wing-20230701

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 1, 2023


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____

Commission File No. 001-37425

WINGSTOP INC.

(Exact name of registrant as specified in its charter)


Delaware						47-3494862
(State or other jurisdiction of incorporation or organization)						(IRS Employer Identification No.)


15505 Wright Brothers Drive
Addison, Texas						75001
(Address of principal executive offices)						(Zip Code)

(972) 686-6500

(Registrant’s telephone number, including area code)


Securities registered pursuant to Section 12(b) of the Act:
Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.01 per share	WING	NASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes x No

On August 1, 2023 there were 29,977,614 shares of common stock outstanding.

TABLE OF CONTENTS


		Page
PART I	Financial Information	4
Item 1.	Financial Statements	4
	Consolidated Balance Sheets - July 1, 2023 (Unaudited) and December 31, 2022	4
	Consolidated Statements of Comprehensive Income (Unaudited) - Thirteen and Twenty-s ix Weeks Ended July 1, 2023 and June 25, 2022	5

	Consolidated Statements of Stockholders’ Deficit (Unaudited) - Thirteen and Twenty-s ix Weeks Ended July 1, 2023 and June 25 , 2022	6
	Consolidated Statements of Cash Flows (Unaudited) - Twenty-s ix Weeks Ended July 1, 2023 and June 2 5 , 2022	8
	Notes to Consolidated Financial Statements (Unaudited)	10
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29
Item 4.	Controls and Procedures	30

PART II	Other Information	31
Item 1.	Legal Proceedings	31
Item 1A.	Risk Factors	31
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	31
Item 3.	Defaults Upon Senior Securities	31
Item 4.	Mine Safety Disclosures	31
Item 5.	Other Information	31
Item 6.	Exhibits	32
	Signatures	33

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

WINGSTOP INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(amounts in thousands, except share and par value amounts)


	July 1, 2023		December 31, 2022
	(Unaudited)
Assets
Current assets
Cash and cash equivalents	$	188,500	$	184,496
Restricted cash	11,444		13,296
Accounts receivable, net	10,747		9,461
Prepaid expenses and other current assets	5,548		4,252
Advertising fund assets, restricted	21,944		15,167
Total current assets	238,183		226,672
Property and equipment, net	78,570		66,851
Goodwill	65,175		62,514
Trademarks	32,700		32,700
Customer relationships, net	8,378		9,015
Other non-current assets	28,211		26,438
Total assets	$	451,217	$	424,190
Liabilities and stockholders' deficit
Current liabilities
Accounts payable	$	6,112	$	5,219
Other current liabilities	30,732		34,726
Current portion of debt	—		7,300
Advertising fund liabilities	21,944		15,167
Total current liabilities	58,788		62,412
Long-term debt, net	711,411		706,846
Deferred revenues, net of current	28,296		27,052
Deferred income tax liabilities, net	3,150		4,180
Other non-current liabilities	14,923		14,561
Total liabilities	816,568		815,051
Commitments and contingencies (see Note 7)
Stockholders' deficit
Common stock, $0.01 par value; 100,000,000 shares authorized; 29,977,614 and 29,932,668 shares issued and outstanding as of July 1, 2023 and December 31, 2022, respectively	300		300
Additional paid-in-capital	2,038		2,797
Retained deficit	(367,327)		(393,321)
Accumulated other comprehensive loss	(362)		(637)
Total stockholders' deficit	(365,351)		(390,861)
Total liabilities and stockholders' deficit	$	451,217	$	424,190

See accompanying notes to consolidated financial statements.

WINGSTOP INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(amounts in thousands, except per share data)

(Unaudited)


