Wingstop Inc.

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Wingstop, Inc. Fiscal Fourth Quarter 2021 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. Please note that this conference is being recorded today, Wednesday, February 16, 2022. On the call today are Charlie Morrison, Chairman and Chief Executive Officer of Michael Skipworth, President and Chief Operations Officer, and Alex Kalida, Senior Vice President and Financial Officer. I would now like to turn the conference over to Susana Arevalo, Vice President of FP&A and Investor Relations. Please go ahead.

Thank you and welcome. Everyone should have access to our fiscal fourth quarter and full year 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 condition. 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 to comparable GAAP measures are contained in our earnings release. Lastly, to 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. Our fourth quarter and full year results reflect continued momentum in our brand, despite the challenging operating environment. Today, I want to reflect on our journey since our initial public offering in June of 2015. Since that time, our shareholders who invested with us at that time and are still with us today have enjoyed a nearly 900% return. That return includes more than half a billion dollars in cash returned by way of dividends. Over that time, our team, combined with our investments in people and technology and the efforts of our franchisees, whom we affectionately call our brand partners, has delivered industry-leading results year after year. Over that time, domestic same-store sales growth has averaged 8.7% each year. New unit development has increased 13.5% annually. System sales growth has averaged 19.4%, and adjusted EBITDA growth has averaged 20.2%. We continue to streak of same-store sales growth that is now 18 years in length. I provide that context as a baseline for our results in 2021, as well as our outlook in 2022. In March 2020, our world changed dramatically. No one ever prepares their business for a pandemic, but Wingstop was ready. We were able to pivot quickly and leverage our strategic decision to invest in a robust technology stack that delivered best-in-class guest experience for digital and delivery ordering. We closed our dining rooms to protect our teams and our guests from the virus and settled into a year of record growth for the brand. Domestic same-store sales increased 21% in 2020. Many thought it would be hard for Wingstop to eclipse that performance in 2021 as the economy began to reopen and restaurants thankfully were able to accept customers for dine-in occasions again. In 2021, many brands saw same-store sales growth similar to what Wingstop experienced in 2020 as they lapped the challenges of the prior year due to the shutdowns. Wingstop continued to execute our strategic playbook in 2021, and as we sit here today, we are proud to say that not only did we lap the performance of 2021, delivering our 18th consecutive year of positive same-store sales growth and increasing our domestic average unit volumes to 1.6 million. But we did so in the face of an even tougher operating environment. The challenges we have seen associated with the extraordinary amount of stimulus that was pumped into the economy in 2020 and early 21 have led to the tightest job market we have seen in years, as well as a now 40-year high for inflation, peaking recently at 7.5% in January. But Wingstop experienced even greater inflationary pressures as the spot price of bone-in chicken wings rose more than 70% in the year. As a reminder, bone-in chicken wings are the core of our menu and make up approximately 65% of all product purchases. Our simple operating model allows us to absorb these swings and still keep our focus on our long-term strategies. Our brand partners understand this volatility and have aligned with us on price and product changes that we believe have mitigated most of the challenges and positioned us for continued growth. In the face of such adversity, we continued our pattern of industry leading growth. We opened 193 net new units, a new record for the brand. That is 12.5% growth. We ended the year with more than 700 commitments for domestic development, thus replenishing the pipeline from the start of 2021 and positioning us for another record year in 2022. Despite the cost headwinds of 2021, we delivered another year of 20% plus adjusted EBITDA growth, continuing on the trend our shareholders have enjoyed since our IPO. And our international business has returned to pre-pandemic levels and experienced net growth in the face of a challenging operating environment and plan to open new markets in 2022 to pursue our goal of 3,000 plus restaurants overseas. Our performance in 2021 was not just the result of rolling over a year after the pandemic subsided. It is reflective of a brand that is well positioned in a category all by itself. a brand that has stayed true to a proven strategy that has not changed in years. We are not in a turnaround. We have continued momentum that will take us well into the future. As I look to 2022, I am as excited as ever for the Wingstop brand. In collaboration with our brand partners, we are going to take our 1% local marketing allocation and consolidate it with our national fund to increase our total marketing spend to more than $100 million. We have built the infrastructure to convert our marketing approach from a promotional brand to a true MarTech platform focus, leveraging our database of more than 27 million users. We will also continue to build on our multi-year $50 million investment we started in 2021 to redefine our tech stack and position Wingstop for the future, expanding our global platform. This is not a story of a great quarter or a great year. This is a story about a unique brand that has been able to withstand the toughest tests and continue to showcase industry leading results. We are not concerned with what is going to happen in any given quarter. We see that the economy could slow down later in 2022, but we will stay true to our strategy. Shareholders expect us to deliver long-term, sustainable growth, even in the face of headwinds that might cause other brands to slow. That has been the experience so far, and we intend to continue our long-term growth. Our momentum is strong. In 2022, we intend to deliver on our mid-term algorithm of mid-single-digit domestic same-store sales growth and achieve a new record of approximately 200 net new restaurants. We will continue to make strategic investments to scale our business well into the future. With that, we now believe that our domestic footprint can scale to 4,000 restaurants and maintain our position for 3,000 international restaurants. That's a potential of 7,000 plus total restaurants. Our performance since our IPO has delivered approximately 900% total shareholder return, and this is something to be very proud of. But we believe we are just getting started. I'm very proud of the strong relationship we have with our brand partners who are growing this business with us. I'm honored to work with the strongest management team in the industry and thankful to our long-term shareholders for their continued confidence in Wingstop. 2021 was yet another great year for Wingstop, and we believe that 2022 is shaping up to be another one as well. With that, let me turn it over to Alex.

