 20152018 in dollars is as follows (in thousands):
| Fiscal Year | |||||||||||||||||
| December 26, 2020 | December 28, 2019 | December 29, 2018 | |||||||||||||||
| Expected income tax expense at statutory rate | $ | 5,658 | $ | 5,411 | $ | 5,655 | |||||||||||
| Excess tax benefits from equity compensation | (3,963) | (1,777) | (1,669) | ||||||||||||||
| Non-deductible expenses | 690 | 942 | 207 | ||||||||||||||
| State tax expense, net of federal benefit | 620 | 985 | 520 | ||||||||||||||
| Foreign tax expense | 191 | 259 | 241 | ||||||||||||||
| Foreign tax credits | (191) | (259) | (241) | ||||||||||||||
| Increase (decrease) in unrecognized tax benefit | 102 | (128) | 322 | ||||||||||||||
| Other | 530 | (144) | 173 | ||||||||||||||
| Income tax expense | $ | 3,637 | $ | 5,289 | $ | 5,208 | |||||||||||
F-17
| Fiscal Year | |||||||||||
| December 30, 2017 | December 31, 2016 | December 26, 2015 | |||||||||
| Expected income tax expense at statutory rate | $ | 10,902 | $ | 8,594 | $ | 5,546 | |||||
| Tax Act impact on deferred taxes | (5,473 | ) | — | — | |||||||
| Permanent differences | (2,300 | ) | 92 | 64 | |||||||
| State tax expense, net of federal benefit | 616 | 395 | 544 | ||||||||
| Foreign tax expense | 347 | 132 | 236 | ||||||||
| Foreign tax credits | (347 | ) | (132 | ) | (236 | ) | |||||
| Increase in unrecognized tax benefit | 114 | 185 | 104 | ||||||||
| Valuation allowance | — | — | (317 | ) | |||||||
| Other | (14 | ) | (147 | ) | (202 | ) | |||||
| Income tax expense | $ | 3,845 | $ | 9,119 | $ | 5,739 | |||||
The components of deferred tax assets (liabilities) arewere as follows (in thousands):
| December 30, 2017 | December 31, 2016 | December 26, 2020 | December 28, 2019 | |||||||||||||||
| Deferred tax assets: | Deferred tax assets: | |||||||||||||||||
| Deferred revenue | $ | 1,403 | $ | 3,394 | Deferred revenue | $ | 4,873 | $ | 4,510 | |||||||||
| Accrued bonus | 53 | 706 | ||||||||||||||||
| Property and equipment | — | 136 | ||||||||||||||||
| Accrued incentive compensation | Accrued incentive compensation | 1,089 | 262 | |||||||||||||||
| Stock based compensation | 607 | 818 | Stock based compensation | 738 | 776 | |||||||||||||
| Deferred rent | 270 | 453 | Deferred rent | 358 | 394 | |||||||||||||
| Intangible assets | 191 | 593 | Intangible assets | 82 | 99 | |||||||||||||
| Other | 157 | 248 | Other | 628 | 1,467 | |||||||||||||
| Net operating loss carryforwards and credits | 443 | 443 | Net operating loss carryforwards and credits | 987 | 869 | |||||||||||||
| Valuation allowance | (482 | ) | (482 | ) | Valuation allowance | (577) | (577) | |||||||||||
| 2,642 | 6,309 | 8,178 | 7,800 | |||||||||||||||
| Deferred tax liabilities: | Deferred tax liabilities: | |||||||||||||||||
| Intangible assets | (11,302 | ) | (18,613 | ) | Intangible assets | (10,599) | (10,820) | |||||||||||
| Property and equipment | (139 | ) | — | Property and equipment | (2,059) | (1,465) | ||||||||||||
| (11,441 | ) | (18,613 | ) | (12,658) | (12,285) | |||||||||||||
| Net deferred tax liability | $ | (8,799 | ) | $ | (12,304 | ) | Net deferred tax liability | $ | (4,480) | $ | (4,485) | |||||||
The Company had a state net operating loss carry-forward of $23.3 million at December 30, 201726, 2020 and December 31, 2016.28, 2019. The state net operating loss carry forwards begin to expire in 2030.
differences.
The Company files income tax returns, which are periodically audited by various federal and state jurisdictions. The Company was not subject to federal or state tax examinations prior to 2009. In fiscal 2013year 2019, the Internal Revenue Service (“IRS”) commenced an examination of the Company’s U.S. income tax returnsreturn for fiscal 2010years 2016 and 2011, which was subsequently settled and closed.