	Thirteen Weeks Ended				Twenty-Six Weeks Ended
	July 1, 2023		June 25, 2022		July 1, 2023		June 25, 2022
Revenue:
Royalty revenue, franchise fees and other	$	47,984	$	36,044	$	96,172	$	71,114
Advertising fees	36,596		28,987		74,059		51,526
Company-owned restaurant sales	22,593		18,746		45,663		37,342
Total revenue	107,173		83,777		215,894		159,982
Costs and expenses:
Cost of sales (1)	16,642		14,899		33,337		30,573
Advertising expenses	38,729		29,685		78,372		52,852
Selling, general and administrative	22,128		13,949		45,773		32,035
Depreciation and amortization	3,218		2,547		6,207		4,774
Loss on disposal of assets	—		323		77		767
Total costs and expenses	80,717		61,403		163,766		121,001
Operating income	26,456		22,374		52,128		38,981
Interest expense, net	4,244		5,986		8,817		10,178
Loss on debt extinguishment	—		—		—		814
Other (income) expense	(46)		26		142		91
Income before income tax expense	22,258		16,362		43,169		27,898
Income tax expense	6,077		3,055		11,319		5,915
Net income	$	16,181	$	13,307	$	31,850	$	21,983

Earnings per share
Basic	$	0.54	$	0.45	$	1.06	$	0.74
Diluted	$	0.54	$	0.44	$	1.06	$	0.73

Weighted average shares outstanding
Basic	29,972		29,882		29,959		29,866
Diluted	30,049		29,914		30,043		29,944

Dividends per share	$	0.19	$	0.17	$	0.38	$	4.34

Other comprehensive income (loss)
Currency translation adjustment	$	128	$	(271)	$	276	$	(337)
Other comprehensive income (loss)	128		(271)		276		(337)
Comprehensive income	$	16,309	$	13,036	$	32,126	$	21,646

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

See accompanying notes to consolidated financial statements.

WINGSTOP INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders' Deficit

For the Twenty-Six Weeks Ended June 25, 2022

(amounts in thousands, except share data)

(Unaudited)


	Common Stock
	Shares	Amount		Additional Paid-In Capital		Retained Deficit		Accumulated Other Comprehensive Loss		Total Stockholders’ Deficit
Balance at December 25, 2021	29,837,454	$	299	$	463	$	(310,031)	$	(256)	$	(309,525)

Net income	—	—		—		8,676		—		8,676
Shares issued under stock plans	41,289	—		125		—		—		125
Tax payments for restricted stock upon vesting	(1,923)	—		—		(298)		—		(298)
Stock-based compensation expense	—	—		2,191		—		—		2,191
Dividends declared on common stock and equivalents	—	—		(2,370)		(122,960)		—		(125,330)
Currency translation adjustment	—	—		—		—		(66)		(66)
Balance at March 26, 2022	29,876,820	299		409		(424,613)		(322)		(424,227)
Net income	—	—		—		13,307		—		13,307
Shares issued under stock plans	37,594	—		1,838		—		—		1,838
Tax payments for restricted stock upon vesting	(46)	—		—		(4)		—		(4)
Stock-based compensation expense, net of forfeitures	—	—		(1,601)		—		—		(1,601)
Dividends declared on common stock and equivalents	—	—		—		(4,512)		—		(4,512)
Currency translation adjustment	—	—		—		—		(271)		(271)
Balance at June 25, 2022	29,914,368	$	299	$	646	$	(415,822)	$	(593)	$	(415,470)

See accompanying notes to consolidated financial statements.

WINGSTOP INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders' Deficit

For the Twenty-Six Weeks Ended July 1, 2023

(amounts in thousands, except share data)

(Unaudited)


	Common Stock
	Shares	Amount		Additional Paid-In Capital		Retained Deficit		Accumulated Other Comprehensive Loss		Total Stockholders’ Deficit
Balance at December 31, 2022	29,932,668	$	300	$	2,797	$	(393,321)	$	(637)	$	(390,861)
Net income	—	—		—		15,669		—		15,669
Shares issued under stock plans	49,817	—		111		—		—		111
Tax payments for restricted stock upon vesting	(13,613)	—		—		(2,292)		—		(2,292)
Stock-based compensation expense	—	—		3,345		—		—		3,345
Dividends declared on common stock and equivalents	—	—		(5,444)		(465)		—		(5,909)
Currency translation adjustment	—	—		—		—		147		147
Balance at April 1, 2023	29,968,872	300		809		(380,409)		(490)		(379,790)
Net income	—	—		—		16,181		—		16,181
Shares issued under stock plans	9,084	—		362		—		—		362
Tax payments for restricted stock upon vesting	(342)	—		—		(69)		—		(69)
Stock-based compensation expense	—	—		3,546		—		—		3,546
Dividends declared on common stock and equivalents	—	—		(2,679)		(3,030)		—		(5,709)
Currency translation adjustment	—	—		—		—		128		128
Balance at July 1, 2023	29,977,614	$	300	$	2,038	$	(367,327)	$	(362)	$	(365,351)

See accompanying notes to consolidated financial statements.

