Wingstop Inc (WING) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Wingstop Inc. second-quarter FY15 earnings conference call.

(Operator Instructions)

Please note that this conference is being recorded today, August 6, 2015. On the call today, we have Charlie Morrison, President and Chief Executive Officer, and Mike Mravle, Chief Financial Officer. I would now like to turn the conference over to Mike. Please go ahead.

Thank you, Operator, and good afternoon. By now everyone should have access to our second-quarter earnings release. If not, it can be found at www.wingstop.com under the investor relations section.

Before we begin our formal remarks, I need to remind everyone that our discussion today will include forward-looking statements. These forward-looking statements are not guarantees of future performance, and therefore, you should not put undue reliance on them. These statements are also subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect.

We refer all of you to our recent SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial condition. Lastly, during today's call, we will discuss non-GAAP financial measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP, and reconciliations to comparable GAAP measures are available in our earnings release. With that, I would like to turn the call over to Charlie Morrison.

Thank you, Mike. Good afternoon, everyone, and welcome to our inaugural earnings conference call. I would like to begin with a brief summary of our Q2 results, after which I will provide an overview of our brand and review of our growth strategy. Afterwards, Mike will review our quarterly financial results in more detail and provide guidance for 2015. Finally, I will conclude with some closing remarks before we open the lines for your questions.

We are very pleased with our second-quarter results, which included 18% revenue growth and 19.6% adjusted net income growth versus the second quarter of 2014. Our development pipeline continued to yield outstanding results, with 40 net new openings in the quarter, bringing our year-to-date total net openings to 73. We grew our restaurant count by 19.5% versus the prior year and ended the quarter with 785 system-wide restaurants.

Domestic same store sales were up 9%, keeping us on track to make 2015 our 12th consecutive year of positive same store sales growth. This robust top-line growth enabled us to deliver strong profit growth, even while we continue to invest in our infrastructure to support our long-term growth. Mike will provide more details on our financial performance in a little bit.

I'd like to now spend a few minutes describing our brand for those of you who may be new to Wingstop. Wingstop is a category leader as the largest fast-casual chicken wing focused chain in the US. We are mainly a franchisor, with 98% of our 785 restaurants being franchised as of the end of the second quarter. Wingstop is the destination when you crave fresh, cooked-to-order wings that come in a variety of bold distinctive and cravable flavors.

Our award-winning wings are paired with hand-cut seasoned fries and other sides that are made fresh daily. Our menu is highly customizable for different dining occasions, and we believe it offers a compelling value proposition for individuals, families and groups. We have a broad and growing consumer appeal, anchored by the highly sought off millennial consumer, which makes up approximately 50% of our customer base.

We offer compelling unit economics to our franchisees that we believe will continue to fuel our growth. Our domestic average unit volume for our last completed fiscal year was approximately $1.1 million. The average restaurant size was approximately 1,700 square feet, and average investment costs were approximately $370,000. We have a simple operation due to our focused menu, small footprint and significant carryout mix that is approximately 75% of sales.

These factors have driven average cash-on-cash returns for our franchisees of approximately 35% to 40% in the second year of operation. Our real estate requirements for new restaurants are flexible due to the unique demographic profile of our consumers, which we feel provides ample opportunities to grow our restaurant base. Our concept is also very portable. We are in 38 states across the country, have one of the lowest closure rates in the industry, and we still have significant white space to grow.

These attributes have driven impressive growth for our brand, our franchisees and our investors. Specifically, domestic same store sales have increased for 11 consecutive years. The past three years cumulative domestic same store sales growth is 36.2%. Domestic system-wide restaurant count has grown by 50%, since the end of 2011, through the first half of 2015. In 2014, we generated $24.4 million in adjusted EBITDA, a year-over-year increase of 25%.

We have continued the strong trend of growth through the first half of 2015 as well. In addition to our strong growth, we also offer a high-margin, asset-light model of a franchisor, with low capital spending and high conversion of EBITDA to cash. Adjusted EBITDA margin was 36.1% in 2014, and over 90% of our EBITDA was converted into cash over the past three years.

