Wingstop Inc.

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Wingstop Incorporated Fiscal Second Quarter 2021 Earnings Conference Call. Please note that this conference is being recorded today, Wednesday, July 28, 2021. On the call, we have Charlie Morrison, Chairman and Chief Executive Officer, and Michael Skipworth, Executive Vice President and Chief Financial Officer. I would now like to turn the conference over to Michael. Please go ahead, sir.

Thank you and welcome. Everyone should have access to our fiscal second quarter 2021 earnings release. A copy is posted under the investor relations tab on our website at ir.wingstop.com. Our discussion today includes forward-looking statements. These statements are not guarantees of future performance and are subject to numerous risks and uncertainties that could cause our actual results to differ materially from what we currently expect.

Our SEC filings describe various risks that could affect our future operating results and financial conditions. We use certain non-GAAP financial measures that we believe can be useful in evaluating our performance.

Presentation of such information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. Reconciliations of comparable GAAP measures are contained in our earnings release. Lastly, for the Q&A session, we ask that you please each keep to one question and a follow-up to allow as many participants as possible to ask a question. With that, I would like to turn the call over to Charlie. Thank you and good morning. Today we are excited to come to you live from New York City, a market with a lot of potential for Wingstop and one that many of you in the investment community call home. We are excited by the reopening of this vibrant city, along with a continued return to our everyday lives as we attempt to gain better control of the pandemic in the U.S. We hope the same can be said for all global markets in the coming months. A year ago, in the second quarter of 2020, we all faced a challenging situation as we began sheltering at home as COVID-19 affected all our families. But Wingstop was well positioned for this unforeseen event by way of our investment in technology and delivery platforms that we believed would create growth well into the future. Yet we saw a significant acceleration in our business, achieving our highest domestic same-store sales on record for a quarter at 31.9% during that time. I'm pleased to say in the second quarter of 2021, our domestic same-store sales grew an additional 2.1% on top of that to lap that successful quarter in 2020. This translated to a 34% growth rate on a two-year basis and an increase from our two-year comp in Q1 of 30.6%. The average restaurant in our system is now generating annual sales volumes approaching 1.6 million compared to 1.4 million a year ago. This top line growth has provided relief from the record high prices we have seen in bone-in wings as our brand partners are able to leverage fixed costs in their P&L and maintain strong unit level economics. Managing the cost volatility of wings has been a focus for us for a number of years. We know that the key to unlocking a less volatile food cost for the brand is predicated on the utilization of more parts of the chicken. As many of you know, we have tested the use of dark meat products for some time, and at the end of the second quarter, we put those insights to work and launched a virtual brand called ThighStop. The clever approach to the launch was positioned as a unique and creative way to capture the attention we believe chicken thighs deserve. As a virtual brand, ThighStop can only be accessed through ThighStop.com and DoorDash and is available for carryout and delivery only. In addition to what we're calling bone-in thighs, we're also offering boneless thighs, which are a juicier, flavorful complement to our traditional boneless wings. Just as we pioneered wings as the center of the plate item, we believe we can also make thighs the center of the plate item and make them a fan favorite for a long time to come. With our focused approach on thighs as a virtual brand, we generated more than 4 billion media impressions, with 3 billion impressions generated in just a few days after the launch. We are just over a month in and are pleased with the performance of DyeStop so far, and the response we have seen from our customers is very positive. Given the challenges all poultry producers continue to face with staffing, we anticipate wing prices to remain elevated for the balance of the year. Our expectation is that Costa Goods will operate at approximately 45% in the second half of the year. We anticipate restaurant margins of approximately 20% for the second half of the year, which at this level we believe represents the uniqueness of our operating model through the high productivity it generates due to our simple labor model. While it has not been easy, unlike other restaurant concepts, we have very streamlined kitchen operations with small roster sizes, which have enabled our system to better weather the severe labor challenges some of our peers are facing. This, coupled with leverage from AUVs approaching $1.6 million, will help our brand partners continue to navigate this current inflationary environment. In fact, with this growth in average unit volumes up almost $500,000, the cash flow at the restaurant level is even stronger than it was when we last experienced this elevated level of wing inflation in 2017. That strength generated another record quarter of net new openings of 45 restaurants, which translated to year-over-year growth of 13.1%. Over the last 12 months, we have opened over 200 restaurants, the first time in our history we've done so in a 12-month timeframe. Truly a testament to the strength of our model and our brand partners' continued excitement to grow with Wingstop. Despite the cost headwinds we are facing, we are confident in our ability to exceed our original unit growth targets for the year. And as such, we are updating our guidance for restaurant development growth to 12% plus. Digital sales mix increased in Q2 reaching nearly 65% of sales. Customer acquisition and retention has continued at strong levels with nearly 25 million customers in our database. We are excited to see growth in our medium and heavy cohorts as we move new and light users up the frequency curve. Digital sales continue to grow and are on pace to exceed $1.5 billion annually. These results have been due in part to our commitment to developing a best-in-class tech stack. As we communicated last quarter, we are doubling down on our tech and digital efforts and are investing to elevate our global capabilities in this area. We have embarked on a multi-year project that will take our digital and tech capabilities to the next level as we continue to work towards digitizing every transaction and expand our fast-growing customer database. We continue to see growth in the delivery channel as well, and it now represents 27% of our total sales up from mid-20s in Q1 of this year. While the pandemic continues to pose challenges in all markets worldwide, we are pleased with the performance and continued recovery of our strategic international markets. The shifting consumer behaviors in 2020 validated our growth strategy, which is focused in markets where we believe we can have a premium brand positioning and can operate a high off-premise and digital-focused business, And as such, we continue to be very strategic in the markets we focus our resources and efforts on. One of those key strategic markets is the U.K., a market with tremendous long-term potential and a model market for our Western Europe expansion. In the second quarter, we signed a minority investment deal with our brand partner in the U.K., We believe this strategic use of our capital will strengthen the development pipeline in that market, and we are excited to support our brand partners as we work to achieve the potential for the Wingstop brand in the U.K. The validation of the strategy and success in strategic markets has translated into encouraging progress in business development in other parts of the world, and we are confident in our ability to grow the brand globally, an opportunity we believe comprises over 3,000 restaurants. Another key step in the international strategy was the announcement of our plans to enter Canada. During the quarter, we announced the signing of a 100-unit restaurant development agreement, and our hopes are to open the market by early 2022. I'm also thrilled to announce that we have completed the remodeling of our new headquarters in Addison, Texas, located just five minutes from our prior office, and our corporate team members have now returned to the office. Our people are the foundation of our strategy and this new state of the art office space provides an environment that will support our next phase of growth and positions us to live our core values and attract top talent. We are all incredibly excited to have a space that aligns with the strength and runway for growth for the Wingstop brand. I'd like to come back to where we started today and discuss our excitement in bringing Wingstop to Manhattan. The New York market is one with a lot of white space for our brand. In Manhattan specifically, we've identified approximately 25 trade areas for our restaurants, and we believe this is an opportunity to invest our capital to open company-owned restaurants and deliver a great return for our shareholders. This will be a combination of ghost kitchens and traditional street-side locations. In a few short weeks, we'll have our first ghost kitchen open here in Manhattan, Ghost Kitchens will play a key role in the build-out of our footprint, and we're excited about the potential this new restaurant format can offer. In fact, we now have 15 Ghost Kitchens open globally, and while our brand partners enjoy best-in-class sales to investment ratios for traditional Wingstop locations, we've seen Ghost Kitchens have ratios at three to four times stronger than our traditional locations. I would also like to comment on our sustainability efforts and I'm pleased to announce the launch of a webpage on wingstop.com dedicated to communicating our environmental, social, and governance efforts. You've heard me talk about the Wingstop way, a set of values that guides us in everything we do, and this extends to our ESG practices. At Wingstop, we are not just making a pledge to improve. We are proud to demonstrate our commitment to our community. 50% of our board of directors, 60% of our brand partners, as we call our franchisees, and the majority of our corporate team members all identify as diverse. We are proud to display these metrics on our new site, and I'm proud of the progress we have made in areas of diversity, equity and inclusion, energy and waste management, and in our communities through the continued work of Wingstop Charities and our team member foundation. all of which will expand their reach outside of the U.S. Since our IPO, investors have enjoyed a total shareholder return of over 700 percent. Our balance sheet is in a very strong position and we remain committed to returning cash to our shareholders. And to that end, our board of directors approved a 21 percent increase in our quarterly dividend to 17 cents per share of common stock. which is a demonstration of our confidence in the business and the strong cash flow generation of our asset light model. The future for our brand is exciting, and we continue to position the business for the long term. We remain confident in our strategies that will continue to reward our shareholders, brand partners, and team members as we are on our way to becoming a top 10 global restaurant brand. With that, I'll turn it over to Michael. Thank you, Charlie. We are pleased to report solid second quarter results, particularly when you consider the comparison of Q2 2020. We grew royalties, franchise fees, and other revenue by $5.3 million or 19%.

