0001636222-20-000127.txt : 20200729 0001636222-20-000127.hdr.sgml : 20200729 20200729161303 ACCESSION NUMBER: 0001636222-20-000127 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 54 CONFORMED PERIOD OF REPORT: 20200627 FILED AS OF DATE: 20200729 DATE AS OF CHANGE: 20200729 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Wingstop Inc. CENTRAL INDEX KEY: 0001636222 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 000000000 STATE OF INCORPORATION: DE FISCAL YEAR END: 1226 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-37425 FILM NUMBER: 201057432 BUSINESS ADDRESS: STREET 1: 5501 LBJ FREEWAY STREET 2: 5TH FLOOR CITY: DALLAS STATE: TX ZIP: 75240 BUSINESS PHONE: 972-331-8484 MAIL ADDRESS: STREET 1: 5501 LBJ FREEWAY STREET 2: 5TH FLOOR CITY: DALLAS STATE: TX ZIP: 75240 FORMER COMPANY: FORMER CONFORMED NAME: Wingstop, Inc. DATE OF NAME CHANGE: 20150323 FORMER COMPANY: FORMER CONFORMED NAME: Wing Stop Holdings Corp DATE OF NAME CHANGE: 20150311 10-Q 1 wing-20200627.htm 10-Q wing-20200627
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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 June 27, 2020
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)

Delaware47-3494862
(State or other jurisdiction of incorporation or organization)(IRS Employer Identification No.)
5501 LBJ Freeway
5th Floor
Dallas
Texas75240
(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 classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.01 per shareWINGNASDAQ 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 filerxAccelerated 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 July 28, 2020 there were 29,598,958 shares of common stock outstanding.




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


3


PART I.  FINANCIAL INFORMATION
Item 1.  Financial Statements
WINGSTOP INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(amounts in thousands, except share and par value amounts)
 June 27,
2020
 December 28,
2019
 (Unaudited) 
Assets 
Current assets 
Cash and cash equivalents$45,766  $12,849  
Restricted cash4,132  4,790  
Accounts receivable, net5,580  5,175  
Prepaid expenses and other current assets4,118  2,449  
Advertising fund assets, restricted7,860  4,927  
Total current assets67,456  30,190  
Property and equipment, net27,220  27,842  
Goodwill50,160  50,188  
Trademarks32,700  32,700  
Customer relationships, net12,255  12,910  
Other non-current assets11,323  12,283  
Total assets$201,114  $166,113  
Liabilities and stockholders' deficit
Current liabilities
Accounts payable$2,890  $3,348  
Other current liabilities20,829  21,454  
Current portion of debt16,000  3,200  
Advertising fund liabilities7,860  4,927  
Total current liabilities47,579  32,929  
Long-term debt, net310,846  307,669  
Deferred revenues, net of current22,280  22,343  
Deferred income tax liabilities, net6,043  4,485  
Other non-current liabilities7,038  8,115  
Total liabilities393,786  375,541  
Commitments and contingencies (see Note 7)
Stockholders' deficit
Common stock, $0.01 par value; 100,000,000 shares authorized; 29,596,347 and 29,457,228 shares issued and outstanding as of June 27, 2020 and December 28, 2019, respectively
296  295  
Additional paid-in-capital43  552  
Accumulated deficit(193,011) (210,275) 
Total stockholders' deficit(192,672) (209,428) 
Total liabilities and stockholders' deficit$201,114  $166,113  