WINGSTOP INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(amounts in thousands)

(Unaudited)


	Twenty-Six Weeks Ended
	July 1, 2023		June 25, 2022

Operating activities
Net income	$	31,850	$	21,983
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization	6,207		4,774
Deferred income taxes	(1,030)		(1,534)
Stock-based compensation expense	6,891		590
Loss on disposal of assets	77		767
Amortization of debt issuance costs	1,021		879
Loss on debt extinguishment	—		814
Changes in operating assets and liabilities:
Accounts receivable	(1,286)		(241)
Prepaid expenses and other assets	(4)		(1,173)
Advertising fund assets and liabilities, net	6,235		5,814
Accounts payable and other current liabilities	(3,528)		(2,216)
Deferred revenue	1,442		(844)
Other non-current liabilities	92		(149)
Cash provided by operating activities	47,967		29,464

Investing activities
Purchases of property and equipment	(17,002)		(12,695)
Acquisition of restaurants from franchisee	(4,396)		—
Proceeds from sales of assets	—		3,637
Payments for investments	(808)		—
Cash used in investing activities	(22,206)		(9,058)

Financing activities

Proceeds from exercise of stock options	473		1,963
Borrowings of long-term debt	—		250,000
Repayments of long-term debt	(3,650)		—
Payment of deferred financing costs and other debt-related costs	—		(5,442)
Tax payments for restricted stock upon vesting	(2,361)		(302)
Dividends paid	(11,836)		(129,906)
Cash provided by (used in) financing activities	(17,374)		116,313

Net increase in cash, cash equivalents, and restricted cash	8,387		136,719
Cash, cash equivalents, and restricted cash at beginning of period	205,715		54,906
Cash, cash equivalents, and restricted cash at end of period	$	214,102	$	191,625

Supplemental information:
Accrued capital expenditures	$	4,179	$	6,831

See accompanying notes to consolidated financial statements.

WINGSTOP INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

(1) Basis of Presentation and Update to Significant Accounting Policies

Nature of operations. Wingstop Inc., together with its consolidated subsidiaries (collectively, “Wingstop” or the “Company”), is in the business of franchising and operating Wingstop restaurants. As of July 1, 2023, the Company had a total of 2,046 restaurants in its system. The Company’s restaurant base is approximately 98% franchised, with 2,001 franchised locations (including 252 international locations) and 45 company-owned restaurants as of July 1, 2023.

Basis of presentation. The accompanying unaudited consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. Consequently, financial information and disclosures normally included in financial statements prepared annually in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted. Balance sheet amounts are as of July 1, 2023 and December 31, 2022, and operating results are for the thirteen and twenty-six weeks ended July 1, 2023 and June 25, 2022.

In the Company’s opinion, all necessary adjustments have been made for the fair presentation of the results of the interim periods presented. The results of operations for such interim periods are not necessarily indicative of the results to be expected for the full year. The accompanying interim unaudited consolidated financial statements should be read in conjunction with the audited financial statements and the related notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

Fiscal year. The Company uses a 52- or 53-week fiscal year that ends on the last Saturday of the calendar year. Fiscal years 2023 and 2022 have 52 and 53 weeks, respectively.

Cash, Cash Equivalents, and Restricted Cash. Cash, cash equivalents, and restricted cash within the Consolidated Balance Sheets and the Consolidated Statements of Cash Flows as of July 1, 2023 and December 31, 2022 were as follows (in thousands):


	July 1, 2023		December 31, 2022
Cash and cash equivalents	$	188,500	$	184,496
Restricted cash	11,444		13,296
Restricted cash, included in Advertising fund assets, restricted	14,158		7,923
Total cash, cash equivalents, and restricted cash	$	214,102	$	205,715

Recently issued accounting pronouncements. We reviewed all recently issued accounting pronouncements and concluded that they were either not applicable or not expected to have a significant impact on our consolidated financial statements.