The increase was driven by domestic same-store sales growth of 2.1% and 184 global net franchise openings since the year-ago comparable period.

And by the continued strength we are seeing in non-comp restaurants, which are now producing AUVs of $1.2 million as they enter the comp base.

Just a couple of years ago, our 2019 vintage generated $900,000 in AUVs during their first year of operations.

Truly a testament of the strength of our model when you consider the initial investment of approximately $400,000 has remained the same over that time period. And just to reiterate, this growth on top of a 31.9% comp last year resulted in two-year stacked same-store sales growth of 34%.

It's these best-in-class unit economics that have fueled the 45 net new restaurants opened in the second quarter and, as Charlie noted, over 200 gross openings over the past 12 months.

Company-owned restaurant sales were flat year over year due to a one-year same-store sales decline of 3.1%, offset by four net new company-owned restaurants since the year-ago comparable period.

On a two-year basis, company-owned same-store sales grew by 21.6%, and unit volumes increased by more than $100,000, now averaging $2.1 million.

Food, beverage, and packaging cost as a percentage of company-owned restaurant sales increased by 11.4 percentage points compared to the second quarter last year, which at the time benefited from very favorable costs with wing prices as low as 99 cents per pound. Bone-in wings on the spot market have increased approximately 125% year over year. But thanks to the price mitigation strategies in place with our largest poultry suppliers, our restaurants were able to minimize some of the inflation and saw an effective year-over-year increase in the price of wings of 65%. The leverage you saw on both labor and other operating expenses, as well as lapping team member incentives pay, helped offset more than half of the increase in food costs. As Charlie mentioned, we expect wing prices to remain elevated for the balance of 2021 and food cost as a percentage of sales to be approximately 45% for the second half of the year. The AUV growth, coupled with our efficient operating model, we anticipate sales leverage will partially offset these cost pressures and hold company-owned restaurant margins at approximately 20% in the second half of fiscal 2021. In conjunction with the ThighStop launch, the first $100 million in ThighStop sales are royalty-free as we build excitement and support to drive ThighStop sales and position us to execute our whole bird strategy.

The food cost for ThighStop is accretive, even when compared to our long-term target for food costs, and we believe ThighStop sales are a highly incremental occasion.

Moving to SG&A, we saw an increase of $2.7 million over the prior year, mainly due to investments in people to support our growth.

