Wingstop – A Bright Spot Amid the Pandemic

These days, news of a restaurant company reconfiguring debt, and adding to its borrowing capacity, isn’t revelatory. However, to read such a story that’s not only not tinged with existential dread, but highlights the immense value of versatility and foresight, and exudes genuine optimism for the future? That’s more of a rarity.

On October 5, Wingstop announced a plan to refinance its existing securitized financing facility. As of September 26, 2020, the facility had an outstanding balance of $317 million of senior term notes and $16 million of senior variable funding notes. The planned refinancing – expected to close in Q4, subject to certain conditions – consists of $400 million of December 2027 senior term notes (preliminarily rated “BBB”) and $50 million of senior variable funding notes, and will increase the size of the Company’s securitized financing facility, to approximately $480 million. Exact terms – namely, interest rate – are yet to be determined.

The new borrowing, which will be sponsored through the Wingstop Funding LLC trust (via Wingstop Funding LLC 2020-1), is a whole-business securitization (WBS) – a transaction in which an issuance of bond or notes is secured by income-generating assets (i.e., not financial assets, like loans or receivables) that represent the majority of revenues. In this instance, the facility will overwhelmingly (91%) backed by revenues from domestic franchise royalties, with franchise fees (5%) and revenue from international operations and company-owned stores making up the remainder.

As of September 26, 2020, the Dallas-based casual/fast-casual purveyor of chicken wings (and tenders) had 1,479 restaurants system-wide, 1,308 of which are in the United States, with another 171 international franchised restaurants across nine countries. All but 31 Wingstop locations worldwide are franchised by 282 franchisees, who own roughly five units apiece and have an average original tenure of eight years. In something of a departure from similar WBS deals, Wingstop is including revenue from its 31 company-owned stores – which has risen from $57.5 million to $89.6 million over the past two years – in the securitization.

At the time of the announcement, the Company noted that, in addition to paying off existing debt and covering transaction costs associated with the refinancing, proceeds would go toward continued expansion, as efforts continue to reduce reliance on Texas, California, and Florida (which represent about 50% of revenue), with the possibility that some capital could be returned to shareholders in the form of dividends.

The following day, Wingstop announced preliminary fiscal Q3 2020 results (full results are scheduled for November 2). According to the announcement, system-wide sales rose 32.8% in Q3, to $509.2 million, while comparable-store sales rose 25.4% year-over-year. Unsurprisingly, the engine behind these outstanding results was strong growth in digital sales – which rose more than 62% from Q3 2019 and accounted for roughly 80% of domestic sales – as customers shifted to at-home delivery and pick-up.

On the chance that the raw numbers left any ambiguity regarding the rosiness of the situation – or that– the accompanying comments from management were standing by to erase any doubt. CEO Charlie Morrison noted that not only did Wingstop add 43 new stores during the quarter, with expectations for between 120 and 130 net new locations for all of 2020, but continues to see sales growth at even its oldest locations. According to Morrison, the Company remains “focused on executing our growth strategies and becoming a top 10 global restaurant brand.” Not quite the restaurant rhetoric to which we’ve grown accustomed.

With an already strong focus on offsite (carry-out/delivery) dining, combined with the nature of its offerings, in terms of portability, ease of plating and preparation at home, their association with televised sports – which returned en masse over the summer – and a “cooking fatigue” washing over a population that’s largely not dined out in months (and may not do so “normally” for quite some time;) that Wingstop performed well during this period isn’t altogether shocking. However, that these numbers resulted not in celebration, as they would have done in virtually any other corner of the industry, but actually prompted a negative reaction in the Company’s shares (which trade on NASDAQ, under the symbol “WING”) speaks to the incredible standard that the Company has set for itself.

Consider that, on the heels of rock-solid 9.9% same-store sales growth in a mostly “normal” first quarter, Wingstop turned in a spectacular performance in arguably the most challenging fiscal quarter ever for U.S. restaurants. In Q2 2020, system-wide sales rose 37% (to $509 million), while same-store sales jumped by a whopping 31.9%. Company-owned same-store sales grew 24.7% year-over-year (Q3 was just 15.2%), with digital sales accounting for a comparable 63.7% of sales, and carry-out/delivery comprising 80% of domestic sales.

The manner in which Wingstop has endured unfathomable adversity speaks to the value of preparedness, and commitment, in good times, to long-term strategies – from leasing space in inexpensive real estate developments, to focusing on online and takeaway – to equip the Company to weather adversity. This is the calling card for a company that’s on the verge of its 17th straight year of comps growth, with a compound annual growth rate of 24% since 2000.

That Wingstop has navigated a minefield, not only surviving, but thriving, and cemented itself as one of the industry’s models of resilience, is not a coincidence. It’s not that the Company somehow foresaw a pandemic and adjusted accordingly. Not exactly.

Note: Neither EMERGING nor the author owns stock or has a financial interest in Wingstop.

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