See accompanying notes to consolidated financial statements.
4


WINGSTOP INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(amounts in thousands, except per share data)
(Unaudited)
 Thirteen Weeks EndedTwenty-Six Weeks Ended
 June 27,
2020
June 29,
2019
June 27,
2020
June 29,
2019
Revenue:   
Royalty revenue, franchise fees and other$27,858  $21,187  $52,057  $42,515  
Advertising fees and related income19,923  13,487  35,937  26,697  
Company-owned restaurant sales18,324  13,888  33,547  27,403  
Total revenue66,105  48,562  121,541  96,615  
Costs and expenses:   
Cost of sales (1)
13,387  10,573  24,563  20,303  
Advertising expenses18,589  12,973  33,513  25,707  
Selling, general and administrative13,194  13,394  27,504  25,936  
Depreciation and amortization1,398  1,335  2,953  2,611  
Total costs and expenses46,568  38,275  88,533  74,557  
Operating income19,537  10,287  33,008  22,058  
Interest expense, net4,214  4,299  8,359  8,709  
Income before income tax expense15,323  5,988  24,649  13,349  
Income tax expense3,784  1,070  5,014  1,825  
Net income$11,539  $4,918  $19,635  $11,524  
Earnings per share
Basic$0.39  $0.17  $0.66  $0.39  
Diluted$0.39  $0.17  $0.66  $0.39  
Weighted average shares outstanding
Basic29,588  29,418  29,538  29,377  
Diluted29,793  29,667  29,751  29,650  
Dividends per share$0.11  $0.09  $0.22  $0.18  

(1) Cost of sales includes all operating expenses of company-owned restaurants, including advertising expenses, and excludes depreciation and amortization, which are presented separately.
See accompanying notes to consolidated financial statements.


5


WINGSTOP INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Deficit
For the Twenty-Six Weeks Ended June 29, 2019 and June 27, 2020
(amounts in thousands, except share data)
(Unaudited)
Common Stock
SharesAmount
Additional
Paid-In Capital
Accumulated DeficitTotal Stockholders’ Deficit
Balance at December 29, 201829,296,939  $293  $1,036  $(226,159) $(224,830) 
Adjustment for ASC 842 adoption—  —  —  154  154  
Net income—  —  —  6,606  6,606  
Shares issued under stock plans114,936  1  157  —  158  
Tax payments for restricted stock upon vesting(12,469) —  —  (833) (833) 
Stock-based compensation expense—  —  838  —  838  
Dividends paid—  —  (1,825) (746) (2,571) 
Balance at March 30, 201929,399,406  294  206  (220,978) (220,478) 
Net income—  —  —  4,918  4,918  
Shares issued under stock plans45,778  1  147  —  148  
Tax payments for restricted stock upon vesting(2,456) —  —  (226) (226) 
Stock-based compensation expense—  —  1,928  —  1,928  
Dividends paid—  —  (1,389) (1,269) (2,658) 
Balance at June 29, 201929,442,728  $295  $892  $(217,555) $(216,368) 


Common Stock
SharesAmountAdditional
Paid-In Capital
Accumulated DeficitTotal Stockholders’ Deficit
Balance at December 28, 201929,457,228  $295  $552  $(210,275) $(209,428) 
Net income—  —  —  8,096  8,096  
Shares issued under stock plans128,585  1  504  —  505  
Tax payments for restricted stock upon vesting(2,419) —  —  (229) (229) 
Stock-based compensation expense—  —  1,331  —  1,331  
Dividends paid—  —  (2,168) (1,055) (3,223) 
Balance at March 28, 202029,583,394  296  219  (203,463) (202,948) 
Net income—  —  —  11,539  11,539  
Shares issued under stock plans13,057  —  57  —  57  
Tax payments for restricted stock upon vesting(104) —  —  (12) (12) 
Stock-based compensation expense—  —  1,969  —  1,969  
Dividends paid—  —  (2,202) (1,075) (3,277) 
Balance at June 27, 202029,596,347  $296  $43  $(193,011) $(192,672) 

See accompanying notes to consolidated financial statements.