Thanks, Charlie. Our fourth quarter and full year performance demonstrates the strength and resiliency of our model, and we're pleased with our continued momentum amidst a challenging macroeconomic backdrop. Domestic same-store sales grew by 7.5% during the fourth quarter and 8% for the full year, which on a two-year basis equates to 25.7% for the fourth quarter and 29.4% for the full year. In addition to many price increases to address inflation, approximately half of our sales growth in 2021 was driven by transactions, which underscores the power of our one-to-many and one-to-one marketing efforts. This exceptional top-line performance paired with another record development year with 193 net new units resulted in $2.3 billion in system-wide sales, during 2021, an increase of 20.2% versus the full year 2020. Royalty revenue franchise fees and other revenue increased by $5.1 million during the fourth quarter to $33.1 million. The increase was largely due to domestic same-store sales growth of 7.5% and 189 net franchise openings during 2021. Company-owned restaurant sales increased by $1.1 million during the fourth quarter to $17.1 million. This increase was mainly driven by company-owned same-store sales growth of 5.3%. In today's release, and associated with our expansion into Manhattan, we introduced an additional cost of sales metric to provide clarity into the impact of one-time pre-opening expenses. We believe this presentation provides better insight into our core restaurant margins. Cost of sales as a percentage of company-owned sales, excluding pre-opening expenses, increased by eight percentage points during the fourth quarter. The increase in cost of sales was primarily due to record high bone-in wing prices. Erneberry prices for jumbo wings increased 41% when compared to the fourth quarter last year. However, Our restaurants saw an increase in landed costs of only 27.5% thanks to our price mitigation strategies. One of our stated strategies is to mitigate the volatility we see in food costs. And we are actively exploring a variety of strategic options to gain more control of our supply chain. Our goal is to deliver a more predictable food costs for our brand partners and continue to deliver best in class returns. With regards to wing inflation, we believe the worst is behind us and are pleased to see sequential quarter improvement in company-owned restaurant margins of 280 basis points. This sequential improvement has carried into 2022 as we continue to see a declining trend in the price of jumbo wings, now at $2.60 per pound, as well as the benefit from menu price increases. As these positive trends continue, we anticipate year-over-year deflation in wing prices in the second half of the year. Leveraging our entrepreneurial spirit, we recently opened a company-owned prototype restaurant with a delivery and carry-out only format, allowing us to rapidly test new equipment and layouts and initiatives to reach 100% digital transactions. We also opened three locations in Manhattan at the end of 2021 and expect to open six to eight additional restaurants during 2022 as we execute on our strategy to show up in a big way in New York City, and we remain excited by the potential this market has for our brand. In the fourth quarter, SG&A expenses decreased by $900,000 to $18 million. The change in SG&A expense compared to the same quarter prior year was primarily due to a decrease of $1.3 million related to COVID-19 costs and support provided to international franchisees, as well as a $900,000 decrease in consulting expenses to support our strategic initiatives. These decreases were partially offset by a $1.4 million investment in people to support the growth in our business inclusive of stock-based compensation expense. In the fourth quarter, We noted in today's release an accrual adjustment for $1.2 million associated with outperformance of our incentive plan in light of another record year. This adjustment was not contemplated in prior SG&A guidance. Adjusted EBITDA and non-GAAP measure was $20.2 million for the fourth quarter, an increase of 24.5%. As Charlie mentioned, 2021 marked another year of more than 20% growth in adjusted EBITDA. And since our first year as a public company, our adjusted EBITDA growth rate has averaged 20%. Adjusted net income and adjusted earnings per diluted share, both non-GAAP measures, were $7.3 million and 24 cents per diluted share, up 38% and 33% respectively compared to the same quarter last year. The performance-based compensation booked in the fourth quarter had a $0.04 per share impact to our adjusted EPS. Reconciliations between non-GAAP and their most comparable GAAP measures are included in today's earnings release. We ended the year with $425.6 million of net debt and a leverage ratio of 4.8 times net debt to adjusted EBITDA. an improvement of 1.2 turns versus the same period last year. We continue to de-lever quickly with our strong cash flow generation from our asset-light, highly franchised model. We are consistently evaluating the most effective uses of capital as well as monitoring the macro environment. Today, our Board of Directors announced a quarterly dividend of $0.17 per share of common stock payable to stockholders of record as of March 11, 2022. This dividend totaling approximately $5.1 million will be paid on March 25, 2022. As you clearly heard from Charlie, we remain confident in Wingstop's long-term outlook, and we will continue to make the appropriate investments to drive long-term growth. As we look ahead, we are confident in our growth algorithm with 2022 guidance of mid-single-digit domestic same-store sales growth and 200 net new restaurants. We estimate reported SG&A for 2022 to be between $73 and $76 million, which includes an estimated $12 to $13 million of stock-based compensation expense, as we continue to invest behind resources that will enable global brand growth. Also, I want to remind everyone, for modeling purposes, that 2022 includes the 53rd week. Before we open the call for Q&A, I'd like to take a moment to celebrate Wingstop Charities and their efforts in the communities we serve. In 2021, we crossed an important milestone with Wingstop Charities providing over $1 million to community organizations and restaurant team members in need since its inception. During 2021 alone, Wingstop Charities provided over 100 grants to organizations and restaurant team members. In addition, our contribution to No Kid Hungry provided 1 million meals to our youth. We appreciate all the hard work by team members both in the restaurant and at our support center, our brand partners, and our supplier partners who all helped deliver another banner year for Wingstop despite ongoing challenges created by the pandemic. We believe our culture is a differentiator and drives our tremendous growth and momentum. while we remain focused on executing our strategic growth priorities to fulfill our vision of becoming a top 10 global restaurant brand. With that, let's turn to Q&A. Operator, please open the line for questions.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. Please each keep to one question and a follow-up to allow as many participants as possible to ask a question. The first question is from David Tarantino of Baird. Please go ahead.

Hi. Good morning. Charlie, my question is on your same-store sales outlook. I think in your prepared remarks you mentioned that you expect to deliver on your midterm algorithm of mid-single-digit growth, but you also mention some concerns about the economy potentially slowing as you move through the year. So I'm just wondering if you could comment on your degree of confidence in your outlook as you sit here today, and perhaps how do you see the year playing out given the comparisons you're facing? Thanks.