We believe our franchisor model provides predictable results, due to low operating cost volatility, and also provides us with the balance sheet flexibility to maximize shareholder returns. Our success has allowed us to garner numerous awards and accolades from respected industry publications, including being named the fifth fastest growing brand in the restaurant industry by Nation's Restaurant News, being called the best franchise deal in America by QSR Magazine, and have been voted best wings in markets all across the country. As we look ahead, we're encouraged by our performance and believe that we are well positioned to deliver long-term sustainable growth.

The following are our significant growth opportunities. First and foremost, Wingstop has proven portability and significant white space to spread our wings across the country. We estimate our domestic market opportunity is approximately 2,500 restaurants and intend to expand by filling out our existing core markets as well as entering new markets. We believe our broad consumer appeal, simple operating model, low entry costs, flexible real estate profile and compelling unit economics position our brand well for growth.

There is significant demand from existing franchisees to open more Wingstop locations and we are also attracting potential new franchise partners. Over the longer term, there is also an international growth opportunity. We are incubating the concept in six international markets and have grown to 52 restaurants as of the end of the second quarter this year.

Our first international franchise opened in Mexico in 2009, and we have since penetrated Indonesia, the Philippines, Russia, Singapore, and just recently, the United Arab Emirates. We believe our concept will be successful in international markets due to strong worldwide consumption of chicken and the flavor profile of our products.

Turning back to our domestic operations, our same store sales growth is being driven by growing brand awareness as we have expanded our footprint, the strong comp performance of our new stores when they enter our comp base and grow over time, and our effective use of social media to engage our core audience. In addition, we'll remain focused on growing sales through our flavor events, online ordering and scaling the national media over the long term.

We typically do two flavor events per year. Our spring flavor event, which ended just in June, was Serrano Pepper Glaze, and we're gearing up for our fall flavor event, which will launch in September. These events are operationally simple ways to provide our guests with new flavor experiences that deliver on our brand promise. However, we purposefully limit menu changes to keep operations simple and focus on those elements that truly differentiate us in the market.

Online ordering is a large opportunity for us due to our high takeout mix and younger millennial audience. We rolled out a new online ordering platform and mobile app in the third quarter of 2014 and have seen our sales from that channel almost double to approximately 13% of sales in Q2 of this year. In addition, we're rolling out a single integrated point-of-sale system that will greatly enhance the consumer experience and provide operational efficiencies for us to continue to grow this channel.

Lastly, we have a longer-term opportunity to scale to national media to best leverage our marketing investments and drive more brand awareness. With that, let me turn it over -- the call to Mike for a more detailed review of the quarterly financials.

Thanks, Charlie. Before we discuss the second quarter itself, I'd like to briefly recap our recent IPO. On June 11, 2015, we priced the initial public offering of 6.7 million shares of our common stock.

We sold an aggregate of 2.15 million shares of our common stock, at a price to the public of $19 per share, for aggregate gross offering proceeds of approximately $40.8 million. And selling stockholders sold 4.5 million shares of our common stock, at a price to the public of $19 per share, for aggregate gross offering proceeds of $85.9 million.

After underwriter discounts and commissions, and offering expenses of $3.2 million, we received net proceeds from the offering of approximately $35 million. We did not receive any proceeds from the sale of shares of common stock by the selling stockholders. A portion of these proceeds were used to prepay $32 million of the outstanding balance under our credit facility. The remainder of the proceeds were used to pay a one-time fee, in consideration for the termination of our management agreement with Roark Capital, and other transaction-related expenses.

Now, turning to the results of our second quarter 2015 ended June 27. Total revenues increased 18% to $19.2 million for the second quarter 2015, from $16.3 million in the comparable prior-year period. The majority of our revenues are made up of royalties and franchise fees, which increased 24.6% to $11.4 million for the second quarter, compared to $9.2 million in last year's second quarter.

As Charlie mentioned earlier, we opened 40 net new restaurants in the second quarter, bringing our year-to-date total net new openings to 73. We ended the second quarter with 766 total franchised restaurants, representing a franchised restaurant growth rate of approximately 20%.