2017.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
| Balance as of December 30, 2017 | $ | 680 | |||
| Additions for tax positions of prior years | 78 | ||||
| Subtractions for tax positions of prior years | 0 | ||||
| Additions for tax positions of current year | 155 | ||||
| Subtractions for tax positions of current year | 0 | ||||
| Balance as of December 29, 2018 | 913 | ||||
| Additions for tax positions of prior years | 187 | ||||
| Subtractions for tax positions of prior years | (330) | ||||
| Additions for tax positions of current year | 929 | ||||
| Subtractions for tax positions of current year | 0 | ||||
| Balance as of December 28, 2019 | 1,699 | ||||
| Additions for tax positions of prior years | 0 | ||||
| Subtractions for tax positions of prior years | (959) | ||||
| Additions for tax positions of current year | 54 | ||||
| Subtractions for tax positions of current year | 0 | ||||
| Balance as of December 26, 2020 | $ | 794 | |||
F-18
| Balance as of December 27, 2014 | $ | 129 | |
| Additions for tax positions of prior years | — | ||
| Subtractions for tax positions of prior years | — | ||
| Additions for tax positions of current year | 336 | ||
| Subtractions for tax positions of current year | — | ||
| Balance as of December 26, 2015 | 465 | ||
| Additions for tax positions of prior years | — | ||
| Subtractions for tax positions of prior years | — | ||
| Additions for tax positions of current year | 137 | ||
| Subtractions for tax positions of current year | — | ||
| Balance as of December 31, 2016 | 602 | ||
| Additions for tax positions of prior years | — | ||
| Subtractions for tax positions of prior years | — | ||
| Additions for tax positions of current year | 78 | ||
| Subtractions for tax positions of current year | — | ||
| Balance as of December 30, 2017 | $ | 680 | |
As of December 30, 201726, 2020 and December 31, 2016,28, 2019, the accrued interest and penalties on the unrecognized tax benefits were $151,000$325,000 and $116,000,$316,000, respectively, excluding any related income tax benefits. The Company recorded accrued interest related to the unrecognized tax benefits and penalties as a component of the provision for income taxes recognized in the Consolidated Statement of Operations.
At December 26, 2020 and December 28, 2019, the amount of unrecognized tax benefits was $794,000 and $1,699,000, respectively, which, if ultimately recognized, would reduce the Company’s effective tax rate.
| (10) | Debt Obligations | ||||
Long-term debt consistsconsisted of the following components (in thousands):
| December 30, 2017 | December 31, 2016 | ||||||
| Term loan | $ | 64,750 | $ | 68,250 | |||
| Revolving credit facility | 69,000 | 83,000 | |||||
| Debt issuance costs | (409 | ) | (533 | ) | |||
| Less: current portion of debt | (3,500 | ) | (3,500 | ) | |||
| Long-term debt, net | $ | 129,841 | $ | 147,217 | |||
| December 26, 2020 | December 28, 2019 | ||||||||||
| 2020-1 Class A-2 Senior Secured Notes | $ | 480,000 | $ | 0 | |||||||
| 2018-1 Class A-2 Senior Secured Notes | 0 | 317,600 | |||||||||
| Debt issuance costs, net of amortization | (9,467) | (6,731) | |||||||||
| Less: current portion of debt | (3,600) | (3,200) | |||||||||
| Long-term debt, net | $ | 466,933 | $ | 307,669 | |||||||
As of December 30, 2017,26, 2020, the scheduled principle payments on debt were as follows (in thousands):
| Fiscal year 2021 | $ | 3,600 | |||
| Fiscal year 2022 | 4,800 | ||||
| Fiscal year 2023 | 4,800 | ||||
| Fiscal year 2024 | 4,800 | ||||
| Fiscal year 2025 | 4,800 | ||||
| Thereafter | 457,200 | ||||
| Total | $ | 480,000 | |||
Securitized Financing Facility
In November 2018, Wingstop Funding LLC (the “Issuer”), a limited-purpose, bankruptcy-remote, wholly-owned indirect subsidiary of the Company, issued Series 2018-1 4.97% Fixed Rate Senior Secured Notes, Class A-2 (the “2018 Class A-2 Notes”) with an anticipated term of five years and an initial principal amount of $320 million. In addition, the Issuer issued Series 2018-1 Variable Funding Senior Secured Notes, Class A-1 (the “2018 Variable Funding Notes”, and together with the 2018 Class A-2 Notes, the “2018 Notes”), which allowed the Issuer to borrow up to $20 million on a revolving basis. A portion of the proceeds of the 2018 Class A-2 Notes were to repay approximately $215 million borrowed under the Company’s senior credit facility.