Well, good morning, David. Thank you for the question. Yeah, I think my comments centered on confidence in achieving our mid-single-digit midterm algorithm. We're very confident that we can achieve that this year. The commentary on the economy is more tailored towards a nod towards the challenges and the headwinds that various years present to any particular brand, but at Wingstop, I think we've been able to demonstrate that no matter what the headwind is, we've been able to be able to navigate through that. Quite frankly, if there was a slowing, I think that's actually to the advantage of Wingstop. Our customers tend to protect their indulgent occasions that they love Wingstop for, and we've seen that our frequency doesn't change even when some of the macro pressures come to play, and I think we saw that over the last two years. We'll continue to see that this year.

Great. Thank you.

The next question is from John Glass of Morgan Stanley. Please go ahead.

Thanks. Good morning. I wanted to revisit the unit guidance for 2022, understanding it's a new record year versus 21, but it isn't that much of an increase versus 21. And so I'm just trying to parse out what is conservatism in your view? versus what are maybe some real factors that whether it's the cost inflationary environment or the development environment that may prohibit, you know, increased unit development. So I guess just how conservative is 200 and what are the factors behind it as you thought about that number?

Yeah. Good morning, John. I think we're very confident in achieving that target at 200. We've had a strong start to the year and we hope that that momentum continues. Obviously, there's always the consideration to any macro challenges that might exist in the past couple of years. We've all been thrown some challenges here and there, but we've been able to withstand that. And I think in 2021, we demonstrated clearly that we could hit yet another record, even in the face of some macro headwinds and notably inflation. There's nothing in front of us that we see right now that would cause us to lose the momentum that we have. We always have clarity into the six-month outlook on our development pipeline, and as I mentioned, it was a strong start already to the year. When we get into quarter two and closer to quarter three, we'll have more clarity, as we always do. We have always erred on the side of being thoughtful in our guidance on that, but also have been able to deliver against the expectations that we set, if not beat them. So as we stand right now, a lot of positives in front of us. The price of chicken wings is coming down, has come down a lot in the fourth quarter, and even more so in recent weeks. If that trend continues, that's definitely a positive for our franchisees as they look to continuing their development pace that we're seeing them going through now. And then I'll also call attention to the international markets. We have a strong finish to the year in the fourth quarter. You know, opening 18 international restaurants just in the quarter alone, which is a demonstration that our franchisees overseas are continuing to open restaurants and build them, and that those businesses are back to their pre-pandemic levels. We have new markets coming on board. They take a little bit more time. But overall, we feel very good about the pipeline that's in front of us. Barring any challenges, I believe that that number is certainly achievable, and if the momentum continues, we'll see where we are in another quarter or so.

Great. Thank you for that. Very clear. On your same-store sales guidance for 2022, what's the implied price increase? I know you talked last quarter about taking some pricing, that some of it rolls off, but maybe just contextualize what was the fourth – in fact, what was the pricing component of fourth quarter – And what do you generally assume that will be in 22, just to help understand what drives comps?

Yeah, I think we noted last quarter that franchisees were taking price going into the fourth quarter that may taper off, that the actual effect of the price increase would start to take effect, I should say, in Q1. So we do anticipate that quarter one is certainly stronger as we move wind our way off some of that pricing through the balance of the year, that may taper a little bit. But overall, you know, I would expect that a fairly consistent comp throughout the year on a two-year basis is the way to think about how we're looking at the overall effect. But the one-year comp will have some noise in it only because of some of that pricing starting to wane in the back half of the year.

Okay.

Thank you.

The next question is from Jeffrey Bernstein of Barclays. Please go ahead.

Great. Thank you very much. First, just following up on the menu pricing, I believe, based on your commentary last quarter, that maybe you're starting the year now with roughly 10% menu pricing taken by franchisees. On the face of it, it seems aggressive considering you do target the lower-income consumer. So I'm just wondering, I know you mentioned that the consumer seems to protect their indulgent occasions like Wingstop. But any concern related to elasticity or anything you've seen thus far where franchisees perhaps are now looking to offer more bundles or deals to ease some of the pressure on the consumer spend side of things? And then one follow-up.

Very good morning, Jeff. One thing to keep in consideration is that the effect of total price increases last year was about 10 points. However, starting in the first quarter, we do roll over some price increases that were taken in the prior year, so the net impact of that is probably about half of that. As it relates to the consumer and our pricing power, I think we've been able to demonstrate, as Alex mentioned on the call, the ability to continue to grow transactions, even when we're taking a pretty significant price increase. We do expect that we'll get back to our normal cadence of price increases, which usually is about one to two points a price per year in the comp. But we'll have to get through some of the rollover effect of the price increases we took last year. But we do not see that it is having a negative effect on transaction volume. And quite frankly, I think the consumer, and with the general nature of inflation in the economy and the amount of money they have, is a good indicator that they're willing to take those higher prices, not only with Wingstop, but with many other retail and other occasions.

Understood. And then my follow-up was just on the marketing commentary you made. I think you said there's another 50 basis points or 100 basis points. Maybe you could just confirm. But that's shifting from local to national. So I just want to make sure that franchisees aren't spending more. They're just reallocating it more to national and local. If you could just provide some color on how much that is and how you plan on spending that kind of broken out between channels, that would be great. Thank you.

Yeah, and thank you for that question. I appreciate you capturing that. I think it's very important as a reflection on our overall marketing strategy. What we did agree to with our franchisees was to take what was a local cooperative marketing spend that was distributed around the country, notably in our larger markets, and consolidate that now with our national spend. So we will be spending 5% of sales on a national basis going forward. What we believe in the analysis we did and why we arrived at this decision with our brand partners was centered on the fact that we can use that money much more efficiently on a national basis than we can on a local. There are a couple strategies that drive that. Number one is the one-to-one marketing platform that we're developing for Wingstop that capitalizes on these 27 million plus users that are in our database today. Our ability to market to them one-to-one is much more efficient than more of a scattered approach in a local market. The other thing we notice is that we don't need to be buying things like Facebook advertising at the local level. just to buy it also at the national level, we can consolidate that purchase and in many cases do substantially better, 30% to 40% better with our money in terms of the efficiency we gain. So I think this will overall positively affect our overall marketing spend, our effectiveness of that spend, and really target it so that it matches up with our long-term strategy of this macro approach to filling the top of the funnel, bringing people into our brand, and then at the micro level, one-to-one marketing that really enhances the guest experience for our customers. So we think it's a big win for the future.