We are reiterating our guidance for SG&A as we continue to expect cost of $64.8 to $66.8 million, inclusive of stock-based compensation expense, which is estimated to be between $9.7 and $10.2 million in 2021.

As for the cadence for the balance of the year, we expect SG&A to be more heavily weighted towards the fourth quarter in anticipation of increased levels of hiring as we continue to execute against our previously stated strategy to invest in people as our foundation as we build towards becoming a top 10 global restaurant brand.

Adjusted EBITDA grew 9.5% to $22.9 million, and we recorded adjusted earnings per share of 38 cents compared to 34 cents in the prior fiscal second quarter. Please refer to our SEC filings for a reconciliation between non-GAAP measures and their most directly comparable GAAP measures. We remain committed to driving shareholder value and returning capital to shareholders through our quarterly dividends.

which is targeted at approximately 40% of free cash flow. As Charlie mentioned, our board of directors approved a 21% increase in our quarterly dividend from 14 cents to 17 cents per share of common stock. This is a demonstration of the robust cash flow generation and strength of our business. This dividend totaling approximately $5.1 million will be paid on September 3rd to stockholders of record as of August 13th, 2021. Our results in the second quarter continue to demonstrate the strength of our brand and growth strategies. We believe we are well positioned to execute against our strategic long-term growth initiatives. With that, I'd like to turn the call over for Q&A.

Thank you. We will now begin the question and answer session. To ask a question, please press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. And to withdraw your question, please press star then two. And at this time, we'll pause momentarily to assemble our roster. And the first question will come from David Tarantino with Beard. Please go ahead.

Hi, good morning, and congratulations on another strong quarter. Charlie, you've had two straight quarters with same-store sales up. more than 30% over the last two years, I guess, two-year basis. And I just wanted to get your sense on the sustainability of that volume increase and whether you think that this is just a new layer of business that you're going to grow from here or whether you think there is something temporary in the first half of the year that might have elevated that trend.

Good morning, David. Thank you. You know, it's interesting. I think this is a new layer of business, and I think it's best evidenced by the continued increases we see in our customer database and all the first-party data that we have in front of us now exceeding 25 million unique users. That gives us confidence that these new customers are coming in. We can watch and monitor them carefully. because of our strong digital presence and market to them to continue increasing their frequency and at a minimum retain them as future customers. So what we did see from quarter to quarter was an increase in the pace of our two-year same-store sales growth, which we were very pleased with, and, you know, of course, rolling over a 31.9% comp It was no easy task, but we had the confidence we could do it, and I think it just continues to boost our confidence and our ability to grow this brand. We have so many levers in front of us, the continued growth in digital, the continued focus on CRM and working directly one-to-one with this huge database of customers, and then, of course, expanding into new markets, additional advertising resources. We have all the right levers in there for this to be long-term sustainable growth. Great. Thank you very much.

The next question will come from Jeffrey Bernstein with Barclays. Please go ahead.

Great. Thank you very much. I had a question, and then per your suggestion, just one follow-up. From a question standpoint, just looking at the unit growth, I know you're now talking about 12% plus this year, up from 11, up from the long-term 10. I just wonder if you could provide some context for us, especially when you talk about 200 openings over the past 12 months, maybe context into what discussions are like with franchisees. I was wondering if it was strong comp momentum and the elevated AUVs lead to more immediate excitement and push for greater openings and how that comes about and whether inflation impacts those discussions at all. And then I had one follow-up.

Thanks, Jeff. I appreciate the question because it is the constant conversation with our franchisees about their economics. And as you said, and I'll repeat, our AUVs now are approaching on average $1.6 million per restaurant. If you think back to 2017 when we saw COGS inflation that got as high as a 43% food cost, our cash flow characteristics of these restaurants are substantially stronger than they were then. And so we are having more of a cash conversation than we are a margin conversation. And I think it's important that we tend in our industry to get locked in on margins and percentages, but we take the dollars to the bank. And if you look at the four-wall economics of our average restaurant, you see quickly that the returns are still quite strong. During the last year, we saw such strengthening in the brand with this 34% two-year comp that our brand partners are excited about continuing to develop. And we know that we've seen the cyclicality of wing volatility over the years, and we'll navigate through this one just the same and end up on the other side looking fantastic. But I can't stress enough that even with these elevated food costs, we still are seeing extraordinary restaurant-level cash flow, which is leading to our strong development in the pipeline and we anticipate in the future.

I mean, just to follow up on the thigh launch, I mean, it's a pretty big deal for a brand name, Wingstop, and a country seemingly infatuated with wings to shift focus to thighs. We know it's not new, and you've been testing it for some time, but I'm just wondering if you can give any additional color on whether it's feedback from customers, franchisees, or what do you expect at the sales mix?

maybe how you price it, the cost structure, anything along those lines to give some color, if the thigh business were to succeed, whether or not you'd be pleased with a accelerating mix on that front from a sales or a cost perspective?

Well, definitely it has a real benefit from a cost perspective because it helps us achieve our goal of utilizing more of the chicken, which is critically important to our long-term business. supply chain strategy, and as you know, we've talked about this for years. From the consumer standpoint, they love the product. As you said, they're infatuated with this product, so we're excited about what the potential holds. We did launch it in a very limited format, so it's only available for delivery or carryout through our partner at DoorDash. We do anticipate that we will fold this product into our Wingstop menu in the second half of the year and then make this available to all of our guests, whether you come in through wingstop.com, thyestop.com, or in the restaurants themselves. So we're excited about the launch. As we mentioned, we had a huge splash when we launched this, generated a lot of traction against what would be a traditional launch of a new product. And so I think it's going to build just as the idea of chicken wings as a plate item built 27 years ago. We're going to build this into our brand much the same.