6


WINGSTOP INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(amounts in thousands)
(Unaudited)
 Twenty-Six Weeks Ended
 June 27,
2020
June 29,
2019
Operating activities  
Net income$19,635  $11,524  
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization2,953  2,611  
Deferred income taxes1,720  (687) 
Stock-based compensation expense3,300  2,766  
Gain on disposal of assets(2,016)   
Amortization of debt issuance costs815  775  
Changes in operating assets and liabilities:
Accounts receivable(405) 123  
Prepaid expenses and other assets(652) (678) 
Advertising fund assets and liabilities, net2,004  (2,664) 
Accounts payable and other current liabilities(675) (3,503) 
Deferred revenue10  (258) 
Other non-current liabilities(1,077) 482  
Cash provided by operating activities25,612  10,491  
Investing activities
Purchases of property and equipment(2,670) (1,442) 
Proceeds from sales of assets2,300    
Cash used in investing activities(370) (1,442) 
Financing activities
Proceeds from exercise of stock options562  306  
Borrowings of long-term debt16,000    
Repayments of long-term debt(800) (800) 
Tax payments for restricted stock upon vesting(241) (1,059) 
Dividends paid(6,500) (5,229) 
Cash provided by (used in) financing activities9,021  (6,782) 
Net increase in cash, cash equivalents, and restricted cash34,263  2,267  
Cash, cash equivalents, and restricted cash at beginning of period21,175  20,940  
Cash, cash equivalents, and restricted cash at end of period$55,438  $23,207  

See accompanying notes to consolidated financial statements.


7

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

(1) Basis of Presentation and Update to Significant Accounting Policies
Basis of Presentation
Wingstop Inc., together with its consolidated subsidiaries (collectively, “Wingstop” or the “Company”), is in the business of franchising and operating Wingstop restaurants. As of June 27, 2020, the Company had 1,244 domestic franchised restaurants, and 162 international franchised restaurants. As of June 27, 2020, the Company owned and operated 30 restaurants.
The accompanying unaudited consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. Consequently, financial information and disclosures normally included in financial statements prepared annually in accordance with accounting principles generally accepted in the United States have been condensed or omitted. Balance sheet amounts are as of June 27, 2020 and December 28, 2019, and operating results are for the thirteen and twenty-six weeks ended June 27, 2020 and June 29, 2019.
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 28, 2019.
The Company uses a 52/53-week fiscal year that ends on the last Saturday of the calendar year. Fiscal years 2020 and 2019 each have 52 weeks.
Cash, Cash Equivalents, and Restricted Cash
Cash, cash equivalents, and restricted cash within the Consolidated Balance Sheets and the Consolidated Statements of Cash Flows as of June 27, 2020 and December 28, 2019 were as follows (in thousands):
June 27, 2020December 28, 2019
Cash and cash equivalents$45,766  $12,849  
Restricted cash4,132  4,790  
Restricted cash, included in Advertising fund assets, restricted5,540  3,536  
Total cash, cash equivalents, and restricted cash$55,438  $21,175  
Segment Reporting
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. Due to changes in how the Company’s chief operating decision maker assesses the Company’s performance and allocates resources, the Company reevaluated its operating segments and has determined it has one operating segment and one reporting segment.
Recently Issued Accounting Pronouncements
In December 2019, the Financial Accounting Standards Board issued Accounting Standard Update No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes ("ASU 2019-12"). ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, including applicable interim periods. The Company is currently assessing the impact of adopting this standard but does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.
8

WINGSTOP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
(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.
Basic weighted average shares outstanding is reconciled to diluted weighted average shares outstanding as follows (in thousands):
Thirteen Weeks EndedTwenty-Six Weeks Ended
June 27,
2020
June 29,
2019
June 27,
2020
June 29,
2019
Basic weighted average shares outstanding29,588  29,418  29,538  29,377  
Dilutive shares205  249  213  273  
Diluted weighted average shares outstanding29,793  29,667  29,751  29,650  
For the thirteen weeks ended June 27, 2020 and June 29, 2019, equity awards representing approximately 1,000 and 6,000 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 June 27, 2020 and June 29, 2019, equity awards representing approximately 1,000 and 18,000 shares, respectively, were excluded from the dilutive earnings per share calculation because the effect would have been anti-dilutive.
(3) Dividends
In each of the first two quarters of 2020, the Company’s Board of Directors declared a quarterly dividend of $0.11 per share of common stock, which, in the aggregate, totaled $6.5 million, or $0.22 per share of common stock, and which was paid during the twenty-six weeks ended June 27, 2020.