(2) Earnings per Share

Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of shares of common stock outstanding for the reporting period. Diluted earnings per share reflects the potential dilution that could occur if securities convertible into, or other contracts to issue, common stock were exercised or converted into common stock. For the calculation of diluted earnings per share, the basic weighted average number of shares is increased by the dilutive effect of the exercise and vesting of stock options and restricted stock units, respectively, as determined using the treasury stock method.

WINGSTOP INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Basic weighted average shares outstanding is reconciled to diluted weighted average shares outstanding as follows (in thousands):


	Thirteen Weeks Ended		Twenty-Six Weeks Ended
	July 1, 2023	June 25, 2022	July 1, 2023	June 25, 2022
Basic weighted average shares outstanding	29,972	29,882	29,959	29,866
Dilutive shares	77	32	84	78
Diluted weighted average shares outstanding	30,049	29,914	30,043	29,944

For the thirteen weeks ended July 1, 2023 and June 25, 2022, equity awards representing approximately 1,000 and 77,000 shares, respectively, were excluded from the dilutive earnings per share calculation because the effect would have been anti-dilutive.

For the twenty-six weeks ended July 1, 2023 and June 25, 2022, equity awards representing approximately 3,000 and 38,000 shares, respectively, were excluded from the dilutive earnings per share calculation because the effect would have been anti-dilutive.

(3) Dividends

In connection with the Company’s regular dividend program, in each of the first two quarters of 2023, our Board of Directors declared a quarterly dividend of $0.19 per share of common stock, which, in aggregate, totaled $11.4 million, or $0.38 per share of common stock, and which was paid during the twenty-six weeks ended July 1, 2023.

Subsequent to the second quarter, on August 1, 2023, the Company’s Board of Directors declared a quarterly dividend of $0.22 per share of common stock for stockholders of record as of August 18, 2023. The regular quarterly dividend is to be paid on September 8, 2023, totaling approximately $6.6 million.

(4) Fair Value Measurements

Fair value is the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. Assets and liabilities are classified using a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value as follows:

Level 1 — Unadjusted quoted prices for identical instruments traded in active markets.

Level 2 — Observable market-based inputs or unobservable inputs corroborated by market data.

Level 3 — Unobservable inputs reflecting management’s estimates and assumptions.

WINGSTOP INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The carrying values of cash and cash equivalents, accounts receivable, and accounts payable approximate fair value due to their short-term nature. Fair value of debt and the investment in bonds issued by the Company’s United Kingdom master franchisee, Lemon Pepper Holdings Ltd. (“LPH”), are determined on a non-recurring basis, which results are summarized as follows (in thousands):


	Fair Value Hierarchy	July 1, 2023				December 31, 2022
		Carrying Value		Fair Value		Carrying Value		Fair Value
Securitized Financing Facility:
2020-1 Class A-2 Senior Secured Notes (1)	Level 2	$	472,800	$	409,620	$	475,200	$	406,462
2022-1 Class A-2 Senior Secured Notes (1)	Level 2	$	248,125	$	214,628	$	249,375	$	215,709
Investments in bonds of LPH (2)	Level 3	$	3,450	$	4,197	$	3,196	$	3,906

(1) The fair value of the 2020-1 and 2022-1 Class A-2 Senior Secured Notes was estimated using available market information.

(2) The fair value approximates discounted cash flows using current market rates for debt investments with similar maturities and credit risk.

The Company also measures certain non-financial assets (primarily long-lived assets, intangible assets, and goodwill) at fair value on a non-recurring basis in connection with its periodic evaluations of such assets for potential impairment.

(5) Income Taxes

Income tax expense and the effective tax rate were $6.1 million and 27.3%, respectively, for the thirteen weeks ended July 1, 2023, and $3.1 million and 18.7%, respectively, for the thirteen weeks ended June 25, 2022. Income tax expense and the effective tax rate were $11.3 million and 26.2%, respectively, for the twenty-six weeks ended July 1, 2023, and $5.9 million and 21.2%, respectively, for the twenty-six weeks ended June 25, 2022. The main component of the year-over-year increase in effective tax rates was the impact of stock awards forfeited during the thirteen and twenty-six weeks ended June 25, 2022.