Thank you very much. The next question will come from Andy Barish with Jefferies. Please go ahead.

Hey, guys. Nice job comping the comp. I guess it's always about the next quarter and just Wondering what we should expect in terms of the two-year kind of deceleration as, you know, some of the checklists normalizes and dining rooms reopen. Just give us a little color on, you know, kind of what you're seeing in the business, you know, as things, you know, start to get back to a little bit more of a normal. Good morning, Andy. You know, I think anybody in my position or any of our peers and others in the industry would like to figure out, you know, what that idea of when do you get back to normal because things seem to continue to change every day. But we do anticipate, you know, still seeing a strong two-year comp for the balance of the year. certainly there is the potential for that to moderate, just given our two-year performance and the one-year performance. But overall, a lot of that has to do with macro events, I think. And the other piece that I would call out from Wingstop's benefit is is that last year we banked a lot of extra advertising dollars for the year that we've put into this year. A big chunk of those went in the first half to comp to comp as we just did and demonstrated we would. We have more of those available in the back half of the year as well. We continue to get much more premium placement of our advertising. And then with this growing, very large database of new customers that are coming into the business, our ability to continue to market to them and drive the business all become opportunistic for us in terms of driving our comp performance. So I'm comfortable with where we've guided, but I'd also say that, you know, we have a lot of levers, as I mentioned before when I was talking to David, a lot of levers in front of us. And I think this brand has always been in a good position of having plenty of levers to drive growth as we continue to expand our footprints.

Thanks, Charlie.

And then just a quick follow-up on where you think, you know, franchisee menu pricing is these days, just given obvious increases in your main commodity, but also just the industry generally taking more price than we've seen historically? Yeah, I mean, we have been, you know, over the past few years taking more a very thoughtful series of price increases that get us one to two points of price a year. This year, with the commodity inflation and generally with our pricing power that we know we have, we have taken some additional price, and I would expect that franchisees will continue to do that in the coming quarters in reaction to the overall inflationary environment that exists today. Thank you.

The next question will come from John Glass with Morgan Stanley. Please go ahead.

Thanks very much, Charlie. First, can you just maybe expand on your entry into New York, I guess, the urban core? First of all, do you expect that to be an entirely a company-operated market or mixed market? My impression was it was company-led. Why is that? And Remind us how many of your stores are in urban core? Is this part of an experiment to think about how you can be more of an urban brand as historically you've been sort of suburban, whether markets led you to this or is this sort of the first entree into an urban core market?

Hi, John. Yeah, let me clarify your last comment because I think Wingstop has always grown up as a very urban brand. Even since our IPO, we've talked about an inside-out strategy to our developments. And, you know, in New York, you would expect that we would start in Manhattan, work our way out, but instead we've been in Brooklyn, the Bronx, Queens, and other markets, Long Island. We've always had Manhattan sitting here, and I think one of the challenges to Manhattan for anybody is it's an extraordinarily high-priced real estate market. But to answer your first question, we believe that it's well-suited to be a company-owned market. We love the economics of Wingstop and we love the economics even more of the ghost kitchen concept. And it's been our desire to hold this market back for company expansion, which we've done over the years. We wanted to make sure that we had access to real estate that was reasonably priced, which we believe exists right now in this market. And we also, most importantly, wanted to make sure that we had a good strategy and partnership opportunity for ghost kitchen expansion as well as delivery. This market obviously has extraordinary density. It's a delivery-focused market. That makes sense for us. So what you'll see us doing is incorporating street-side locations to demonstrate the brand but really factoring in ghost kitchens as a real key to our strategy. The investment cost in those ghost kitchens is substantially lower than what it takes to open a new restaurant. And so we think that this approach is going to be great. And as a company-owned market, it's great use of our capital. We think it will have a fantastic return, and we're excited to finally be in Manhattan very soon.

Thanks. So just on Bicep, why did you launch that as a virtual brand if the intention was to integrate it back into the stores? Was it to generate sort of the buzz that you did? Was it more that than it was maybe that you wanted to separate channels? And does it add any complexity to restaurants if you're cooking two different parts of the birds, cooking times? Is there any added complexity to adding size to the menu from an operational standpoint?

Yeah, I appreciate that. It certainly was launched to make sure that we generated a lot of news and noise. As many of you have asked me over the last year or so, what's going on with all these virtual brands that are popping up? And so we said, you know what, we can do that too. And we launched ThighStop as a way to demonstrate that Wingstop, in effect, is a great virtual brand concept. We still have not opened all of our dining rooms. In fact, the vast majority of them are still closed. And so our brand does operate primarily in a virtual sense, and we're happy with that. This is a great way to do it. Generated a lot of press, as we talked about, over 4 billion impressions in a one-week time period was just amazing news. And I think it's good for the brand, so it worked. We've always felt that it was right to fold it back into the Wingstop brand once we established the product and the positioning. And I think what we're hearing from our fans is, you know, bring it into Wingstop. Let's take this thing and run with it. So we're very excited about that. The challenge of operations is zero almost. We had to add a couple smallwares just to process the product, but they actually cook in about the same amount of time as a bone-in chicken wing. The boneless product cooks exactly the same as our boneless white meat product. So it fits beautifully into our workflow. No hang-ups. Right now, it's just about maximizing volume and using that to really free up the opportunity to get much better pricing on chicken long-term.

Thank you.

The next question will come from Nicole Miller with Piper Sandler. Please go ahead.