In addition to restaurant development, revenue growth was also driven by domestic same store sales growth of 9%. Builds in our company-owned restaurants also contributed to our revenue growth, with this segment increasing to $7.8 million from $7.1 million in the prior year, driven exclusively by 9.5% growth in same store sales. In the aggregate, our domestic system-wide same store sales growth was 9%, extending a run of positive same store sales.

Cost of sales increased 11% to $5.5 million, from $5 million in the prior fiscal year's second quarter. As a percentage of company-owned restaurant sales, cost of sales increased 100 basis points to 70.5%, from 69.5%. The increase was primarily driven by a 26% increase in the commodity cost of bone-in chicken wings, which partially offset by lower labor costs and other restaurant operating expenses as a percentage of company-owned restaurant sales.

Selling, general and administrative expenses increased to $10.7 million, from $5.6 million in the prior year. The increase in SG&A was primarily due to a one-time fee of $3.3 million, paid in consideration for the termination of our management agreement with Roark Capital. Other one-time IPO expenses of $700,000, and investments in our infrastructure to support our growth, on an adjusted basis, excluding the $3.3 million termination fee, $100,000 of management fees, and $700,000 of expenses associated with our initial public offering, selling, general and administrative expenses were approximately $6.5 million for the second quarter.

Adjusted EBITDA, a non-GAAP measure, increased 18.6% to $7.2 million, from $6.1 million. As a percentage of total revenue, adjusted EBITDA increased approximately 20 basis points to 37.7%. Please review the reconciliation table provided in our earnings release between adjusted EBITDA and net income, its most directly comparable GAAP measure.

Interest expense increased approximately $200,000 to $1.2 million, due to the increase in our outstanding debt balance as a result of the March 2015 recapitalization. Income tax expense was $400,000 for the quarter. Our annual effective tax rate is estimated at 38.6% compared to 37.2% in the prior year.

We reported net income of $600,000, or $0.02 per diluted share, compared to net income of $2.5 million, or $0.10 per diluted share, in the same quarter last year. Weighted average diluted shares outstanding were approximately 27 million for the second quarter, and approximately 26.1 million for the prior-year period.

Adjusted net income, a non-GAAP measure, was $3.2 million, or $0.11 per pro forma diluted share, compared to $2.7 million, or $0.10 per pro forma diluted share last year. We used a pro forma diluted weighted average share count of 28.7 million shares for 2015 and 28.3 million shares for 2014.

Pro forma diluted share count gives historical effect to the additional 2.15 million shares of our common stock, issued in the IPO, as if all shares had been outstanding as of the beginning of 2014. Please review the reconciliation table provided in our earnings release between adjusted net income and net income, its most directly comparable GAAP measure.

In terms of our liquidity and balance sheet, as of June 27, 2015, we had cash and cash equivalents of approximately $4.9 million and outstanding debt of $100.5 million. As I mentioned earlier, we made a $32 million payment against our term loan with net proceeds from the IPO. Due to this large voluntary payment we will not have another required principal payment on our current term loan until 2019. Our gross debt to trailing 12-month adjusted EBITDA was approximately 3.9 times. Total CapEx was $200,000 in Q2.

With regards to FY15, we are providing the following full-year guidance. We look for 120 to 130 net new system-wide franchise store openings. Domestic same store sales are projected to increase 6.5% to 7%. Total revenue is modeled between $75.5 million and $76 million.

SG&A expenses between $33 million and $34 million, this is inclusive of $3.3 million in management agreement termination fee, $200,000 in management fees, and $2 million in transaction costs that were associated with both our March 2015 refinancing and our IPO. Adjusted EBITDA is anticipated between $26.8 million and $27.3 million. Adjusted net income is expected between $11.8 million and $12.1 million. And lastly, pro forma diluted share count of approximately 28.8 million.

With that, I will turn the call back to Charlie for closing remarks before we head to Q&A.

Thank you, Mike. I'm very proud of the great results in Q2 as well as the fine work by our team to continue to deliver fantastic results in the future.

In summary, we have significant potential to grow our restaurant base and estimate that we can build approximately 2,500 restaurants in the US alone. We believe we have a compelling value proposition and broad appeal that is clearly resonating with our flavor-seeking customers as demonstrated by our track record of same store sales growth. And lastly, we offer investors an asset-light franchise model that generates strong and consistent cash flow.