In October 2020, the Company completed a transaction to refinance its existing securitized financing facility with a new securitized financing facility, pursuant to which the Issuer issued $480.0 million of its Series 2020-1 2.84% Fixed Rate Senior Notes, Class A-2 (the “2020 Class A-2 Notes”) with an anticipated term of seven years. The Issuer also entered into a revolving financing facility of Series 2020-1 Variable Funding Senior Notes, Class A-1 (the “2020 Variable Funding Notes,” and together with the 2020 Class A-2 Notes, the “2020 Notes”), which permits borrowings of up to a maximum principal amount of $50 million, which may be used to issue letters of credit. A portion of the proceeds of the 2020 Class A-2 Notes was used to repay the principal outstanding on the existing 2018 Notes and to pay related transaction fees and expenses. The additional net proceeds were used to strengthen the Company's liquidity position and for general corporate purposes, which included a return of capital to the Company’s stockholders in 2020. NaN borrowings were outstanding under the 2020 Variable Funding Notes as of December 26, 2020.
The 2018 and 2020 Notes were each issued in a securitization transaction, which is guaranteed by certain limited-purpose, bankruptcy-remote, wholly owned indirect subsidiaries of the Company and secured by a security interest in substantially all of their assets, including certain domestic and foreign revenue-generating assets, consisting principally of franchise-related agreements and intellectual property.
F-19
| Fiscal year 2018 | $ | 3,500 | |
| Fiscal year 2019 | 2,625 | ||
| Fiscal year 2020 | 3,500 | ||
| Fiscal year 2021 | 124,125 | ||
| Total | $ | 133,750 | |
The 2020 Variable Funding Notes accrue interest at a variable rate based on (i) the prime rate, (ii) the Eurodollar rate for U.S. Dollars (or a benchmark replacement), or (iii) with respect to advances made by conduit investors, the weighted average cost of, or related to, the issuance of commercial paper allocated to fund or maintain such advances, in each case plus any applicable margin, as more fully set forth in the 2020 Variable Funding Note Purchase Agreement, dated October 30, 2020. There is a commitment fee on the unused portion of the 2020 Variable Funding Notes facility, which is 30 basis points based on the utilization under the 2020 Variable Funding Notes facility. As of December 26, 2020, $4.9 million of letters of credit were outstanding against the 2020 Variable Funding Notes, which relate primarily to interest reserves required under the indenture. There were 0 amounts drawn down on the letters of credit as of December 26, 2020.
The 2020 Notes are subject to a series of covenants and restrictions customary for transactions of this type, including (i) that the Issuer maintains specified reserve accounts to be used to make required payments in respect of the 2020 Notes, (ii) provisions relating to optional and mandatory prepayments and the related payment of specified amounts, including specified make-whole payments in the case of the 2020 Class A-2 Notes under certain circumstances, (iii) certain indemnification payments in the event, among other things, that the assets pledged as collateral for the 2020 Notes are in stated ways defective or ineffective, and (iv) covenants relating to recordkeeping, access to information, and similar matters. The 2020 Notes are also subject to customary rapid amortization events provided for in the indenture, including events tied to failure to maintain stated debt service coverage ratios, the sum of global gross sales for specified restaurants being below certain levels on certain measurement dates, certain change of control and manager termination events, an event of default, and the failure to repay or refinance the 2020 Class A-2 Notes on the applicable scheduled maturity date. The 2020 Notes are also subject to certain customary events of default, including events relating to non-payment of required interest, principal or other amounts due on or with respect to the 2020 Notes, failure to comply with covenants within certain time frames, certain bankruptcy events, breaches of specified representations and warranties, failure of security interests to be effective, and certain judgments. As of December 26, 2020, the Company was in compliance with all financial covenants.
| (11) | Leases | ||||
The Company determines whether an arrangement is a lease at inception. The Company has operating leases certainfor office and retail space, as well as equipment. The Company's leases have remaining terms of 0.3 years to 8.8 years, some of which include options to extend the lease term for up to ten years. Lease terms may include options to renew when it is reasonably certain that the Company will exercise that option. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants.
As most of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available on the commencement date in determining the present value of lease payments. The Company has lease agreements that contain both lease and equipment under non-cancelable operatingnon-lease components. For real estate leases, The Company accounts for lease components together with terms expiring at various dates through July 2032.non-lease components (e.g., common-area maintenance).