Thank you so much. Just on the point of marketing or advertising, if you could just walk us through the cadence of the national TV advertising. Maybe we could get the context or the base for 2019 weeks. And then you had just mentioned a couple of questions ago, a pullback in 2020. So how many weeks in 2020? And then where do you stand year to date this year? Thanks.

Yeah, I would say the... number of weeks is probably less relevant than is the quality of the media that we're buying so we might be since 2019 two or three weeks greater than we were at that point in time but the depth of the advertising measured by either how many trps we're we're delivering and then the quality of the media that we're buying which is very premium this year so premium when i just when i say that means in this particular year, the best place to be is live sports and sports events and around content that is fresh and new, of which there's very little. So we were very careful and strategic in our buy this year to make sure that we were showing up in the places we needed to be. So in the back half of the year, you'll certainly see us prominently positioned against football. And the NBA has been strong for us. We've been in and around soccer over the summer months, and we'll continue that. So it's less about the weeks, and it's a lot more about the depth and the premium nature of the buy that we're focused on.

And then just as a follow-up, can you talk about who is coming in? Well, not into the stores, but into the sales base. I was looking back, and I think customer boxes – 3 and 4 and 7 and 8 were like the vast majority, like 60% of sales. And Box, I think you call them 12 and 13 are heavy QSR users that you could tap into. Are you accessing those customers?

Absolutely we are. In fact, this database that we're building, these 25 million people strong now in this database, you can see clearly that the new customers that are coming in are those Box 12 and 13 and for the benefit of everyone else. that essentially equates to these heavy QSR users that are not Wingstop users or historically have not been. They may be aware, but they demonstrate little or light frequency with us. And so our job in this premium-placed marketing is to continue to drive awareness for those customers and a reason, if you will, a reason to convert and try and utilize Wingstop. And so once we get them now, we can start to establish that one-to-one relationship and continue to grow that long-term. So that is... definitely working as we had planned that over the past couple years.

Thank you, and congrats on the quarter.

Thank you so much.

The next question will come from John Tower with Wells Fargo. Please go ahead.

Great. Just a few from me, if I may. First, clarification. Sorry, Mike. I might have misheard this earlier. You had mentioned that there is some royalty-free sales on the thigh stop for the franchisees. I'm just curious. I couldn't hear the exact level of sales that was. And then just following up on the food cost side, I appreciate you guys offering us insight into where COGS are going to shake out for the balance of the year. On that, does that contemplate... the mix of five sales kind of staying as is or moving higher as we move throughout the year? And then just broadly speaking, in your conversations with suppliers, are you getting any sense as to these wing costs easing as we move into 22? Or is there very limited visibility into any sort of pricing beyond what we've got in 21? Hey, John. Thanks for the question. And as it relates to backstop sales, we did extend to our brand partners an agreement to offer them royalty-free first $100 million in sales. And that was really done just to create excitement within the brand partner community and a lot of support for what we think is going to be a long-term win for the brand. And it plays a little bit into some of your other questions, but obviously, as Charlie mentioned earlier, Selling more of the thigh product back half of the bird really helps us lean in and advance that long-term strategy we have for supply chain around whole birds. As it relates to the margin information we provided for the balance of the year, that does contemplate thigh stop sales mix, and it won't be a material number if it mixes a significantly different number from where we are today, but it is contemplated there. And then lastly, I think we, as we mentioned in our prepared remarks, we do expect to see the price of wings sustained through the balance of this year, hence the updates to food costs and four-wall margins. Okay, but you haven't had any conversations with suppliers about perhaps this being temporary beyond meeting expectations? And it starts to improve in 22 as perhaps, you know, maybe this isn't a supply issue. It's more about potentially just getting the product out and about, or is it more of a supply issue? There's two things. We've talked about it a little bit before. One is obviously a challenge around labor within their plants and processing the number of birds that the demand is there for. But then secondarily, it's also a hatchability issue that we are having those conversations with suppliers that they expect hatchability rates to improve in 2022. So there are those conversations being had, and the expectation is that wing presses will improve when we get on the other side of 2021. Got it. Thank you very much.

Welcome. The next question will come from Andrew Charles with Cowan. Please go ahead.

Michael, I just want to follow up on that last point. Just on the cost of goods guidance that was raised to 44% from 42%, I know last quarter you talked about how this is a function of poultry plants not being fully staffed due to the supplemental unemployment insurance benefits. I would have thought that would have kind of continued to ease as stimulus is being removed in several states with the federal curtailment of the supplemental $300 a week coming in September. Are you seeing more enduring wing competition weighing on wing costs versus your expectations from 90 days ago? And then I have a quick follow-up on that as well.

Hey, Andrew, it's Charlie. I'll grab this one just for a second. I don't think the supplemental unemployment impact is being demonstrated in the market at this point. It is very difficult to find people, and I think we hear this from our suppliers, you hear it from any industry everywhere, you hear it about microchip shortages and so on. So while it may appear that we should expect that to relax, it's not demonstrating itself. And I think there's more money coming into the market by way of the tax credits and other ways to stimulate the economy. And that's presenting a challenge for everyone on hiring. I think people's behaviors are changing as well so we haven't seen it come back yet we're not we're seeing some trickle effect in a few markets but not overall so I just I wanted to clarify that particular point and then you want to yeah no and I think you know beyond that Andrew there's there's been more that we've gathered and learned from our conversations with our supplier partners just around as Charlie mentioned the lack of progress that they're seeing around staffing levels. But then in addition to that, just learning more about hatchability rates. And if you think about the overall supply of birds in the market for that poultry industry to take 3% to 5% out in a short period of time on top of demand outpacing supply, it's going to result in what we believe will be sustained prices for wings for the balance of the year. They are working on improving the breed stock for birds, the rooster stock that's technically just underperforming these days and not being able to achieve the hatchability rates that the industry has enjoyed over the years.