Subsequent to the second quarter, on July 28, 2020, the Company’s Board of Directors declared a quarterly dividend of $0.14 per share of common stock for stockholders of record as of August 28, 2020, to be paid on September 11, 2020, totaling approximately $4.1 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
 June 27, 2020 December 28, 2019
  
Carrying
Value
 Fair Value 
Carrying
Value
Fair Value
Securitized Financing Facility:
2018-1 Class A-2 Senior Secured Notes (1)
Level 2$316,800  $314,395  $317,600  $331,247  
2018-1 Class A-1 Variable Funding Senior Notes (2)
Level 2$16,000  $16,000  $  $  
(1) The fair value of the 2018-1 Class A-2 Senior Secured Notes was estimated using available market information.
9

WINGSTOP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
(2) The fair value of the 2018-1 Class A-1 Variable Funding Senior Notes was estimated based on the borrowing rates currently available for variable rate loans obtained from third-party lending institutions and approximated the book value of such 2018-1 Class A-1 Variable Funding Senior Notes.
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 $3.8 million and 24.7%, respectively, for the thirteen weeks ended June 27, 2020, and $1.1 million and 17.9%, respectively, for the thirteen weeks ended June 29, 2019. Income tax expense and the effective tax rate were $5.0 million and 20.3%, respectively, for the twenty-six weeks ended June 27, 2020, and $1.8 million and 13.7%, respectively, for the twenty-six weeks ended June 29, 2019.
Income tax expense for the thirteen and twenty-six weeks ended June 27, 2020 included $0.2 million and $1.5 million, respectively, in tax benefits resulting from the recognition of excess tax benefits from stock-based compensation, as compared to $0.6 million and $1.8 million in tax benefits for the thirteen and twenty-six weeks ended June 29, 2019, respectively.
(6) Debt Obligations
Long-term debt consists of the following components (in thousands):
June 27, 2020December 28, 2019
2018-1 Class A-2 Senior Secured Notes$316,800  $317,600  
2018-1 Class A-1 Variable Funding Senior Notes16,000    
Debt issuance costs, net of amortization(5,954) (6,731) 
Total debt326,846  310,869  
Less: current portion of debt(16,000) (3,200) 
Long-term debt, net$310,846  $307,669  

The Company's outstanding debt consists of (i) Series 2018-1 4.97% Fixed Rate Senior Secured Notes, Class A-2 (the “Class A-2 Notes”) issued by Wingstop Funding LLC (the “Issuer”), a limited-purpose, bankruptcy-remote, wholly owned indirect subsidiary of Wingstop Inc. and (ii) Series 2018-1 Variable Funding Senior Notes, Class A-1, which permit borrowings of up to a maximum principal amount of $20 million, which may be used to borrow amounts on a revolving basis and to issue letters of credit (the “Variable Funding Notes,” and together with the Class A-2 Notes, the “Notes”).
As of June 27, 2020, we had $316.8 million of Class A-2 Notes outstanding and $16.0 million of Variable Funding Notes outstanding. The Variable Funding Notes were issued in the first quarter of 2020 as a precautionary measure to improve the Company's cash position. The Variable Funding Notes had a weighted average interest rate of 2.72% during the twenty-six weeks ended June 27, 2020 and are classified as current debt. There were no borrowings outstanding under the Variable Funding Notes as of December 28, 2019. Further, as of June 27, 2020 and December 28, 2019, $4.0 million of letters of credit were outstanding against the Variable Funding Notes, which relate primarily to interest reserves required under the base indenture and related supplemental indenture. There were no amounts drawn down on the letters of credit as of June 27, 2020 or December 28, 2019.
During the first fiscal quarter of 2020, the Company had a leverage ratio under the Class A-2 Notes of less than 5.0x. Per the terms of the Company’s debt agreements, principal payments on the Class A-2 Notes are not due until the repayment date as long as the Company maintains a leverage ratio of less than 5.0x. As such, the Company ceased making principal payments beginning in the second quarter of 2020. Accordingly, the entire outstanding balance of the Class A-2 Notes has been classified as long-term debt.
The Class A-2 Notes and the Variable Funding Notes were each issued in a securitization transaction pursuant to which certain of the Company’s domestic and foreign revenue-generating assets, consisting principally of franchise-related agreements and intellectual property, were contributed or otherwise transferred to the Issuer and certain other limited-purpose, bankruptcy-remote, wholly owned indirect subsidiaries of the Company that act as guarantors of the Notes and that have pledged substantially all of their assets.
10