F-20
Components of future minimum rental payments required under our operatinglease expense were as follows (in thousands):
| Year Ended | |||||||||||
| December 26, 2020 | December 28, 2019 | ||||||||||
Operating lease cost (a) | $ | 2,439 | $ | 2,113 | |||||||
Variable lease cost (b) | 609 | 507 | |||||||||
| Total lease cost | $ | 3,048 | $ | 2,620 | |||||||
(a) Includes short-term leases, excluding contingent rent, that have initial or remaining non-cancelable lease terms in excess of one year, as of December 30, 2017,which are immaterial.
(b) Primarily related to adjustments for inflation, common area maintenance, and property tax.
Supplemental cash flow information related to leases is as follows (in thousands):
| Year Ended | |||||||||||
| December 26, 2020 | December 28, 2019 | ||||||||||
| Operating cash flow information: | |||||||||||
| Cash paid for amounts included in the measurement of lease liabilities | $ | 2,426 | $ | 2,263 | |||||||
| Non-cash activity: | |||||||||||
| Right-of-use assets obtained in exchange for new operating lease liabilities | $ | 3,011 | $ | 1,352 | |||||||
| Fiscal year 2018 | $ | 1,783 | |
| Fiscal year 2019 | 1,561 | ||
| Fiscal year 2020 | 1,436 | ||
| Fiscal year 2021 | 1,282 | ||
| Fiscal year 2022 | 1,226 | ||
| Thereafter | 4,037 | ||
| Total | $ | 11,325 | |
| Year Ended | |||||||||||||||||
| Balance Sheet Classification | December 26, 2020 | December 28, 2019 | |||||||||||||||
| Right-of-use assets | Other non-current assets | $ | 6,294 | $ | 8,242 | ||||||||||||
| Current lease liabilities | Other current liabilities | 2,385 | 1,806 | ||||||||||||||
| Non-current lease liabilities | Other non-current liabilities | 5,476 | 7,976 | ||||||||||||||
Weighted average lease term and non-cancelablediscount rate information related to leases was $2.0 million, $1.9 million, and $2.0 million for theas follows:
| Year Ended | |||||||||||
| December 26, 2020 | December 28, 2019 | ||||||||||
| Weighted average remaining lease term of operating leases | 4.0 years | 5.4 years | |||||||||
| Weighted average discount rate of operating leases | 3.58 | % | 4.77 | % | |||||||
F-21
Maturities of lease liabilities by fiscal years ended December 30, 2017, December 31, 2016, and December 26, 2015, respectively.year are as follows (in thousands):
| Fiscal year 2021 | $ | 2,614 | |||
| Fiscal year 2022 | 1,902 | ||||
| Fiscal year 2023 | 1,734 | ||||
| Fiscal year 2024 | 935 | ||||
| Fiscal year 2025 | 698 | ||||
| Thereafter | 594 | ||||
| Total future minimum lease payments | 8,477 | ||||
| Less: imputed interest | (616) | ||||
| Total lease liabilities | $ | 7,861 | |||
| (12) | Commitments and Contingencies | ||||
The Company is subject to legal proceedings, claims and liabilities, such as employment-related claims and other 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 those actions should not have a material adverse impact on financial position, results of operations or cash flows.
Many of the food products the Company purchases are subject to changes in the price and availability of food commodities, including chicken. The Company works with its suppliers and uses a mix of forward pricing protocols for certain items under which we agree with our supplier on fixed prices for deliveries at some time in the future, fixed pricing protocols under which we agree on a fixed price with our supplier for the duration of that protocol, and formula pricing protocols under which the prices we pay are based on a specified formula related to the prices of the goods, such as spot prices.
The Company’s use of any forward pricing arrangements varies substantially from time to time and these arrangements tend to cover relatively short periods (i.e., typically twelve months or less). Such contracts are used in the normal purchases of our food products and not for speculative purposes, and as such are not required to be evaluated as derivative instruments.purposes. The Company does not enter into futures contracts or other derivative instruments.
| (13) | Employee Benefit Plan | ||||
The Company sponsors a 401(k) profit sharing plan for all employees who are eligible based upon age and length of service. The Company made matching contributions of approximately $450,000, $425,000$735,000, $594,000, and $332,000$556,000 for fiscal years 2017, 20162020, 2019, and 2015,2018, respectively.