You're shifting 1% from local to national. Is there any local remaining, or is that now 5%, 100% national?

It is 100% national. There is no local remaining. That is correct.

Thank you.

The next question is from Nicole Miller of Piper Sandler. Please go ahead.

Thank you and good morning. I want to ask about frequency. So the last couple of years have been about attracting new guests and maybe say the 27 million loyalty members are a proxy of that. We can go back to the January 2022 analyst day and look at what you shared in terms of light, medium and heavy users. And I think you can average out 12 visits a year. There's enough information with the AUV and what you provided at the time. And if these new guests come in as, let's say, light users, like four times a year, but then you kind of plot out what happens if they turn into your average guest at 12 times a year, it just seems like a major, major influence to AUV from frequency. So new units matter, new customers matter, but how much does translating these new guests to come more often impact your strategy?

Thank you for the very thoughtful question, Nicole. I agree with you that the impact of this strategy should deliver long-term sustainable same-store sales growth for the brand and by way of increasing frequency amongst both existing and new users to the brand. I'll call attention to an interesting note that we've talked about over the last year and a half, which is so many new customers coming into the brand associated with our technology sophistication and readiness during the pandemic. We've been able to retain those guests at a frequency level that is at or better than what we've seen in the past. We also are able to now segment those customers in this database and understand a lot more about them and tailor our efforts towards the type of customer that we believe is going to be a more frequent user of Wingstop and invite them back faster. Over the course of the last year, we saw an increasing trend and momentum on our retention rates for new guests coming into the business. And as we take these new marketing dollars and consolidate them nationally, and put them to work, we believe that we can continue to improve upon the retention rates that we've even seen so far and expect those to increase over time, which, as I think you alluded to and we agree with, is a long-term driver of continued same-store sales growth momentum for the brand.

Thank you. The next question is from Jeff Farmer of Gordon Haskett. Please go ahead.

Good morning and thank you and wanted to shift gears a bit. So with the introduction of the thigh stop virtual concept, I think that was June of 2021. You guys followed that up with the introduction of thighs, I believe, to the core wing stop in September of 2021. Question I have is what sales mix shift have you seen between bone and wings and boneless wings and thighs. So the bigger question there is, has the introduction of thighs as a prominent menu item done everything you've hoped?

Yeah, good morning, Jeff. I think it's definitely done what we hoped, which is help us understand how to use more parts of the bird. And in our product mix, we continually are working with the product to make sure that we've got it optimized for long-term success. We've seen the consistent cadence of mixed performance in the product since we've launched and then brought it onto the full menu. And it's done its job to help mitigate some of the volatility in wing prices or at least reduce our food cost because the product is actually cheaper to acquire. So I think all of those things have played into success for Thai Stop. I think a question will come about what does that mean for the current year and what do we expect it to have as an impact to royalties because we have provided our franchisees with a royalty-free impact of the thigh product itself on the sales from that product. And we believe that will be about 5.7% for the full year of 2022 just to help with that question that I know is probably the next one.

Yeah, I would have got to that, but just to take advantage of the fact that you just answered that, just one follow-up on this. So in terms of thinking about sort of broad strokes, I know you can't provide too much detail, but just in terms of thinking about cost of goods sold across the three different products, meaning bone and wings and thighs, is there any sort of high-level commentary you can provide there?

I think that... The best way to put it is we expect this to, and we've talked about this before, we expect this product to follow the cadence of Boneless Wings way back when we launched it a long time ago. It's a slow build. It's not growing perhaps at the rate that some would expect. We're fine with that. It is certainly optimizing the supply chain for us and making an impact there. It's helping us in terms of the number of whole birds we can buy and negotiate for in the marketplace, and that is a big deal for us. Long term, we expect this product to continue to grow. As I mentioned, we're going to continue to look at ways that we can optimize thighs into the mix, but it'll take some time. And I think that's been our consistent message from the get-go. All right.

Thank you.

The next question is from Andrew Charles of Cowan. Please go ahead.

Awesome. So, Charlie, because we don't have to talk about the royalty, can you talk about the increased target to 4,000 Ultimate U.S. stores from 3,000 previously? What I'm trying to figure out is how much of the increased target ties to new store formats like Ghost Kitchens, like the new Restaurant of the Future prototype, or should we think about it as a certain new geography or trade zone where you foresee increased penetration versus your prior expectation?

Thank you, Andrew. I had you right in the proper sequence for that question. I I would say, look, if we look back to when we went public and we talked about 3,000 restaurants domestic, we look at a market like Dallas-Fort Worth that had 80 to 90 restaurants in it, and today we're sitting here at 130 restaurants and growing, which would be a great extrapolation to why we believe 4,000 is certainly achievable. Core markets are still our focus, so the major MSAs are going to be where we're going to focus our efforts to penetrate and ultimately fortress those markets long-term. The mix of assets is an excellent question because we have seen with the advancement we've had with ghost kitchens and the productivity of those that they do fit a proper model. A good example is we launched in New York City with a ghost kitchen first and then complemented that with street-side locations. We're going to continue to expand Manhattan that way going forward with a mix of both. And then to your point about our new format that we unveiled here in Dallas, what we've done is almost reverted back to where we started the brand in the very beginning. It's a counter-only location, no seats, a refocused kitchen that we believe will be more efficient, and that's something we learned a lot about when we started our efforts in London and grew the UK business. We can handle a lot more transaction volume in that kitchen. We like that. More efficient to execute. All of those factor into what will be generally a much smaller, more stealth execution of the brand, which means it's playing upon the experience we've seen so far at over 60% digital, heavy delivery focus, and the fact that we haven't still opened the vast majority of our dining rooms across the country here in the U.S., we believe the brand is well positioned to be able to show up just about anywhere.