WINGSTOP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
(7) Commitments and Contingencies
The Company is subject to legal proceedings, claims, and liabilities, such as employment-related claims and premises-liability cases, which arise in the ordinary course of business and are generally covered by insurance. In the opinion of management, the amount of ultimate liability with respect to such actions is not likely to have a material adverse impact on the Company’s financial position, results of operations, or cash flows.
(8) Stock-Based Compensation
Stock-based compensation is measured at the date of grant, based on the calculated fair value of the award, and is recognized as expense over the requisite employee service period (generally the vesting period of the award). The Company recognized $3.3 million in stock-based compensation expense for the twenty-six weeks ended June 27, 2020, with a corresponding increase to additional paid-in-capital. Stock-based compensation expense is included in selling, general and administrative expense in the Consolidated Statements of Operations.
Stock Options
The following table summarizes stock option activity (in thousands, except term and per share data):
 Stock OptionsWeighted Average Exercise Price Per ShareAggregate Intrinsic ValueWeighted Average Remaining Term
Outstanding - December 28, 2019134  $5.72  $10,801  3.8
Options granted67  84.41  
Options exercised(46) 12.12  
Outstanding - June 27, 2020155  $38.02  $15,086  5.6
The total grant-date fair value of stock options vested during the twenty-six weeks ended June 27, 2020 was $0.2 million. The total intrinsic value of stock options exercised during the twenty-six weeks ended June 27, 2020 was $2.8 million. As of June 27, 2020, total unrecognized compensation expense related to unvested stock options was $1.4 million, which is expected to be recognized over a weighted-average period of 2.7 years. During the twenty-six weeks ended June 27, 2020, there was a modification to certain awards resulting in additional compensation expense of $0.4 million.
Restricted Stock Units and Performance Stock Units
The following table summarizes activity related to restricted stock units (“RSUs”) and performance stock units (“PSUs”) (in thousands, except per share data):
Restricted Stock UnitsWeighted Average Grant Date Fair Value Per SharePerformance Stock UnitsWeighted Average Grant Date Fair Value
Outstanding - December 28, 201982  $52.73  169  $55.92  
Units granted24  87.72  43  84.37  
Units vested(38) 44.57  (52) 41.54  
Units canceled(11) 63.89  (8) 66.04  
Outstanding - June 27, 202057  $70.82  152  $68.49  
The fair value of the Company’s RSUs and PSUs is based on the closing market price of the stock on the date of grant. The RSUs granted during the twenty-six weeks ended June 27, 2020 vest over a three-year service period. As of June 27, 2020, total unrecognized compensation expense related to unvested RSUs was $3.4 million, which is expected to be recognized over a weighted-average period of 1.9 years.
The Company granted 40,529 PSUs during the twenty-six weeks ended June 27, 2020 that are based on a service condition and a performance vesting condition based on 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 the 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 $157.96 per unit based on the
11