| (14) | Stock-Based Compensation | ||||
The Wingstop Inc. 2015 Omnibus Equity Incentive Plan or the 2015 Plan,(the "2015 Plan"), was adopted in June 2015 and became effective upon completion ofis currently the offering.only plan under which the Company currently grants awards. The 2015 Plan provides for the grant or award of stock options, stock appreciation rights, restricted stock awards, restricted stock units, performance unit awards, performance share awards, cash-based awards and other stock-based awards to employees, directors, and other eligible persons. Under the 2015 Plan, Wingstop had 2,143,589 shares authorized for issuance, 263,876 sharesAs of common stock issuable upon exercise of currently outstanding options or vesting of restricted stock awards, and 1,871,698December 26, 2020, there were approximately 1.6 million shares available for future grants as of December 30, 2017.under the 2015 Plan. Prior to the 2015 Plan, the Company granted awards under the Wing Stop Holding Corporation 2010 Stock Option Plan.
The options and restricted stock awards granted under the 2015 Plan are subject to either service-based or performance-based vesting. Service-based optionsawards contain a service-based, or time-based, vesting provision. Performance-based options contain performance-based vesting provisions based on the Company meeting certain Adjusted EBITDA profitability targets or sales targets for each fiscal year during the vesting period. In the event of a change in control of the Company (as defined in the 2015 Plan), unless otherwise determined by the board of directors or the Compensation Committee of the board of directors, each outstanding award will be treated as the compensation committee determines, either by the terms of the award agreement or by resolution adopted by the compensation committee, including without limitation, that the awards may bebecome fully vested assumed replaced with substitute awards, cashed-out or terminated.
F-22
| Stock Options | Weighted Average Exercise Price | Aggregate Intrinsic Value | Weighted Average Remaining Term | |||||||||
| Outstanding - December 27, 2014 | 1,466 | $ | 3.74 | $ | 7,551 | 8.0 | ||||||
| Granted | 106 | 16.75 | ||||||||||
| Exercised | (329 | ) | 1.45 | |||||||||
| Canceled | (66 | ) | 1.17 | |||||||||
| Outstanding - December 26, 2015 | 1,177 | 4.66 | $ | 21,059 | 7.7 | |||||||
| Granted | 36 | 24.34 | ||||||||||
| Exercised | (166 | ) | 2.92 | |||||||||
| Canceled | (192 | ) | 5.99 | |||||||||
| Outstanding - December 31, 2016 | 855 | 5.14 | $ | 20,905 | 6.8 | |||||||
| Granted | — | — | ||||||||||
| Exercised | (326 | ) | 4.04 | |||||||||
| Canceled | (109 | ) | 7.23 | |||||||||
| Outstanding - December 30, 2017 | 420 | $ | 5.45 | $ | 14,068 | 5.7 | ||||||
Stock-based compensation is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the requisite employee service period (generally the vesting period of the grant). The Company recognized approximately $1.9$8.6 million, $1.2$7.0 million, and $1.2$3.7 million in stock compensation expense for fiscal years 2017, 20162020, 2019, and 2015,2018, respectively, with a corresponding increase to additional paid-in-capital. Stock compensation expense is included in Selling, general and administrative expenses 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 28, 2019 | 134 | $ | 5.72 | $ | 10,801 | 3.8 | |||||||||||||||||
| Options granted | 68 | 79.41 | |||||||||||||||||||||
| Options exercised | (133) | 5.52 | |||||||||||||||||||||
| Outstanding - December 26, 2020 | 69 | $ | 78.40 | $ | 4,291 | 9.1 | |||||||||||||||||
The total grant-date fair value of stock options vested during each of the fiscal years 2020, 2019, and 2018 was $0.2 million, $0.5 million, and $0.5 million, respectively. The total intrinsic value of stock options exercised was $15.8 million, $6.7 million, and $7.6 million for fiscal years 2020, 2019, and 2018, respectively.
A summary of the status of non-vested sharesoptions as of December 30, 201726, 2020 and the changes during the period then ended is presented below (in thousands, except per share data):
| December 30, 2017 | ||||||
| Shares | Weighted average grant-date fair value | |||||
| Non-vested shares at beginning of year | 500 | $ | 7.19 | |||
| Granted | — | $ | — | |||
| Vested | (220 | ) | $ | 5.33 | ||
| Forfeited | (109 | ) | $ | 7.23 | ||
| Non-vested shares at end of year | 171 | $ | 9.54 | |||
| Stock Options | Weighted average grant-date fair value | ||||||||||
| Non-vested options - December 28, 2019 | 17 | $ | 10.20 | ||||||||
| Granted | 68 | 22.99 | |||||||||
| Vested | (17) | 10.00 | |||||||||
| Non-vested options - December 26, 2020 | 68 | $ | 23.01 | ||||||||
As of December 30, 2017,26, 2020, there was $0.8$1.3 million of total unrecognized stock compensation expense related to non-vested stock options, and restricted stock awards, which will be recognized over a weighted average period of approximately 1.52.2 years.