That's really helpful. Thanks. And then, Alex, question for you. I mean, when you look at the 2022 SG&A guidance as percent of system sales, should we think of this as the peak of the heavy lifting behind the tech stack project, behind international development investments that will hopefully allow you to lever SG&A in 2023 and beyond?

Yeah, Andrew, I think we've pointed to that where we feel we're going to gain that leverage comparable to other peers is in the long term. We're going to continue to make those investments in the business that support areas, strategic areas like technology and development. So I think you'll see us continue to invest as we guided to this year to support the business up for the long term.

Thanks, Chris.

The next question is from James Rutherford of Stevens, Inc. Please go ahead.

Hey, thank you. I was just curious if you could talk about the performance of your 2020 and 2021 classes of restaurants and just what kind of unit volumes those are producing, kind of compared to prior vintages, and whether you're seeing the historical pattern play out where they open and steadily build volumes kind of off of that base.

Good morning. Yes, still opening in the $1.1 to $1.2 million range, and that has been a big increase and a shift over the past two or three years from what was about 850,000 and growing. We are still seeing them mature. As we mentioned, our average unit volume for the system in the U.S. is $1.6 million. So we expect these restaurants to continue to grow. As we've seen, that same cadence is expected. There's, you know, to say it a different way, there's not a honeymoon associated with the opening of these restaurants that causes them to fall back.

Okay. Good to hear. And then if I'm not mistaken, it's been just over a year since you entered into the contract with your largest suppliers to give you those kind of favorable pricing on bone and wings. How should we think about the go-forward impact and your exposure to spot price movements? I don't think we know the duration of that contract, but just how do we think about that as wing prices are coming down, but should we still expect a delta between spot and what you all pay? Thank you very much.

Yeah, we're very thankful to our largest suppliers for working with us on that mitigation, and most of those are still in effect, and we expect those to maintain until we see this highly inflationary environment subside, which really has a lot to do with getting people back to work in these plants and expanding their practical capacity, which we believe will help. Over the course of this year, I think things are lining up. such that we should see some continued improvement in the price of chicken wings, which will benefit our P&L certainly and continue to do so. Even over the past week, we've seen about a $0.04 decline in the Erneberry price for chicken wings. So post-Super Bowl, we expected that to be the case. We hope that that continues. But I think over the long term, we're going to really exercise a lot of effort towards what we can do to take a little bit more control in the supply chain, whether that be through strategies to partner with certain suppliers on dedicating volume to Wingstop, whether that has to do with acquiring or building or evaluating various ways in which we can involve ourselves closer to the production of the product. So a lot more to come on that, but right now we feel very good about just the spot prices and where they're going and the direction they're heading. Thank you very much.

The next question is from Chris O'Call of Stiefel. Please go ahead.

Thanks. Good morning, guys. Charlie, you mentioned the company was expecting to be less reliant on promotional activity. So does this change your willingness to introduce new products, sauces, for example? And are there other cuts of the chicken that the that the company's testing to determine if it could benefit the supply chain or create a lot of demand? Good morning.

You know, by being less promotional, I want to clarify that statement. There's still the necessity to promote the brand at the macro level so that people know about Wingstop, that there's a call to action as it relates to any new innovations, products, or otherwise. And quite frankly, in the last... part of 2021, we launched a new flavor, Orange Szechuan, which was a fan favorite and was successful for us, and so we'll continue to do that. We've got a lineup of flavor opportunities that we'll continue to do, and that's been our cadence and sequence for quite some time. Going forward, will we use other cuts of the chicken? Certainly we've evaluated a lot of those. The key was to leverage the dark meat on the bird through the thigh and the drum and I think our innovation on creating thigh bites as an example which is a boneless version of our existing all white meat boneless wing is a great example of a really solid innovation that we think not only do guests love the product that we think it has a long-term effect in terms of being a high mix item as we continue to develop that product so overall we're going to continue to look at other ways to use the bird and expand the whole bird concept that we've talked about, which should ladder up to our supply chain strategies and how we can control more of the supply. Thank you.

The next question is from Michael Tamas of Oppenheimer. Please go ahead.

Thanks. Good morning, everyone. You know, you mentioned the benefits of shifting the national advertising to help you drive greater one-to-one marketing capabilities. So can you just talk about how impactful this can be It sounds like you have a lot of information supporting this change, and so can you just share what you're seeing either from a customer frequency or spend or just anything in general that helped drive that decision? Thanks.

Yeah, if I go back to what I commented on earlier, there are two benefits to it. The analysis just on the math exercise of efficiency says that we can meaningfully increase the effectiveness of our marketing without spending any more dollars, which in a sense transfers to more impressions, more TRPs, more ways to deploy our marketing dollars much more efficiently than we were doing in the local markets. And I think that's just a demonstration of the scale efficiencies we're creating as a brand. As it relates to frequency, our strategy really is now one that's focused on a MarTech platform more so than a promotional approach that most restaurant brands take, which means that we can, regardless of whether we have a new product or not, we can really start to point our advertising directly to consumers. A lot of our Facebook advertising, for example, now is not just a scattershot of Facebook ads, but we're going directly to the consumer and marketing directly to them and delivering unique messages to different segments based on who they are, how they use us, what their flavor preferences are, et cetera. It all now becomes very tailored. And that's what we're doing with this increased spin nationally is continuing to make that more precise. And I do believe long-term it will be a lot more effective. It will increase our frequency and start to shift the mix, quite frankly, of our customer base to our advantage to a higher frequency of higher potential user of our brands.