WINGSTOP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
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. The compensation expense related to the PSUs is recognized over the vesting period when the achievement of the performance conditions becomes probable. The total compensation cost for the PSUs is determined based on the most likely outcome of the performance condition and the number of awards expected to vest. As of June 27, 2020, total unrecognized compensation expense related to unvested PSUs was $5.8 million.
(9) Company-owned Restaurant Transactions
During the Company’s fiscal quarter ended June 27, 2020, the Company sold two company-owned restaurants in the Houston market to an existing franchisee for proceeds of $2.3 million. In connection with the sale of the restaurants, the Company recorded a $2.0 million pre-tax gain on the sale of the related assets and liabilities, which was net of a $28,000 reduction in goodwill. The net gain on these restaurants was recorded in Selling, general and administrative expense on our Consolidated Statements of Operations.
Subsequent to the end of the Company’s fiscal quarter ended June 27, 2020, the Company completed the sale of five company-owned restaurants in the Kansas City market to an existing franchisee for proceeds of $2.5 million. The total assets associated with these restaurants held for sale totaled $1.9 million and were included in Prepaid expenses and other current assets on the Consolidated Balance Sheet as of June 27, 2020.
(10) 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 June 27, 2020 and June 29, 2019 (in thousands):
Thirteen Weeks EndedTwenty-Six Weeks Ended
June 27, 2020June 29, 2019June 27, 2020June 29, 2019
Royalty revenue$25,447  $18,437  $46,755  $36,344  
Advertising fees and related income19,923  13,487  35,937  26,697  
Franchise fees881  939  1,763  2,521  

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 June 27, 2020 was included in the deferred revenue balance as of December 28, 2019. Approximately $8.3 million and $8.3 million of deferred revenue as of June 27, 2020 and December 28, 2019, 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 7.2 years. The Company does not have any material contract assets as of June 27, 2020.
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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 28, 2019 (our “Annual Report”). The statements in this discussion regarding industry outlook, our expectations regarding our future performance, liquidity, and capital resources, and other non-historical statements are forward-looking statements. These forward-looking statements are subject to risks and uncertainties, including, but not limited to, the risks and uncertainties described in “Special Note Regarding Forward-Looking Statements,” below and “Risk Factors” on page 10 of our Annual Report and in Part II, Item 1A of this Quarterly Report. Our actual results may differ materially from those contained in or implied by any forward-looking statements.
We operate on a 52 or 53 week fiscal year ending on the last Saturday of each calendar year. Our fiscal quarters are comprised of 13 weeks, with the exception of the fourth quarter of a 53 week year, which contains 14 weeks. Fiscal years 2020 and 2019 each contain 52 weeks.
Overview
Wingstop is the largest fast casual chicken wings-focused restaurant chain in the world, with over 1,400 locations worldwide. We are dedicated to serving the world flavor through an unparalleled guest experience and offering of classic wings, boneless wings and tenders, 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.
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. Due to changes in how the Company’s chief operating decision maker assesses the Company’s performance and allocates resources, the Company reevaluated its operating segments and has determined it has one operating segment and one reporting segment.
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 has also 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 markets also closed their dining rooms as a result of the outbreak. As of the end of the second quarter, approximately eight of our international restaurants and six domestic restaurants were temporarily closed. While we cannot predict the extent to which COVID-19 will impact our business or the global economy, we believe our business is well-positioned for the transition to largely off-premise dining that has resulted from the outbreak. Prior to the COVID-19 outbreak, carry-out and delivery represented approximately 80% of our domestic sales mix and our digital sales mix was just over 40%. As a result of the required changes to consumer behavior to largely off-premise dining, as well as promotional activities associated with delivery, we have seen an increase in domestic same store sales growth through the end of the second quarter. 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. We did not experience difficulties with our supply chain as a result of COVID-19 during the first or second quarter of 2020; however, there can be no assurances that we will not experience supply chain challenges in the future. Lastly, to further secure our liquidity position and provide financial flexibility in light of uncertain market conditions, we borrowed $16 million under our Variable Funding Notes (as defined below) in the first quarter of 2020, providing the Company with an unrestricted cash balance of approximately $45.8 million as of June 27, 2020. See "Liquidity and Capital Resources" below for further details.
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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 EndedTwenty-Six Weeks Ended
June 27,
2020
June 29,
2019
June 27,
2020
June 29,
2019
Domestic Franchised Activity:
Beginning of period1,221  1,112  1,200  1,095  
Openings23  29  45  49  
Closures(2) (2) (3) (5) 
Re-franchised by Company —   —  
Restaurants end of period1,244  1,139  1,244  1,139  
Domestic Company-Owned Activity:
Beginning of period32  29  31  29  
Openings—  —   —  
Closures—  —  —  —  
Re-franchised to franchisees(2) —  (2) —  
Restaurants end of period30  29  30  29  
Total Domestic Restaurants1,274  1,168  1,274  1,168  
International Franchised Activity:
Beginning of period160  132  154  128  
Openings   11  
Closures—  (2) —  (4) 
Restaurants end of period162  135  162  135  
Total System-wide Restaurants1,436  1,303  1,436  1,303  
System-wide sales. System-wide sales represents net sales for all of our company-owned and franchised restaurants, with franchised restaurant sales reported by franchisees. While we do not record franchised restaurant sales as revenue, our royalty revenue is calculated based on a percentage of franchised restaurant sales, which generally ranges from 5.0% to 6.0% of gross sales, net of discounts. This measure allows management to better assess changes in our royalty revenue, our overall store performance, the health of our brand, and the strength of our market position relative to competitors. Our system-wide sales growth is driven by new restaurant openings as well as increases in same store sales.
Average unit volume (“AUV”). AUV consists of the average annual sales of all restaurants that have been open for a trailing 52-week period or longer. This measure is calculated by dividing sales during the applicable period for all restaurants being measured by the number of restaurants being measured. Domestic AUV includes revenue from both company-owned and franchised restaurants. AUV allows management to assess our company-owned and franchised restaurant economics. Changes in AUV are primarily driven by increases in same store sales and are also influenced by opening new restaurants.
Same store sales. Same store sales reflects the change in year-over-year sales for the same store base. We define the same store base to include those restaurants open for at least 52 full weeks. This measure highlights the performance of existing restaurants, while excluding the impact of new restaurant openings and permanent closures. We review same store sales for company-owned restaurants as well as franchised restaurants. Same store sales are driven by changes in transactions and average transaction size. Transaction size changes are driven by price changes or product mix shifts from either a change in the number of items purchased or shifts into higher or lower priced categories of items.
 