Before we open up the line for Q&A, I would like to sincerely thank our team members and of our franchisees for their outstanding commitment to the Wingstop brand. Together, they have been instrumental in our success and provide me with confidence that Wingstop has a bright future ahead of us. Thank you, again, for joining us this afternoon. We appreciate your interest in Wingstop and would be happy to answer any questions that you may have. Operator, please open the line for questions.

(Operator Instructions)

Our first question today comes from John Glass of Morgan Stanley. Please go ahead.

Thanks very much. First, Charlie, Mike, I just want to understand, maybe put in context these same store sales increases as you lap substantially more difficult comparisons in the second quarter last year. Was there more pricing perhaps this quarter than there had been prior? Had mix been richer? Is this simply just traffic driving, you know, that you've experienced in the past?

Hey, John, it's Mike. How you doing? So I think the -- you know, what Charlie mentioned in his comments that continue to be the drivers of same store sales. It's our growing brand awareness. It's the new restaurants as they enter the comp base and comp up over time, and also the strong social media presence that we have.

You also have the Serrano Pepper Glaze flavor event in the quarter that was well received as well, so a lot of the same factors that continue to deliver the momentum for the business. We did take a price increase the last Q4 of approximately 3%, so that's kind of rolling through the comp as well.

And you said you typically have these two flavor events a year, but did you have one in the last third quarter, or is this a favorable comparison as you do one this year versus not last year?

Yes, John, it's Charlie. Hello. We did not have a specific flavor event in the third quarter of last year. We are planning a flavor event, as I mentioned before, this year. So we had a very strong brand campaign last year but anticipate we'll have another solid flavor event again this year.

Then can you finally just talk -- you talked about the development pipeline, being very pleased with that. Are there specific new cities you're entering in 2015 versus 2014? Can you talk about maybe initial plans for 2016 and how you think about new markets? And how they may compare to the markets, for example, you entered this year, in term of size, and density and things like that?

Sure. Well, we're not talking about any specific plans for 2016. I think our story is very consistent and in line with what we had previously communicated. We see a lot of growth from our existing markets and have continued to see growth in those markets as well as new markets that we plan to enter into in the future. Other than just the general nature of the new markets we've been in, which include some of the northeast and other parts of the eastern half of the US, I think our development plans are very consistent with what we've cited prior.

Maybe just to maybe come at that one other angle. I mean what new markets, for example, in the first half of this year have you entered, and maybe give some color on how the brand's been received, you know, specific examples of new markets this year to date?

Sure, certainly some of our newer markets include markets up in the northeastern part of the US. In terms of those that we've entered into this year or maybe new states, I would not say any of those necessarily are included in that list because we have had a presence in some of the major metro areas, including Washington DC, New York, New Jersey, and as well as Philadelphia.

But we have had a couple new states that we've added, that would include like the state of Kansas, for one, but we're going to continue to develop our restaurant base in those markets. As we had noted during the IPO, we have a robust pipeline and continue to develop that pipeline into new restaurants in the future.

Thank you.

The next question comes from David Tarantino of Robert W. Baird. Please go ahead.

Hi. Good afternoon and congratulations on a good start to being a public company. My question is about the comps guidance you've laid out. The comps momentum you had in the first half of the year is very impressive, yet it doesn't seem like you're assuming that's going to continue in the second half of the year.

So the question is, is there anything on the horizon that has you particularly concerned, or are you just maybe anchoring on some conservatism in your outlook?

Hey, David, this is Mike. Our full-year guidance is for 6.5% to 7% comps on the year. And just as a baseline, we've had positive comps for 11 consecutive years, and this would be the 12th consecutive year of positive comps, and once again, as Charlie mentioned in his comments, plus 36% over the past three years. So we feel real good about a 6.5% to 7% number for the year.

And when you add in the performance on our new unit development, which is through Q2 on a year-over-year basis at 20%, it adds up to what we believe is a great revenue number on the year. So that's kind of how we're thinking about it and think 6.5% to 7% on top of the base that we have is a real good number.

Sure. You know, I agree. I guess maybe I'll tackle it a different way. How did you see the momentum exiting the second quarter and entering the third quarter? Is there any signs of a slowdown or are you willing to comment on that?