Great, thanks. And then, you know, I think last quarter you talked about a delivery pricing premium of about 15%, and you had the option to sort of flex that down if you thought you needed to to help drive some incremental traffic. So, you know, is it still a 15% premium, and how are you thinking about that in 2022, and do you expect to maybe flex that lever? Thanks.

Yeah, we have held that premium in play and I would expect that we'll hold that for some time. I think the benefit for the customer is they have two choices. One is to go through a marketplace where that premium exists and utilize our brand. And then the other is to come to wingstop.com where they would enjoy our standard menu prices and enjoy that value. And I think we're going to maintain that for the time being. I think we've demonstrated that it's not having a negative effect in any way on transaction volume. And so the longer we hold that out there, I think, while in this inflationary environment, the better for our franchisees and their profitability.

Great. Thank you.

The next question is from Jared Garber of Goldman Sachs. Please go ahead.

Hi, thanks for taking the question. I wanted to circle back to sort of the margin discussion and thinking about maybe over the longer term, the next couple of years, how we sort of think about getting back to the maybe pre-COVID restaurant level margins. Is it, Charlie, in your estimation, is it really just a matter of those wing prices coming down? Or, you know, are there ways that we can think about other efficiencies flowing through the boxes? And I'm wondering specifically maybe how you think about automation as part of that. Obviously, a big piece of the strategy over the last several years, especially pre-COVID, I think, was operating efficiencies and reducing menu SKUs and things of that nature. So just wondering how we should be thinking about some of those margin items over the longer term. Thanks.

Yeah, good morning. Certainly, we do expect wing prices to come down over time, as I'd mentioned before. We also, as I mentioned, are evaluating strategies to take more control of the supply chain and not be as dependent upon the spot market, which we believe will stabilize the overall impact that wings have on our P&L, set another way to mitigate the volatility and keep it much lower than what we've seen. That said, as bone-in wing prices continue to go down as we get closer to the $2 range, that's a great impact, a huge impact to our P&L, and we know that. But at the same time, we didn't just wait for that. We took price when we needed to. We made the product decisions that we needed to with ThighStop to really mitigate the impact of that, and we're going to continue to work on that. That's the menu and pricing side of it. On the other side of it, We are working on innovations. We mentioned earlier our new prototype restaurant, we believe, solves a lot of opportunities for the brand. Notably, this restaurant is highly digital and driving digital transactions, and our stated goal of digitizing every transaction is still well within play. That restaurant alone exceeds 70% in terms of its digital sales, which is indicative of what we think the future is. We use QR codes on our menu boards to encourage guests to use their phone, which is their kiosk in their pocket, to be able to transact with us digitally, even at the front counter, or continue to look at strategies to create efficiencies in the stores by way of the telephone. That's our biggest opportunity because it still represents as much as 30% of our transaction volume today. and we'd like to find ways either through automation or other mechanisms to drive people towards digital transactions. When we do, we know that we enjoy about a $5 higher average ticket, and we can redeploy or reduce the dependency on labor in the restaurants for those transactions. And so beyond that, I think if you look at the way the brand is set up now and the model set up, Our average unit volume exceeding $1.6 million on average, a low investment, a low roster size to be able to operate this restaurant, and a very simple product execution still deliver exceptional returns for our franchisees and hence why they are still developing at a record pace today.

The next question is from Dennis Geiger of UBS. Please go ahead.

Great. Thank you. Charlie, wondering if you could speak a bit more to the considerations for that mid-single-digit comp growth this year. You highlighted a few key points of focus on the call already. But, you know, if you could talk a bit more about maybe some of the biggest drivers that you are most excited about to support that momentum in addition to the pricing, despite the difficult operating environment. We would appreciate any additional commentary there as the first question.

Well, I think the levers we've spoken about that I would summarize that we're bullish about include the transition of that 1% marketing to national basis and being more efficient with it. And then next to that, the deployment of those dollars towards a strong one-to-one effort and our MarTech platform that we're building against this 27 million and growing database of customers. Those two areas alone are great levers that any business would love to have to be able to drive our long-term sustainable same-store sales growth. So if I put those two out there, those are the keys. And then I think just the continued momentum of the brand. This year, if you pool together all of our marketing dollars, we're going to be well over $100 million spend level in the market, which puts us up in the best in class. And so we're excited about the ability to continue to just increase our marketing efforts, grow the top line, grow awareness of the brand, and then

engage those customers and drive a higher frequency by way of that one-to-one effort great thank you and then just a quick point of clarification i think you mentioned a a fairly consistent two-year comp is the way to think about the year so i just wanted to confirm please if if you meant kind of two-year consistency or if you meant relative to to 2019 on sort of a three-year basis consistency through the year Thank you.

Well, yeah, so obviously we're going to roll over in Q2 a big comp number that will cause the two-year to drop, but that's natural. But the continuity from there still should be the same. Three years is an exceptional way to look at it. I do support that. Thank you.

The next question is from Brian Mullen of Deutsche Bank. Please go ahead.

Thank you. Just a question on China. Last call you mentioned pandemic delayed some of the progress in the market a bit. Totally understandable. Maybe you could just elaborate on some of the groundwork you've been laying there lately and where you are in the process with evaluation of potential joint venture partners. Just any color would be great.

Good morning. Thank you for the question on international. I'm really excited about the potential for our international expansion now that we've gotten through the worst of this pandemic and our markets are back to where they were in 2019 levels. I'm also really excited about the pipeline for international deals. I mean, if you combine our domestic pipeline with our international, we've got over 1,100 potential new sites for the brand. A big chunk of those are in international markets. We're getting ready to open Canada here in probably late first, probably early second quarter. We have a proposed record year coming for the UK in our development on strong average unit volumes over $2 million per store. Our partners in Mexico have been with us for a long time, are continuing their cadence of new restaurant development, as well as our partners in Indonesia and Singapore. So the brand is very strong right now on an international basis. Our pipeline for continued growth is there. We're looking at a lot of expansion, not only in expanding in Western Europe, the Middle East, but we also are looking at Asian expansion as well. China is certainly on our radar. It's a market we've been spending a lot of time and effort developing the right relationships and starting to really hone in the strategy there. We're not going to let our foot off the gas there, but it has been more challenging, as you can imagine, to get started in China. But I still believe we have great potential there. Markets like Korea also present great opportunities for us as well. So we're very excited about where our horizons are internationally and getting that business back on track for the momentum it had when the pandemic started a couple years ago.