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EBITDA and Adjusted EBITDA. We define EBITDA as net income before interest expense, net, income tax expense, and depreciation and amortization. We define Adjusted EBITDA as EBITDA further adjusted for transaction costs, costs and fees associated with investments in our strategic initiatives, gains and losses on the disposal of assets, and stock-based compensation expense. EBITDA and Adjusted EBITDA may not be comparable to other similarly titled measures of other companies due to differences in methods of calculation. For a reconciliation of net income to EBITDA and Adjusted EBITDA and for further discussion of EBITDA and Adjusted EBITDA as non-GAAP measures and how we utilize them, see footnote 2 below.
The following table sets forth our key performance indicators as well as our total revenue and net income, for the thirteen and twenty-six weeks ended June 27, 2020 and June 29, 2019 (dollars in thousands):
Thirteen Weeks EndedTwenty-Six Weeks Ended
June 27, 2020June 29, 2019June 27, 2020June 29, 2019
Number of system-wide restaurants open at end of period1,436  1,303  1,436  1,303  
System-wide sales (1)
$509,045  $371,505  $938,952  $733,865  
Domestic restaurant AUV$1,366  $1,189  $1,366  $1,189  
Domestic same store sales growth31.9 %12.8 %21.0 %9.9 %
Company-owned domestic same store sales growth24.7 %13.8 %15.7 %9.1 %
Total revenue$66,105  $48,562  $121,541  $96,615  
Net income$11,539  $4,918  $19,635  $11,524  
Adjusted EBITDA (2)
$20,888  $13,549  $37,245  $27,435  