(6) Debt Obligations

Long-term debt consisted of the following components (in thousands):


	July 1, 2023		December 31, 2022
2020-1 Class A-2 Senior Secured Notes	$	472,800	$	475,200
2022-1 Class A-2 Senior Secured Notes	248,125		249,375
Debt issuance costs, net of amortization	(9,514)		(10,429)
Total debt	711,411		714,146
Less: current portion of debt	—		(7,300)
Long-term debt, net	$	711,411	$	706,846

The Company’s outstanding debt was issued by Wingstop Funding LLC, a limited-purpose, bankruptcy-remote, wholly-owned indirect subsidiary of Wingstop Inc. and consists of (i) Series 2020-1 2.84% Fixed Rate Senior Secured Notes, Class A-2 (the “2020 Class A-2 Notes”), (ii) Series 2022-1 3.734% Fixed Rate Senior Secured Notes, Class A-2 (the “2022 Class A-2 Notes”), and (iii) a revolving financing facility of Series 2022-1 Variable Funding Senior Notes, Class A-1 (the “2022 Variable Funding Notes,” and together with the 2022 Class A-2 Notes, the “2022 Notes”), which permits borrowings of up to a maximum principal amount of $200 million, subject to certain borrowing conditions, a portion of which may be used to issue letters of credit.

No borrowings were outstanding under the 2022 Variable Funding Notes as of July 1, 2023 and December 31, 2022.

As of July 1, 2023, the Company’s leverage ratio under the 2020 Class A-2 Notes and the 2022 Class A-2 Notes was less than 5.0x. Per the terms of the Company’s debt agreements, principal payments can be suspended at the borrower’s election until the repayment date as long as the Company maintains a leverage ratio of less than 5.0x. Accordingly, the Company elected to suspend payments following the principal payment made in the second quarter of 2023, and the entire outstanding balance of $720.9 million of the 2020 Class A-2 Notes and the 2022 Class A-2 Notes has been classified as long-term debt due after fiscal year 2026.

WINGSTOP INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The 2020 Class A-2 Notes and 2022 Notes were issued in securitization transactions, and are guaranteed by certain limited-purpose, bankruptcy-remote, wholly-owned indirect subsidiaries of the Company and secured by a security interest in substantially all of their assets, including certain domestic and foreign revenue-generating assets, consisting principally of franchise-related agreements, intellectual property, and vendor rebate contracts.

(7) Commitments and Contingencies

The Company is subject to legal proceedings, claims, and liabilities, including claims and actions resulting from employment-related and franchise-related matters, which arise in the ordinary course of business and are generally covered by insurance. In the opinion of management, the amount of ultimate liability with respect to such actions is not likely to have a material adverse impact on the Company’s financial position, results of operations, or cash flows.

(8) Stock-Based Compensation

During the twenty-six weeks ended July 1, 2023, the Company granted 41,885 restricted stock units (“RSUs”) to certain employees. The RSUs granted to certain employees generally vest in equal annual amounts over a three-year period, subsequent to the grant date and had a weighted-average grant-date fair value of $172.73 per unit.

In addition, the Company granted 37,414 performance stock units (“PSUs”) to certain employees during the twenty-six weeks ended July 1, 2023. Of the total PSUs granted, 30,430 PSUs are subject to a service condition and a performance vesting condition based on return on incremental invested capital (“ROI PSUs”). The ROI PSUs are generally eligible to cliff-vest approximately three years from the grant date, and the maximum vesting percentage that could be realized for each of the ROI PSUs is 250% based on the level of performance achieved for the awards. The remaining 6,984 PSUs granted are subject to a service condition and a performance vesting condition based on the number of net new restaurants opened over the performance period (“NNR PSUs”). The NNR PSUs vest in equal annual amounts over a three-year period, and the maximum vesting percentage that could be realized for each of the NNR PSUs is 100% based on the level of performance achieved for the awards. The PSUs had a weighted-average grant-date fair value of $172.22 per unit. Total compensation cost for the PSUs is determined based on the most likely outcome of the performance condition and the number of awards expected to vest based on the outcome.