Thanks. And just as a follow-up, in Canada, I know you have a 100-unit development agreement, but could you speak to maybe the pace you would expect your partner to go there? And then maybe over the longer term, how do you see the longer-term opportunity? Because that could be a big market.

Yeah, we think it could be a big market. You know, 100 restaurants is a great representation of the potential for the brand. We haven't talked about what we see beyond that. What I will say is usually our international development deals have a slow ramp that includes, you know, one to three restaurants in the first year of operation, followed by, you know, a pacing up to five to ten restaurants as they get through years two, three, and four, and then sustain from there. So That's been the consistent cadence. We would expect the same to be the case for Canada. We saw that with the U.K., and they're on fire right now and growing quickly. So I think if you use the U.K. as a benchmark of what we think the potential is there, that would follow suit. Thank you.

The next question is from Nick Setien of Wedbush. Please go ahead.

Thank you. I think you mentioned that you expect deflation in the second half of 2022 in terms of wing costs. Just given where the prices are going into Q2 and the pricing you've taken, why can't we see deflation as early as Q2?

Deflation and wing costs, you mean, Nick? I just want to make sure you're talking about wing deflation. Yeah, I think... Look, I think the potential is there. I think it has – there are a lot of factors outside of our control that drive that. But I do believe that there is potential for that, yes.

Okay. And then just – I know last year we talked about staffing quite a bit. You know, was there an impact in terms of on the comp, you know, from staffing challenges? Has that improved in terms of the staffing levels? Does that continue to improve?

Yes, we have not seen an impact to the comp associated with staff levels. That's very isolated. There are a few experiences we've seen where we've had restaurants trim hours, but that's a very, very small number. Overall, it's been a challenge in terms of the wage rate inflation we've seen, which is much like anybody else, exceeded 10% or more. But as it relates to filling the rosters and having enough people in the restaurants, The beauty of Wingstop is our roster sizes are quite small. Today, we're achieving about an 80% roster fill rate, which is plenty to be able to staff the restaurant on a full volume. We'd like those numbers to be higher. And we are seeing the market open up a little bit more, and we're getting hiring done. So I expect that issue to subside going into the second quarter.

And just last follow-up, I know you said you gave us the royalty rate for the year. When we take a step back, I think there's about a 10 basis point benefit from ongoing uptake in royalties from the newer contract still contributing. And so versus 2019, we were much higher in terms of that old and royalty rate. Once the, you know, the sort of thigh royalty moratorium ends, what could that royalty look like, you know, beyond, say, 22? You know, could it be, you know, 20 bips higher, 40 bips higher? Just because from 2019 to 23, that's, you know, quite a few years and obviously have the offsetting impact from international.

You know, excellent question. I would say this, I do expect that the thigh stop impact to wane in the back half of the year, and so that would help increase the effective royalty rate. But that's all factored into the number that I provided earlier, so I just want to be clear on that. We do have some incentive-based royalty impact out there. It's not a lot, but it does impact, and that's within existing franchisees and their development. cadence drives some near-term royalty efficiency. Other than that, we should be back on the cadence of seeing that increase as we approach 6% long-term. So hopefully that gives you that answer. But the 5-7 I mentioned earlier does take into effect the impact of Thigh Stop settling down in the back half of the year.

Thank you very much.

The next question is from Andrew Strzelczyk of BMO. Please go ahead.

Hey, good morning. Thanks for taking the question. I know it's still early and, you know, certainly not a normal environment, but I was hoping you could share some learnings from the New York City stores so far. I think you had expected that performance would be similar to the typical company stores. I don't know if there's any reason to think differently or if there's differences or nuances between the ghost kitchens and the traditional sites. And then if you could share the split between the two formats in 22 for the openings, that would be helpful as well.

Thanks. Yeah, so the ghost kitchens, especially when they go in on their own, unadvertised, tend to start a little slower than a street-side location purely because of the visibility. However, these restaurants, collectively are on a very consistent cadence with what we would see with new stores coming on board. So they follow that pattern we discussed earlier of having an AUV in the low to mid $1 million range and growing. We're very happy with the performance so far. Notably, you know, the city of Manhattan or the borough of Manhattan is not as occupied as it historically has been, and we're still yet seeing good, solid performance as people get back to work We think that's going to be a great opportunity for Wingstop as well. So all systems go on that. We're very pleased with the investment. Over the course of the year, probably a little heavier skew towards street side locations than ghost kitchens, but we'll have a complement of both. But I think we're at one to three right now, ghost kitchen to street sides. We'll probably pick off more of a 60% to 70% street side, the rest ghost kitchens as we go forward.

Great. Thank you very much.

The next question is from Jake Bartlett of Truist. Please go ahead.

Great. Thanks for taking the question. My first is a follow-up on that last one about the performance of the new stores. I'm wondering how much those new stores are pressuring restaurant-level margins near term. I'm assuming quite a bit, but maybe you can confirm that. What is your expectation as to how those margins will trend for the maybe specifically the Manhattan stores, you know, over time as they mature. I have a follow-up.

Okay, sure. Thank you for the question. You know, it's a good opportunity to call attention to the sequential improvement in restaurant EBITDA quarter over quarter from Q3 to Q4, especially given the pre-opening expenses that are typically not shown on our P&L, and we thought it was important for you to understand the impact that has so that you can better understand that we are seeing sequential improvement in margins because of pricing and the improvement in cost of sales associated with the falling off of the urinary barrier. So we're happy about that. We expect that to continue. Those restaurants will have a slight drag. I can let Alex comment on that simply because of the newness of those restaurants and the operating costs associated with operating in Manhattan, but also a good reason why I think Wingstop has a great advantage of having a mix of ghost kitchens and street side locations. Those two things will balance out over time, and we like that. It's much more efficient and effective to run a ghost kitchen than it is a street side location. It costs less to build out, costs less to operate. There are a lot of advantages there, but I think the complement of the two kind of washes things out long term. But in the near term, yeah, there will be some margin impact associated with it. Do you want to add anything?