The estimated fair value of each option granted is calculated using the Black-Scholes option-pricing model. Expected volatilities are based on volatilities from publicly traded companies operating in the Company’s industry. The Company uses historical data to estimate expected employee forfeiture of stock options. The expected life of options granted is management’s best estimate using recent and expected transactions. The risk-free rate for periods within the expected life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The weighted-average assumptions used in the model were as follows:
| 2020 | |||||
| Risk-free interest | 0.7% | ||||
| Expected life | 4.2 years | ||||
| Expected dividend yield | 0.5% | ||||
| Volatility | 34.4% | ||||
| 2016 | 2015 | ||||||
| Risk-free interest | 1.44 | % | 1.96 | % | |||
| Expected life (years) | 6.2 | 6.5 | |||||
| Expected dividend yield | 0 | % | 0 | % | |||
| Volatility | 52.0 | % | 52.0 | % | |||
| Weighted-average Black-Scholes fair value per share at date of grant | $ | 13.74 | $ | 8.87 | |||
The Company used the simplified method for determining the expected life of the options. In addition, assumptions made regarding forfeitures in determining the remaining unamortized share-based compensation are re-evaluated periodically.
F-23
Restricted Stock Units and Performance Stock Units
The following table summarizes activity related to restricted stock units 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 31, 2016 | — | $ | — | — | $ | — | |||||||
| Granted | 105 | 27.02 | 94 | 27.52 | |||||||||
| Released | — | — | — | — | |||||||||
| Canceled | (11 | ) | 26.30 | (8 | ) | 26.30 | |||||||
| Outstanding - December 30, 2017 | 94 | $ | 27.11 | 86 | $ | 27.63 | |||||||
| Restricted Stock Units | Weighted Average Grant Date Fair Value | Performance Stock Units | Weighted Average Grant Date Fair Value | ||||||||||||||||||||
| Outstanding - December 28, 2019 | 82 | $ | 52.73 | 169 | $ | 55.92 | |||||||||||||||||
| Units granted | 27 | 94.12 | 44 | 86.03 | |||||||||||||||||||
| Units vested | (41) | 44.62 | (52) | 41.54 | |||||||||||||||||||
| Units canceled | (14) | 64.59 | (8) | 66.04 | |||||||||||||||||||
| Outstanding - December 26, 2020 | 54 | $ | 76.27 | 153 | $ | 69.08 | |||||||||||||||||
The fair value of restricted stock units and performance stock unitsPSUs is based on the closing price on the date of grant. The restricted stock units granted during fiscal year 20172020 vest over a three year service period. As of December 30, 2017,26, 2020, total unrecognized compensation expense related to unvested restricted stock units was $1.9$2.8 million, which is expected to be recognized over a weighted-average period of 2.21.5 years. During fiscal year 2019, there was a modification to certain awards resulting in additional compensation expense of $0.7 million over the remaining term of the awards.
The performance stock units vestCompany granted 44,458 PSUs during fiscal year 2020 that are based on the outcome of certain performance criteria. ForOf the total PSUs granted, 3,259 are subject to a service condition and a performance stock units granted during fiscal year 2017, the amount of units that can be earned range from 0% to 100% of the number of performance awards granted,vesting condition based on the achievement of certain adjustedAdjusted EBITDA targets, as defined by the plan,2015 Plan, over a performance period of three years. The remaining 41,199 PSUs are subject to the achievement of certain Adjusted EBITDA targets over a performance period of three years. The maximum vesting percentage that could be realized for each of these PSUs is 250%, 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 Company’s 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 $311.72 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.
During fiscal year 2019, the Company granted 86,333 PSUs that are based on the outcome of certain performance criteria. Of the total PSUs granted, 46,333 are subject to a service condition and a performance vesting condition based on the achievement of certain Adjusted EBITDA targets, as defined by the 2015 Plan, over a performance period of one to three years. The remaining 40,000 PSUs are subject to a service condition and a performance vesting condition based on certain operational metrics. The amount of all PSU units granted in 2019 that can be earned ranges from 0% to 100%.
During fiscal year 2018, the Company granted 15,290 PSUs that 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 these 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. These awards had a grant-date fair value range of $0.00 to $179.27 per unit based on the outcome of the performance condition.