Total compensation expense related to all share-based awards, net of forfeitures recognized, was $6.9 million and $0.6 million for the twenty-six weeks ended July 1, 2023 and June 25, 2022, respectively, and was included in Selling, general and administrative (“SG&A”) expense in the Consolidated Statements of Comprehensive Income.

(9) Revenue from Contracts with Customers

The following table represents a disaggregation of revenue from contracts with customers for the thirteen and twenty-six weeks ended July 1, 2023 and June 25, 2022 (in thousands):


	Thirteen Weeks Ended				Twenty-Six Weeks Ended
	July 1, 2023		June 25, 2022		July 1, 2023		June 25, 2022
Royalty revenue	$	43,271	$	33,037	$	86,785	$	65,241
Advertising fees and related income	36,596		28,987		74,059		51,526
Franchise fees	1,107		1,004		2,169		1,963

Franchise fee, development fee, and international territory fee payments received by the Company are recorded as deferred revenue on the Consolidated Balance Sheets, which represents a contract liability. Deferred revenue is reduced as fees are recognized in revenue over the term of the franchise license for the respective restaurant. As the term of the franchise license is typically ten years, substantially all of the franchise fee revenue recognized in the thirteen and twenty-six weeks ended July 1, 2023 was included in the deferred revenue balance as of December 31, 2022. Approximately $8.8 million and $7.7 million of deferred revenue as of July 1, 2023 and December 31, 2022, respectively, relates to restaurants that have not yet opened, so the fees are not yet being amortized. The weighted average remaining amortization period for deferred franchise and renewal fees related to open restaurants is 7.1 years. The Company did not have any material contract assets as of July 1, 2023.

WINGSTOP INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

(10) Acquisitions of Company-owned Restaurants

In the second fiscal quarter 2023, the Company acquired two existing restaurants from a franchisee. The combined purchase price was $4.4 million and was funded by cash flow from operations. The following table summarizes the allocations of the purchase price to the estimated fair value of assets acquired and liabilities assumed at the date of the acquisition (in thousands):


	Purchase Price Allocation
Working capital	$	13
Property and equipment	92
Reacquired franchise rights	1,630
Goodwill	2,661


Total purchase price	$	4,396

The excess of the purchase price over the aggregate fair value of assets acquired was allocated to goodwill and is attributable to the benefits expected as a result of the acquisition, including sales and unit growth opportunities. All of the goodwill from the acquisition is expected to be deductible for federal income tax purposes.

Pro-forma financial information of the combined entities is not presented due to the immaterial impact of the financial results of the acquired restaurants on our consolidated financial statements.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of the financial condition and results of operations of Wingstop Inc. (collectively with its direct and indirect subsidiaries on a consolidated basis, “Wingstop,” the “Company,” “we,” “our,” or “us”) should be read in conjunction with the accompanying unaudited consolidated financial statements and related notes in Part I, Item 1 of this Quarterly Report on Form 10-Q (this “Quarterly Report”) and with the audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (our “Annual Report”). The statements in this discussion regarding industry outlook, our expectations regarding our future performance, liquidity and capital resources, and other non-historical statements are forward-looking statements. These forward-looking statements are subject to risks and uncertainties, including, but not limited to, the risks and uncertainties described in “Special Note Regarding Forward-Looking Statements,” below and “Risk Factors” beginning on page 11 of our Annual Report. Our actual results may differ materially from those contained in or implied by any forward-looking statements.

We operate on a 52- or 53-week fiscal year ending on the last Saturday of each calendar year. Our fiscal quarters are comprised of 13 weeks, with the exception of the fourth quarter of a 53-week year, which contains 14 weeks. Fiscal year 2023 contains 52 weeks, while fiscal year 2022 contains 53 weeks.

Overview

Wingstop is the largest fast casual chicken wings-focused restaurant chain in the world, with over 2,000 locations worldwide. We are dedicated to serving the world flavor through an unparalleled guest experience and offering of classic wings, boneless wings, tenders, and chicken sandwiches, always cooked to order and hand-sauced-and-tossed in 11 bold, distinctive flavors.

The Company is primarily a franchisor, with approximately 98% of Wingstop’s restaurants currently owned and operated by independent franchisees. We believe our asset-light, highly-franchised business model generates strong operating margins and requires low capital expenditures, creating stockholder value through strong and consistent free cash flow and capital-efficient growth.