(1) The percentage of system-wide sales attributable to company-owned restaurants was 3.3% and 3.7% for the thirteen weeks ended June 27, 2020 and June 29, 2019, respectively, and was 3.2% and 3.7% for the twenty-six weeks ended June 27, 2020 and June 29, 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.
Management uses EBITDA and Adjusted EBITDA:
as a measurement of operating performance because they assist us in comparing the operating performance of our restaurants on a consistent basis, as they remove the impact of items not directly resulting from our core operations;
for planning purposes, including the preparation of our internal annual operating budget and financial projections;
to evaluate the performance and effectiveness of our operational strategies;
to evaluate our capacity to fund capital expenditures and expand our business; and
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
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indebtedness use EBITDA (with additional adjustments) to measure our compliance with covenants, such as our fixed charge coverage, lease adjusted leverage, and debt incurrence. EBITDA and Adjusted EBITDA have limitations as analytical tools and should not be considered in isolation, or as an alternative to, or a substitute for net income or other financial statement data presented in our consolidated financial statements as indicators of financial performance. Some of the limitations are:
such measures do not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;
such measures do not reflect changes in, or cash requirements for, our working capital needs;
such measures do not reflect the interest expense or the cash requirements necessary to service interest or principal payments on our debt;
such measures do not reflect our tax expense or the cash requirements to pay our taxes;
although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future and such measures do not reflect any cash requirements for such replacements; and
other companies in our industry may calculate such measures differently than we do, limiting their usefulness as comparative measures.
Due to these limitations, EBITDA and Adjusted EBITDA should not be considered as measures of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and using these non-GAAP measures only supplementally. As noted in the table below, Adjusted EBITDA includes adjustments for transaction costs, 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 this item will occur in future periods. However, we believe these adjustments are appropriate because the amounts recognized can vary significantly from period to period, do not directly relate to the ongoing operations of our restaurants, and complicate comparisons of our internal operating results and operating results of other restaurant companies over time. Each of the normal recurring adjustments and other adjustments described in this paragraph and in the reconciliation table below help management measure our core operating performance over time by removing items that are not related to day-to-day operations.
The following table reconciles net income to EBITDA and Adjusted EBITDA for the thirteen and twenty-six weeks ended June 27, 2020 and June 29, 2019 (in thousands):
Thirteen Weeks EndedTwenty-Six Weeks Ended
June 27,
2020
June 29,
2019
June 27,
2020
June 29,
2019
Net income$11,539  $4,918  $19,635  $11,524  
Interest expense, net4,214  4,299  8,359  8,709  
Income tax expense3,784  1,070  5,014  1,825  
Depreciation and amortization1,398  1,335  2,953  2,611  
EBITDA$20,935  $11,622  $35,961  $24,669  
Additional adjustments:
Gain on disposal of assets (a)
(2,016) —  (2,016) —  
Stock-based compensation expense (b)
1,969  1,927  3,300  2,766  
Adjusted EBITDA$20,888  $13,549  $37,245  $27,435  

(a) Represents a gain resulting from the re-franchise of company-owned restaurants to a franchisee which is included in Selling, general and administrative expense in the Consolidated Statements of Operations.
(b) Includes non-cash, stock-based compensation.
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Results of Operations
Thirteen Weeks Ended June 27, 2020 compared to Thirteen Weeks Ended June 29, 2019
The following table sets forth our results of operations for the thirteen weeks ended June 27, 2020 and June 29, 2019 (dollars in thousands):
Thirteen Weeks EndedIncrease / (Decrease)
June 27,
2020
June 29,
2019
$%
Revenue:
Royalty revenue, franchise fees and other$27,858  $21,187  $6,671  31.5 %
Advertising fees and related income19,923  13,487  6,436  47.7 %
Company-owned restaurant sales18,324  13,888  4,436  31.9 %
Total revenue66,105  48,562  17,543  36.1 %
Costs and expenses:
Cost of sales (1)
13,387  10,573  2,814  26.6 %
Advertising expenses18,589  12,973  5,616  43.3 %
Selling, general and administrative13,194  13,394  (200) (1.5)%
Depreciation and amortization1,398  1,335  63  4.7 %
Total costs and expenses46,568  38,275  8,293  21.7 %
Operating income19,537  10,287  9,250  89.9