The compensation expense related to the performance stock unitsthese PSUs is recognized over the vesting period when the achievement of the performance conditions becomebecomes 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. As of December 30, 2017,26, 2020, total unrecognized compensation expense related to unvested performance stock unitsPSUs was $1.4 million, which is expected to be recognized over a weighted-average period of 2.2 years.
F-24
| Restricted Stock Awards | Weighted Average Grant Date Fair Value | |||||
| Outstanding - December 31, 2016 | 12 | $ | 25.59 | |||
| Granted | 10 | 29.68 | ||||
| Released | (4 | ) | 26.06 | |||
| Canceled | (3 | ) | 27.62 | |||
| Outstanding - December 30, 2017 | 15 | $ | 27.89 | |||
| (15) | Restaurant Transactions | ||||
During 2016,fiscal year 2020, the BoardCompany completed the sale of Directors authorized a dividend in the amount7 company-owned restaurants to 2 existing franchisees for aggregate proceeds of $2.90 per share, or $83.3$4.8 million. In connection with the declaration and paymentsale of the dividend,restaurants, the exercise price of someCompany recorded a $3.2 million pre-tax gain on the sale of the outstanding optionsrelated assets and liabilities, which was net of a $58,000 reduction in goodwill. The net gain on July 12, 2016these restaurant sales was reduced by an amountrecorded in Gain on sale of $2.90 per share. During 2015, the Board of Directors authorized a dividendrestaurants and other expense, net in the amountConsolidated Statements of $1.83 per share or $48.0 million. In connection with the declaration and paymentOperations.
The Company acquired 6 restaurants from franchisees during each of the dividend, the exercise price of some of the outstanding options on March 27, 2015 was reduced by an amount of $1.83 per share. At each dividend date, management evaluated the option modification for incremental compensation expense and calculated $94,000 and $537,000 of total incremental compensation for the modifications during fiscal years 2016ended December 26, 2020 and 2015, respectively.
The following table summarizes the final allocationallocations of the purchase priceprices to the estimated fair values of assets acquired and liabilities assumed atas a result of these acquisitions (in thousands):
| Fiscal Year | |||||||||||||||||
| December 26, 2020 | December 28, 2019 | December 29, 2018 | |||||||||||||||
| Working capital | $ | 40 | $ | 0 | $ | 49 | |||||||||||
| Property and equipment | 652 | 90 | 664 | ||||||||||||||
| Reacquired franchise rights | 2,483 | 610 | 2,705 | ||||||||||||||
| Goodwill | 3,560 | 533 | 3,098 | ||||||||||||||
| Total purchase price | $ | 6,735 | $ | 1,233 | $ | 6,516 | |||||||||||
The results of operations of these locations are included in the Consolidated Statements of Operations since the date of the acquisition, inclusive of adjustments made during the measurement period (in thousands):
| Final Purchase Price Allocation | |||
| Inventory | $ | 16 | |
| Property and equipment | 183 | ||
| Reacquired franchise rights | 2,323 | ||
| Goodwill | 1,429 | ||
| Gift card liability | (2 | ) | |
| Total purchase price | $ | 3,949 | |
The excess of the purchase price over the aggregate fair value of assets acquired was allocated to goodwill and is attributable to the benefits expected as a result of the acquisition, including sales and growth opportunities. As of December 30, 2017, $1.4 millionAll of the goodwill from the acquisitionacquisitions is expected to be deductible for federal income tax purposes.
Pro-forma financial information of the combined entities is not presented due to the immaterial impact of the financial results of the acquired restaurants on our consolidated financial statements.
The fair value measurement of tangible and intangible assets and liabilities as of the acquisition date is based on significant inputs not observed in the market and thus represents a Level 3 fair value measurement. 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.
| (16) | Revenue from Contracts with Customers | ||||
The Company was party tofollowing table represents a management agreementdisaggregation of revenue from contracts with Roark Capital Management, LLC, or Roark Capital Management, an affiliate of Wingstop’s former majority shareholder (prior to the secondary offering completed in March, 2016). Pursuant to this management agreement, Roark Capital Management agreed to provide the Company with advice concerning finance, strategic planning and other services. In June 2015, the Company paid a one-time fee to Roark Capital Management in consideration for the termination of our management agreement of $3.3 million. The Company paid Roark Capital Management fees and expense reimbursement totaling $3.5 millioncustomers for the fiscal year ended December 26, 2015, inclusive of the termination fee.