Change in Presentation

Beginning in the first quarter of 2023, gains and losses on disposal of assets are no longer presented as an adjustment to EBITDA in our calculation of Adjusted EBITDA. EBITDA and Adjusted EBITDA are both non-GAAP measures and are defined below. Prior period gains and losses on disposal of assets have been excluded from EBITDA adjustments to conform to the current presentation. This reclassification had no impact on operating income, balance sheets or statements of cash flows.

Second Quarter of 2023 Highlights

•System-wide sales increased 27.8% over the prior fiscal second quarter to $809.8 million;

•50 net new openings in the fiscal second quarter 2023 for a total of 2,046 worldwide locations;

•Domestic same store sales increased 16.8% over the prior fiscal second quarter;

•Company-owned restaurant same store sales increased 5.7% over the prior fiscal second quarter;

•Digital sales increased to 65.2%;

•Domestic restaurant AUVs exceeded $1.7 million in the current fiscal second quarter;

•Total revenue increased 27.9% to $107.2 million over the prior fiscal second quarter;

•Net income increased 21.6% to $16.2 million, or $0.54 per diluted share, compared to net income of $13.3 million, or $0.44 per diluted share in the prior fiscal second quarter; and

•Adjusted EBITDA, a non-GAAP measure, increased 47.1% to $34.4 million, compared to adjusted EBITDA of $23.3 million in the prior fiscal second quarter.

Year-to-Date Second Quarter of 2023 Highlights

•System-wide sales increased 29.1% to $1.6 billion;

•87 net new openings in the year-to-date second quarter of 2023;

•Domestic same store sales increased 18.4% over the prior fiscal year-to-date period;

•Total revenue increased 34.9% to $215.9 million over the prior fiscal year-to-date period;

•Net income increased 44.9% to $31.9 million, or $1.06 per diluted share, compared to net income of $22.0 million, or $0.73 per diluted share in the prior fiscal year-to-date period;

•Adjusted EBITDA, a non-GAAP measure, increased 53.2% to $68.9 million, compared to adjusted EBITDA of $45.0 million in the prior fiscal year-to-date period.

Key Performance Indicators

Key measures that we use in evaluating our restaurants and assessing our business include the following:

Number of restaurants. Management reviews the number of new restaurants, the number of closed restaurants, and the number of acquisitions and divestitures of restaurants to assess net new restaurant growth.


	Thirteen Weeks Ended		Twenty-Six Weeks Ended
	July 1, 2023	June 25, 2022	July 1, 2023	June 25, 2022
Domestic Franchised Activity:
Beginning of period	1,710	1,551	1,678	1,498
Openings	42	49	74	105
Closures	(1)	—	(1)	(3)
Acquired by Company	(2)	—	(2)	—

Restaurants end of period	1,749	1,600	1,749	1,600

Domestic Company-Owned Activity:
Beginning of period	43	37	43	36
Openings	—	2	—	3
Closures	—	—	—	—
Acquired by Company	2	—	2	—

Restaurants end of period	45	39	45	39

Total Domestic Restaurants	1,794	1,639	1,794	1,639

International Franchised Activity:
Beginning of period	243	203	238	197
Openings	9	16	17	23
Closures	—	—	(3)	(1)

Restaurants end of period	252	219	252	219

Total System-wide Restaurants	2,046	1,858	2,046	1,858

System-wide sales. System-wide sales represents net sales for all of our company-owned and franchised restaurants, as reported by franchisees. 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.

Domestic average unit volume (“AUV”). Domestic AUV consists of the average annual sales of all restaurants that have been open for a trailing 52-week period or longer. This measure is calculated by dividing sales during the applicable period for all restaurants being measured by the number of restaurants being measured. Domestic AUV includes revenue from both company-owned and franchised restaurants. Domestic AUV allows management to assess our domestic company-owned and franchised restaurant economics. Changes in domestic AUV growth are primarily driven by increases in same store sales and are also influenced by opening new restaurants.