That's helpful. And then just to follow up on commodities, you know, as you hit the one-year anniversary of the pricing mechanism, if we look ahead, has there been any change in the structure of the pricing mechanism that you're utilizing? I mean, obviously tremendous benefit that brand partners only recognized about half the inflation on chicken wings versus what it could have been.

Yeah, Andrew, no significant change to call out. It's definitely a demonstration of the strategic partnerships that we have. These supplier partners, we've been doing business with them for over 27 years now, and it just really speaks to how they reward Wingstop for being a buyer of wings year in and year out, not jumping into the market when it's on trend or popular. and we expect to continue to benefit from competitive pricing arrangements that we have today. And, Andrew, I would add one more comment just to clarify from your earlier point. We don't see this impact to wings as being a competitive pressure issue at all. It is purely what Michael has described. The actual supply of birds is down because of these two factors he mentioned. I just think it's important that we just reinforce that message to all of you.

That's very helpful. Thank you.

The next question will come from Jeff Farmer with Gordon Haskett. Please go ahead.

Great. Good morning, and thank you. On the last call, I believe you guys mentioned that your franchisees were, I think you said, leaning into smaller restaurant designs with a greater focus on off-premise. So the question becomes... Are you beginning to see that work its way into the current restaurant design, or are any 2021 openings in the back half of the year going to be in some form of a new design, or what can we expect heading into 2022 as it relates to the core prototype?

Yeah, it is definitely a trend we're seeing as we add new real estate to the pipeline. I'll call out our Manhattan expansion project. and tell you that the average street-side restaurant that we're going to be putting into Manhattan currently, based on the leases we have, is about 1,350 to 1,400 square feet. That's a lot smaller than what we're typically doing, and I think you'll see that trend continue across the country.

Okay, and then just as a follow-up, Charlie, I think you were asked about this earlier in the call, but on menu pricing, can you provide some details on – hopefully at least where the company average menu pricing levels currently stand and thoughts on private pricing power moving forward?

Well, I definitely believe that the brand has adequate pricing power to continue to follow the inflationary trends that are in the market. I think our approach will still be one that's a little more surgical. It won't be a big chunk of a price increase. We've seen some other brands take, but instead we'll continue to do this very carefully and thoughtfully with frequency, at least through the next six to 12 months. But our historical pattern has been two price increases a year, as I mentioned before, yielding one to two points of price. That's been consistently in the comp that we've discussed. over the course of the next six to 12 months, you know, that can pick up in frequency and a little bit in size just to accommodate some of the inflation we're seeing. Thank you.

The next question will come from Andrew Strelzyk with BMO. Please go ahead.

Hey, good morning. I have a question on scale. System sales have essentially doubled over the last three years and so I'm wondering how that added scale is impacting the business and what types of unlocks opportunities it's creating for the system maybe that we could think about.

I really appreciate that comment. It is absolutely correct. And we intend on continuing to see our scale grow and develop. And I think when you think about just some of the current situation we see in terms of commodities and the influence they have and our focus on for instance, in the supply chain yielding a whole bird strategy instead of just buying the commodities. What we want to make sure of is with our size and scale that we don't let an inefficient market dictate our margin structure. And so we are going to be really focused on making sure that we put this brand in the position that it deserves with its size and scale at nearly $2.5 billion of system-wide sales. we should be in a position where we can start to control more of that. And that's where our heads are focused. I think that scale also plays itself out in technology and the advancement of technology. As we mentioned, we're making a big investment. Again, it's centered on control and making sure that we can make the adjustments we need to do to our systems to consistently deliver upon the expectations of our consumers. and not just here in the U.S., but on a global scale. So three of our big strategies incorporate a global supply chain, which is a key focus, a global tech stack, which we've already started the investment in, and making sure that we become one global brand as a company. And you're going to start to see this continue to evolve. Certainly we want those international markets to open back up and gain more traction as we expected, but we've lost over the last 16 or so months and then you'll see Wingstop really start to evolve into that global brand, well on our way to being one of those top ten global brands where, you know, system-wide revenues should be substantially greater than where they are today. So hopefully that gives you some context on that.

Yeah, really helpful, Colin. I appreciate it. Thank you very much.

The next question will come from Michael Tamis with Oppenheimer & Company. Please go ahead.

Hi, thanks. You guys talked about your digital evolution as you gain more customers and launching ThighStop virtually. So can you maybe first remind us where does your 25 million customer database stand compared to a year ago or maybe the beginning of this year? And then what's shifting in your digital strategy? If you can highlight maybe some of those levers that you believe you have left to pull. Thanks.

Yeah, that database, I don't have a specific number, but I can tell you that even since the pandemic started back in March, April of last year, we were adding new guests at a rate of over a million a month. That's tapered a little bit over the course of the last few months, but nonetheless, it's been a substantial increase. And so it's growing very rapidly. I think the last report out, we had a little over 20 million. We're now up to 25. So you get a feel for, and I think important, important to recognize, too, our digital mix has maintained and actually increased sequentially quarter to quarter, which we think is unique in the marketplace and worth discussion. So as we continue to evolve our approach, we're going to behave a little bit more in a platform manner, making sure that we bring guests closer to us, that we spend more time one-to-one engaging with them. We've put a robust CRM system on top of this to make sure we understand a lot more about who they are and driving additional business in the future. The way we can expand on that digitally is to identify their patterns, their preferences, understand more about those customers, and bring solutions to them that are tailored specifically to them. So less perhaps of a promotional approach where we have to bring products to the table to demonstrate and instead focus that attention one-to-one with each and every guest. And that's where the future will be for this brand as we continue to invest heavily in our technology.