No, Jake, just to add, you know, I think you can see the confidence of our franchisees in development and opening restaurants because, you know, we have this near, we had this near-end challenge of record inflation last year, but we've seen that steady uptick in openings with the restaurants through the quarters in 2021. And I think that just points to our franchisees thinking about the long-term, the confidence they have in the returns we'll see.

Great, great. Now, you know, I was looking at kind of labor, It was up 200 basis points, whereas it actually got leveraged last quarter. So I'm assuming that's because of those new stores, but maybe we can touch on it after the call.

Yeah, let me address that for you real quick because I didn't talk specific to labor. I did talk about food. There is some training and COVID-related expenses, meaning retention compensation in that number that drove that. So with the Omicron onset, there was a little bit of noise there in that 200 bps of difference on a year-over-year basis and even sequentially. So I think it is important to call that out.

Great, great. And then the next question is on the commitments. It's nice to see that you've retained the commitments, but if I look at the new stores that you opened and backing into incremental commitments over the last few years, This is the lowest amount of new commitments that you've gotten in three years. So just maybe frame that. Do you think there's any delay in getting new stores signed because of some of the environment? I mean, how confident are you in the new commitments, given that it did decrease a little bit in terms of the incremental commitments?

Well, I think the best way to answer that question is we're very bullish on the opportunity to get to 4,000 restaurants now. So the size of the pipeline in its absolute form is not really something that is indicative of the momentum that's within that pipeline. Last year we opened 193 net new units. If you compare that to prior years and the refill of the pipeline, I actually feel like the net pipeline is bigger than it was a year ago with more stores that were open, meaning you depleted more out of the pipeline to have to fill those back up. So I don't see that as a concern whatsoever.

Got it. And just to clarify, this is 700. This is all domestic, so we should be thinking about the domestic stores that were open that deplete this. So we're talking about 700 last year and then 700 this year domestically, right? Correct. Yeah, true. Yep, that's correct. Got it. Thank you. Appreciate it.

The next question is from Chris Carroll of RBC. Please go ahead.

Hey, Chris, your phone is really choppy. We're only getting about every third syllable.

Can you try again?

I'll talk about it. Yeah, we're going to.

Thank you. Yeah, we'll talk later. Sorry. Let's go to the next caller, Peter Saleh.

The next question is from Peter Saleh of BTIG. Please go ahead.

Great. Thanks. Can you guys hear me okay?

Crisp and clear. Yep.

Excellent. Thank you. Charlie, I think you mentioned automation in the kitchen and mentioned some automation maybe around the phone-in orders. Can you just elaborate on that, and are you seeing any opportunities to automate any of the tasks in the back of the house to ease some of these labor pressures? Is that something of a focus for 22, or is that something further out in the future?

Yeah, I did not, and my apology if I suggested we automated anything in the back of the house. We optimized the back of the house and the flow. That did not include any specific automation necessarily. But as it relates to the telephone and the ability to automate there, it's all about the artificial intelligence engine that we've been testing for some time, trying to perfect that. Once perfected, we believe that can intercept anything a substantial number of the phone calls that come in, which would reduce the burden in the restaurant. That said, I mean, we still can operate a Wingstop restaurant at peak volumes with as few as four to five people in the back of the house. So it's not a lot of labor that's required. So any adjustments or efficiencies would be a big deal. Also, it's important to note that our primary cooking platform is a fryer. And there are not a lot of technologies out there yet that have satisfied a true automation of that process to yield the quality that we expect. So really, I think it's more at the front of the house, the front counter, and the telephones where we believe we can achieve the greatest efficiencies.

Great. And then just on the whole bird supply chain strategy, you mentioned you're still evaluating strategies. Do you have any sense on when you guys will kind of push harder on this whole bird strategy? Is this in 2022 or is the fact that wing prices are starting to come down kind of put it more on the back burner now? Just trying to get your pulse on this strategy.

Yeah, we're pressing very hard on this. We're working with a lot of outside experts on what the right strategy is for Wingstop long-term in terms of taking more control of the supply chain. Right now, we don't have anything specific in front of us other than we clearly understand what efficiencies we can generate for the system once we achieve that ability to generate more control and alleviate ourselves from the spot market. But in the meantime, we're not going to allow a drop in wing prices, which we expect to see to keep us on the sideline on that initiative. Quite frankly, we think it's the right thing to do for the long term of the brand to continue to dig deep and find ways to, again, take more control.

Great. Thank you very much.

The next question is from James Sanderson of North Coast Research. Please go ahead.

Hey, thanks for the question. I wanted to dig in a little bit more to the bone and chicken wing costs, and if you've done any type of analysis to help us understand how store margins will change as the cost of chicken wings declines in the back half of the year, how that could improve store margin, sort of sensitivity to fluctuations.

Yeah, James, a good rule of thumb is that for every $0.10 of improvement in the Erneberry price of bone and chicken wings is about 10 bps to the P&L. So it moves very quickly as these prices come down.

Very good. Also, a quick follow-up. Did you have any – I think that your digital sales mix declined slightly compared to prior quarter. What about your percentage of delivery sales mix versus third quarter? Is that still about 27%?

That is correct. It's comparable to where it was in the prior quarter.

And just a quick follow-up to that. Is the balance between orders placed through marketplaces and through wingstop.com also similar, or has that changed at all?

That also is similar, yes.

All right, great. Thank you very much.

This concludes our question and answer session. The conference has now ended. Thank you for attending today's presentation. You may now disconnect. Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Wingstop.