Domestic same store sales. Domestic same store sales reflects the change in year-over-year sales for the same store restaurant base. We define the same store restaurant base to include those restaurants open for at least 52 full weeks. This measure highlights the performance of existing restaurants, while excluding the impact of new restaurant openings and permanent closures. We review same store sales for domestic company-owned restaurants as well as system-wide domestic restaurants. Domestic 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 (benefit), and depreciation and amortization. We define Adjusted EBITDA as net income before interest expense, net, income tax expense (benefit), and depreciation and amortization, with further adjustments for losses on debt extinguishment and financing transactions, transaction costs, costs and fees associated with investments in our strategic initiatives, 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 financing transactions, transaction costs, costs and fees associated with investments in our strategic initiatives, and related tax adjustments that management believes are not indicative of the Company’s core operating results or business outlook over the long term. 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 for further discussion of Adjusted net income and Adjusted earnings per diluted share as non-GAAP measures and how we utilize them, see footnote 3 below.

The following table sets forth our key performance indicators for the thirteen and twenty-six weeks ended July 1, 2023 and June 25, 2022 (in thousands, except unit data):


	Thirteen Weeks Ended						Twenty-Six Weeks Ended
	July 1, 2023			June 25, 2022			July 1, 2023			June 25, 2022
Number of system-wide restaurants open at end of period	2,046			1,858			2,046			1,858
System-wide sales (1)	$	809,750		$	633,620		$	1,631,359		$	1,263,649
Domestic restaurant AUV	$	1,704		$	1,581		$	1,704		$	1,581
Domestic same store sales growth	16.8		%	(3.3)		%	18.4		%	(1.1)		%
Company-owned domestic same store sales growth	5.7		%	(4.9)		%	7.9		%	(1.5)		%
Total revenue	$	107,173		$	83,777		$	215,894		$	159,982
Net income	$	16,181		$	13,307		$	31,850		$	21,983
Adjusted EBITDA (2)	$	34,350		$	23,344		$	68,933		$	44,989
Adjusted net income (3)	$	17,005		$	13,345		$	34,776		$	23,160

(1) The percentage of system-wide sales attributable to company-owned restaurants was 2.8% and 3.0% for the thirteen and twenty-six weeks ended July 1, 2023 and June 25, 2022, 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, 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 flow 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.

Management uses EBITDA and Adjusted EBITDA:

•as a measurement of operating performance because we believe they assist us in comparing the operating performance of our restaurants on a consistent basis, as they remove the impact of items not directly resulting from our core operations;

•for planning purposes, including the preparation of our internal annual operating budget and financial projections;

•to evaluate the performance and effectiveness of our operational strategies;

•to evaluate our capacity to fund capital expenditures and expand our business; and

•to calculate incentive compensation payments for our employees, including assessing performance under our annual incentive compensation plan.

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. 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 as performance measures and supplementally. As noted in the table below, Adjusted EBITDA includes adjustments for losses on debt extinguishment and financing transactions, transaction costs, costs and fees associated with investments in our strategic initiatives, and stock-based compensation expense. We believe these adjustments are appropriate because the amounts recognized can vary significantly from period to period, do not directly relate to the ongoing operations of our restaurants, and complicate comparisons of our internal operating results and operating results of other restaurant companies over time. Each of the normal recurring adjustments and other adjustments described in this paragraph and in the reconciliation table below help management measure our core operating performance over time by removing items that are not related to day-to-day operations.

The following table reconciles net income to EBITDA and Adjusted EBITDA for the thirteen and twenty-six weeks ended July 1, 2023 and June 25, 2022 (in thousands):


	Thirteen Weeks Ended				Twenty-Six Weeks Ended
	July 1, 2023		June 25, 2022		July 1, 2023		June 25, 2022
Net income	$	16,181	$	13,307	$	31,850	$	21,983
Interest expense, net	4,244		5,986		8,817		10,178
Income tax expense	6,077		3,055		11,319		5,915
Depreciation and amortization	3,218		2,547		6,207		4,774
EBITDA	$	29,720	$	24,895	$	58,193	$	42,850
Additional adjustments:
Loss on debt extinguishment and financing transaction costs (a)	—		—		—		1,124

Consulting fees (b)	1,084		50		3,850		425
Stock-based compensation expense (c)	3,546		(1,601)		6,890		590
Adjusted EBITDA	$	34,350	$	23,344	$	68,933	$

SEC Form 10-Q filed by Wingstop Inc.