Gotcha. Thanks. And then just a follow-up, I think it was John's question on your New York City plan. Are there other markets similar to New York City where you're planning to do this strategy? And how many units do you think annually that might be? Thanks.

Hard to say on how many new units we get, but I think the demonstration of a partnership approach with some of the key ghost kitchen providers is going to be to our advantage. We fit beautifully into those models. We can obviously expand them very rapidly because it doesn't take very long. Once they've got the kitchen in place, we're in. And it takes us maybe six weeks to actually get a restaurant open, so we've really compressed the timeline. We already have a lot of experience. London is a great example. What we've done in London to expand that market as rapidly as we have with both street side and ghost kitchens is a playbook that we're using here in Manhattan. Other markets with potential for that, Boston, Philly, San Francisco, we're already doing it. Densely populated areas of Los Angeles, we have a ghost kitchen in North Hollywood. We have one in San Francisco. I mean, they're doing great. So we're really bullish on this opportunity. We like what it presents for us. It's a way to grow with scale quickly, but also we're going to be thoughtful. We're not going to go swing the pendulum too far. We like the balance of having some street side and these ghost kitchens complementing each other and creating some brand presence. So I'm very excited. It's a fun time. That's why we're here in Manhattan today. We're going to We're going to spend some time with these restaurants and getting this market open and operating. Awesome. Thank you.

The next question will come from Chris O'Keele with Stifel. Please go ahead.

Thanks. Good morning, guys. My first question relates just to development.

Do you believe the system is through kind of the worst of the delays from a construction and permitting standpoint, Charlie, or are franchisees still seeing those delays at various stages? Yeah, we're not seeing delays in any markets. I mean, we've had, I should believe it or not, we've had one or two here in Manhattan, quite frankly. But otherwise, I think everything has worked out just fine. I think we're moving along just fine. There's no real delays. Those were a thing of kind of April, May, June last year, where people were struggling to kind of figure out how do they get out of their local municipalities and get to work inside the stores. And we used some very clever ways with our team to get permits taken care of. But right now, it all seems to be moving along just fine. So labor shortages haven't caused any issues with construction? No, no, we haven't seen it. Now we have, you know, we've got a really good group of contractors we work with across the country that have been able to maintain staff levels, and they're busy. But no, we haven't seen any challenges on that yet.

And then just one last one on

the strength you're seeing from the ghost kitchens. I'm just curious if you could talk about the strategy where maybe franchisees might deploy those assets.

I was just wondering if you envision franchisees using ghost kitchens as kind of a release valve for demand in certain markets just to improve throughput.

Well, they already are. I mentioned a couple of them, one in North Hollywood, one in San Francisco. We've got them all over the country. They are using those. And I think what we're going to do is be very careful about where we place the ghost kitchens in various markets throughout the U.S. versus our street-side locations. You have to have the proper balance. You can't just drop them in everywhere. We've learned that. So I think they're very excited about them for obvious reasons. You can invest in these things for a fraction of the cost of a street-side location with comparable, if not better, rent structures and generate the same, if not more, volume. And so the sales-to-investment ratios on Ghost Kitchens as we noted, can be three times better, even in some cases substantially better than that of a traditional street-side location. So we are going to make those available and are making those available to our franchisees to continue their development. Great. Thanks, guys.

The next question will come from James Rutherford with Stevens. Please go ahead.

Thanks for getting me in. I appreciate it. You mentioned last quarter that you want to gradually migrate to more of a unified proprietary digital ordering platform versus, I think, some of the third-party tools that you're using today. I'm just hoping to understand what are some of the tangible benefits that you hope to see in terms of customer experience, or is it a cost-efficiency dynamic from that rebuild over time?

Yeah, you articulated that quite well. Thank you. It is about scale. It is about globalization. There is not a player today in some of the third-party applications that has a true global scale out there. And our goal is that whatever the Wingstop presence is here in the U.S. would be comparable anywhere in the world. And I think as digitization is growing and becoming more so much more prominent, that's going to be important for us. I think also we've seen brands go before us that have not invested in the global platform early enough, and so there's a retooling that has to happen if you go country by country. This approach allows us to scale globally a comparable platform everywhere. I think the other thing that's important is control of speed. While we love the stack we have and it's been very effective for us, sometimes speed the market on changes, adjustments, modifications that we need for our brand tend to get dropped into the bucket that satisfies everyone, not just what we need. And so we do believe that that's going to be a long-term benefit for the brand as well. Appreciate that. As a follow-up, as you think about where this brand can go or is going over the long term and the aspiration to eventually be a 100% digital business,

What do you think the mix of ghost kitchen versus traditional will be over the next five-plus years? And would you expect some potential conversion from traditional restaurants to ghost kitchens as leases naturally expire across the portfolio? Thank you.

Well, I think the answer to that question is it's an ever-changing target. You know, historically we've identified what we call nontraditional locations, which these ghost kitchens would be. You know, as being a meaningful but, you know, still a small portion of our overall mix, I think what we've learned in London, what we expect to do in other markets around the world can change that mix over time. But, you know, a market like Manhattan will be, you know, maybe a 60-40 split of retail sites to ghost kitchens, something like that. More to come on that. We may modify that. London is following a similar footprint. But we still have all of the, you know, markets out there that are not as densely populated as these are where that may or may not work for us. So it would be a speculative answer to give you to tell you what the mix is, but I think they have a real presence. And, you know, if our desire by becoming a top ten global brand is to get towards 6,000 restaurants, There are going to be a lot of ghost kitchens in that 6,000, no doubt about it. How many, we just don't have a number on just yet.

Thanks very much.

The next question will come from Michael Rothstein with Goldman Sachs. Please go ahead.