| Fiscal Year | |||||||||||||||||
| December 26, 2020 | December 28, 2019 | December 29, 2018 | |||||||||||||||
| Royalty revenue | $ | 98,554 | $ | 75,106 | $ | 61,882 | |||||||||||
| Advertising fees | 74,930 | 55,932 | 34,484 | ||||||||||||||
| Franchise fees | 3,656 | 4,087 | 2,924 | ||||||||||||||
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 current fiscal year was included in the
F-25
| Fiscal Year | |||||||||||
| December 30, 2017 | December 31, 2016 | December 26, 2015 | |||||||||
| Revenue: | |||||||||||
| Franchise segment | $ | 68,483 | $ | 57,071 | $ | 46,688 | |||||
| Company segment | 37,069 | 34,288 | 31,281 | ||||||||
| Total segment revenue | $ | 105,552 | $ | 91,359 | $ | 77,969 | |||||
| Segment Profit: | |||||||||||
| Franchise segment | $ | 31,637 | $ | 25,850 | $ | 19,701 | |||||
| Company segment | 4,643 | 5,526 | 5,737 | ||||||||
| Total segment profit | 36,280 | 31,376 | 25,438 | ||||||||
Corporate and other (1) | — | 2,173 | 5,720 | ||||||||
| Interest expense, net | 5,131 | 4,396 | 3,477 | ||||||||
| Other (income) expense, net | — | 254 | 396 | ||||||||
| Income before taxes | $ | 31,149 | $ | 24,553 | $ | 15,845 | |||||
| Depreciation and amortization: | |||||||||||
| Franchise segment | $ | 2,220 | $ | 2,092 | $ | 1,812 | |||||
| Company segment | 1,156 | 916 | 870 | ||||||||
| Total depreciation and amortization | 3,376 | 3,008 | 2,682 | ||||||||
| Capital expenditures: | |||||||||||
| Franchise segment | $ | 864 | $ | 387 | $ | 1,308 | |||||
Company segment (2) | 1,671 | 1,669 | 607 | ||||||||
| Total capital expenditures | $ | 2,535 | $ | 2,056 | $ | 1,915 | |||||
| As of | |||||||
| December 30, 2017 | December 31, 2016 | ||||||
| Segment assets: | |||||||
| Franchise segment | $ | 98,069 | $ | 94,889 | |||
| Company segment | 14,166 | 9,864 | |||||
| Total segment assets | 112,235 | 104,753 | |||||
Corporate and other (3) | 7,601 | 7,047 | |||||
| Total assets | $ | 119,836 | $ | 111,800 | |||
| Segment goodwill: | |||||||
| Franchise segment | $ | 39,930 | $ | 39,930 | |||
| Company segment | 6,627 | 5,198 | |||||
| Total goodwill | $ | 46,557 | $ | 45,128 | |||
| Quarter Ended | |||||||||||||||||||||||||||||||
| December 30, 2017 | September 30, 2017 | July 1, 2017 | April 1, 2017 | December 31, 2016 (1) | September 24, 2016 | June 25, 2016 | March 26, 2016 | ||||||||||||||||||||||||
| Total revenue | $ | 28,285 | $ | 26,026 | $ | 24,672 | $ | 26,569 | $ | 24,752 | $ | 21,810 | $ | 22,723 | $ | 22,074 | |||||||||||||||
| Operating income | 9,404 | 9,178 | 8,747 | 8,952 | 8,255 | 6,080 | 7,240 | 7,628 | |||||||||||||||||||||||
| Net income | 10,497 | 5,012 | 5,266 | 6,530 | 4,312 | 2,753 | 4,079 | 4,290 | |||||||||||||||||||||||
| Earnings per share | |||||||||||||||||||||||||||||||
| Basic | $ | 0.36 | $ | 0.17 | $ | 0.18 | $ | 0.23 | $ | 0.15 | $ | 0.10 | $ | 0.14 | $ | 0.15 | |||||||||||||||
| Diluted | $ | 0.36 | $ | 0.17 | $ | 0.18 | $ | 0.22 | $ | 0.15 | $ | 0.09 | $ | 0.14 | $ | 0.15 | |||||||||||||||
| Weighted average shares outstanding | |||||||||||||||||||||||||||||||
| Basic | 29,094 | 29,081 | 29,032 | 28,895 | 28,745 | 28,725 | 28,646 | 28,586 | |||||||||||||||||||||||
| Diluted | 29,459 | 29,384 | 29,394 | 29,336 | 29,114 | 29,014 | 28,989 | 28,967 | |||||||||||||||||||||||
December 26, 2020.
F-26