Yes, hey, David. We're not going to update on the quarter. So we're kind of through Q2, and then we're giving full-year guidance. So we're not going to talk about the inter-quarter kind of trends, so --

Right. Fair enough. Then, I guess my last question is on the online ordering platform that you launched, and it seems like you're getting great traction there. Could you talk about kind of where you see that evolving longer term?

I imagine that's a very effective platform with your social media savvy consumers. So could you talk about the impact that's having on your business and where you see that going in the quarters and years ahead?

Sure, David. Great question, and yes, it is definitely something we believe has long-term strategic benefit for our brand. As we mentioned in our comments, this is part of a new technology platform that we're implementing into our restaurant base, now and into the future, and we did see an increase during the quarter in our online revenue to 13%.

So, since we've really rolled out this new app and interface for the consumer side and integrated it now with our point-of-sales system in the restaurants, we believe it creates efficiencies on both sides. Both for the consumer to more efficiently gain access to our restaurants and gain access to our great wings, as well as for our operators in the restaurants to have those orders integrated and coming into their restaurants in a very efficient manner, in a lot of cases already paid for and ready to prepare.

So we think this creates great efficiency for the business long term. It's right down the middle of what our consumers expect of us, and as you may know, roughly 75% of our business comes in or actually goes out the door as carryout products. So we think this has great, great prospects for the future for our brand.

Great. Thank you very much.

You're welcome.

The next question comes from Jeff Farmer of Wells Fargo. Please go ahead.

Thanks. Recognizing that you don't operate a lot of company-owned restaurants, again it still looks like they generate approximately 40% of your consolidated revenue, give or take, so I am curious how sensitive the earnings model is to change in spot wing prices? Because, there's been a lot of focus on that lately.

Yes, Jeff, so you're right, we do have only 19, but they're 19 strong restaurants with great AUVs and they do deliver great revenue growth and profit for us, but obviously wing prices have been volatile. You know, I think in our disclosures we talk about the impact of changes on wing prices, but I think a 10% change in wing prices on an annual basis is worth about $0.5 million. You can kind of do the math on that from a sensitivity standpoint.

Okay. That's helpful. And could you provide some color on the sales trajectory of new restaurants, established developing markets -- I guess I'm just curious, you've talked about this in the past, what the honeymoon is, or if there's a slow build? And then you alluded to it earlier on the call, but are the majority of these restaurants still entering the comparable store base as a tailwind to the same store sales number?

Yes. I think it's consistent with what we've talked about before, that our restaurants don't experience the typical honeymoon that other restaurant concepts do. They tend to start strong and continue to grow as they mature, which certainly does provide a little bit of tailwind into our comparable sales numbers.

Great. Thank you, guys.

You're welcome.

(Operator Instructions)

Our next question today comes from Jeffrey Bernstein of Barclays. Please go ahead.

Thanks. This is (inaudible) for Jeff. Just had a quick question on labor. You mentioned that labor was favorable in the second quarter, but we've heard several of your restaurant peers talk about wage rate inflation, and maybe a little bit of extra turnover as people compete for talent. I'm just wondering if you had any thoughts on labor going forward? Thanks.

Yes, sure. So, you know, a couple things on that front. The first one and foremost, which I know you know, is that we're insulated from a lot of that operating cost risk as a franchisor. So all these are issues that our franchisees face. Our P&L is mitigated from that volatility to a large extent. It's one of the benefits obviously of our franchisor model.

But, recognizing we do have 19 stores, we did have favorable labor as a percentage of sales in the second quarter. A couple of factors in that. One is, you know, we operate in Texas and in Nevada, so we're not in the states that are seeing the significant wage issues, minimum wage hikes and those sorts of things. That helps.

And the second part is, you know, our ops team does a great job in managing that piece of the business, and we're able to leverage our comp store sales. So we're up 9.5% in the second quarter of our company stores, and so from a year-over-year standpoint we're able to leverage that in our labor model.

Great. Thank you.

There are no further questions at this time, so this will conclude today's conference call. You may now disconnect your lines. Thank you for participating and have a pleasant day.