Hi, thanks for the question. You guys touched on it really quickly there on the digital mix, and pretty impressive that it's accelerated. Can you dig a little bit more into the drivers of that specifically? And I know you mentioned that delivery kind of upticked as well. And where do you think this might settle as you kind of go forward back after this year into 22? Thanks.

Yeah, I think we're really excited about our digital mix increasing, but it's been a part of our plan for a long time. We fully expect it to continue to increase as we go forward, bringing delivery on board. You know, effectively, that was launched nationally just before the pandemic started, and, of course, it accelerated. But we didn't expect it to taper off. We've anticipated that it would continue to increase. And if you look back in time for Wingstop, on our digital journey, historically we were increasing our digital mix about 400 bps a year, and it was sequential quarter to quarter increases just happening organically. I think that's going to continue to be the case the more we focus our efforts on our partnership with DoorDash, expanding the brand and markets that are more digitally focused and savvy. and continuing to make sure that our technology is right at the forefront in terms of its relevance to the consumer and keeping the application as our key focus will continue to drive and enhance digital into the future. I think it's an important little stat, but I believe our total cash portion of our total revenue now, the mix of cash customers is down 50%. It's around 15% of our total sales. I think that's indicative of how this brand can really evolve to be a fully digital brand long-term.

Great. Thanks. And one really quick follow-up. Have you seen any change in transaction size behavior as reopening is ramped, or has that been pretty steady since maybe earlier this year or even last year?

Well, I mean, you do see a little bit of mixed shift associated with individual transactions. We've said that many times when you reopen the restaurants. However, the impact of reopening has been, you know, minimal. If anything, maybe slightly accretive to the comp, but overall it's been pretty much a wash as we've seen these restaurants reopen. And as of today, there's still only a couple hundred restaurants that have actually reopened out of the 1,400 in the U.S.,

The next question will come from Brian Vaccaro with Raymond James. Please go ahead.

Thanks, and good morning. First, Charlie, two questions, if I could. But first, Charlie, I was intrigued by your comment on you mentioned that the progress you made on international business development, it sounded like that might be in Asia or other regions. Could you just expand on that, given how important the global development is to your long-term story? Well, I think I would call out two specific areas, although we're seeing interest all over the world. Asia certainly is a market that has a great opportunity for us. We've talked about our desire to expand in China long term. That doesn't happen overnight, as we all know, so it's going to take us some time. But the other part is Western Europe. We really believe what we've learned here already with our market entries in France and the UK is that we have a great opportunity to expand this brand. Those are markets that we can offer a premium price with a heavy digital focus. And I think, you know, the focus on digital from the expansion through the pandemic is going to be to our benefit long-term in a lot of those markets. And then obviously we announced that we signed a deal in Canada for 100 locations last That will start in Toronto, another city that fits the model perfectly. So we're continuing to engage with the leads and hope to, you know, the biggest challenge, if there is an obstacle, is just reopening these markets and getting people back. It's not like the U.S. right now. And so there is a lag, but once that lag is addressed, I think you'll see things continue to expand quickly. All right, that's helpful. And then the follow-up, can you just expand a little on how CyStop is performing since its launch about a month ago? Perhaps you could ballpark weekly sales run rates or when you expect to begin collecting royalties versus that 100 million threshold. And how will you report CyStop's results starting in the third quarter? Thank you. Yeah, we historically don't provide specific product reporting or mixed reporting. That's just been a staple for us for a long time. I think the key to ThighStop is every order is beneficial to our long-term strategy for our supply chain and making sure that we focus on the whole bird. I think as it relates to the revenue, we're very pleased. It's in line with where we expected the product to be in a very narrow focus channel through DoorDash. So we expect to bring this back into the Wingstop brand make it available through our app, and I think that's going to really continue to drive the revenue for Zystop. But at this point, we're very pleased with where it stands. Thank you.

The next question will come from Jake Bartlett with Truist Securities. Please go ahead.

Great. Thanks for taking the question. My question was about the company-owned development in New York City. And I believe you mentioned that there's 25 trade areas that you've identified. And just to clarify, that would imply 25 openings. Just want to make sure that is the case, including ghost and retail stores.

And then also, I know you haven't opened any yet, but Any idea on what that does to the margins?

If that's the kind of addition, certainly it's going to have a big impact on company sales and company margins. Given the high margins it seems like you're going to get at the ghost kitchens, how much should this kind of change just the restaurant-level margin profile of the company in the next year or two?

So the answer to the first question is yes. Those 25 are anticipated to be 25 openings, and we'll get them open as fast as we can. And I think as it relates to the margin structure, it certainly has the potential to be creative and supportive of higher margins for the company-owned operations. We have already 30-plus company-owned restaurants out there, and they're very strong volumes with a lot of leverage through the P&L. So, you know, I wouldn't look to a meaningful change in that for some time. in terms of the overall margin structure. But, yes, they do have the potential of delivering a better outlook. What I would say is, in some cases, compared to markets like Texas and other markets, we're replacing some of the overhead costs with some pretty high rates of rent in this particular market. So we have to factor that in as well. But for now, I just assume it's similar to what we've expected all along.

If I could just add a follow-up on ghost kitchens in general, what kind of unit volumes are you seeing out of the ghost kitchens that you have? Do they kind of drag down the average unit volumes, or are they situated so that the volumes are going to be similar to a retail store?

Yeah, what we've experienced so far, although the number of them is small compared to the size of the footprint of the brand overall, but they've been similar to our average unit volume for a street-side restaurant.

Great. Thank you very much.

This concludes our question-and-answer session as well as our conference call for today. Thank you for attending today's presentation. You may now disconnect.