Wingstop Inc.

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Wingstop Incorporated Fiscal Third Quarter 2022 Earnings Conference Call. All participants will be in a 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, October 26, 2022. I would now like to turn the conference over to Ms. Susana Arivelo, Vice President of F&P and A and Investor Relations. Please go ahead, ma'am.

Thank you and welcome to the fiscal third quarter 2022 earnings conference call for Wingstop. On the call today are Michael Skipworth, President and Chief Executive Officer, and Alice Kaleida, Senior Vice President and Chief Financial Officer. Our fiscal third quarter 2022 results were published earlier this morning and are available on our investor relations 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, 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 Michael.

Thanks, Susana, and good morning, everyone. Thank you for joining our call. At Wingstop, we have carefully constructed our strategies with a technology-forward and growth-oriented mindset, and that is precisely what has enabled the success of the model and our industry-leading growth. That is what has fueled our culture, how we behave, and the core values that are at the forefront of every decision at Wingstop. Our strategy is built upon a foundation rooted in both living the Wingstop way and investing in people as our competitive advantage. This enables our core growth pillars, so preserving our culture is key. In our last earnings call, we signaled to our second half of the year story. We are pleased with our third quarter results. Results that demonstrate the resiliency of the Wingstop brand and the impact of our strategies as we reversed the trend we saw in the second quarter and delivered strong results across the board. This has us well on our way to delivering our 19th consecutive year of same-store sales growth. In the third quarter, domestic same-store sales growth was 6.9%, with the majority of this driven by transaction growth. And that translates to 36% growth on a three-year same-store sales basis. System sales increased 17.7% to approximately $700 million. We opened 40 net new restaurants in the quarter and saw unit growth of 13.5%. Company-owned restaurant margins sequentially improved over the prior quarter as we continue to benefit from meaningful deflation in our core commodity, bone-in chicken wings. Adjusted EBITDA increased 33% to $28.4 million. I would like to spend a couple minutes to provide insights on our quarter trends and detail on the sales-driving strategies we executed against in the third quarter. At our Investor Day earlier this year, we outlined the strategies we are working towards to continue to sustain same-store sales growth and provide a clear line of sight into increasing AUVs above $2 million. During the third quarter, we made exciting progress against several of these sales-driving levers. We expanded our delivery channel, advanced menu innovation with the launch of our chicken sandwich, and we continue to drive brand awareness with an elevated level of national advertising spend. These are not just current quarter drivers for our business, but strategies that we believe have staying power. Let me briefly touch on each of these strategies, starting with chicken sandwich. We launched our chicken sandwich on August 29th. Our mission at Wingstop is to serve the world flavor, so we didn't offer only a plain and spicy version, but we gave our guests a variety of 12 chicken sandwiches, sauced and tossed in any one of our bold, distinctive flavors. And our sandwiches are offered at a compelling value, $5.49 for the a la carte sandwich and a dip, and $7.99 for the combo, which includes a drink, fries, and a dip. We anticipated that our chicken sandwich strategy would bring new guests into the brand and capture additional occasions, but we did not expect to see the incredible demand that we saw in our initial launch. Our initial launch sold out of four weeks of supply in six days, demonstrating the long-term opportunity we believe we have with Chicken Sandwich. After rebuilding supply, we relaunched Chicken Sandwich in early October with a more measured approach to ensure we went over all these new guests we're bringing into the brand by providing a great guest experience. We started the relaunch without advertising support and have gradually phased in media through the month of October. Only a few weeks into the relaunch, and we are pleased with the results, seeing the chicken sandwich mix in the high single digits range. That is over two times what we saw in our market test, and at these mix levels, chicken sandwich is proving it can drive more Wingstop occasions and play a role in building brand awareness. We also see chicken sandwiches as a way for us to further drive boneless mix in our restaurants and can see a path to boneless mix exceeding 50% of our total mix, which will play a key role in advancing our supply chain strategy. With a higher boneless mix, we can see a future with food costs in the low 30% range and will only further strengthen our industry-leading unit economics. Another sales driving lever that we executed against was the addition of Uber Eats as a delivery provider. In July, we launched Wingstop nationally on the Uber Eats platform, and with little advertising efforts, sales proved to be highly incremental and were in line with our expectations. We are excited about the partnership with both leading delivery service providers, Uber Eats and DoorDash, to capture incremental occasions. We believe we are in the early stages of building our delivery channel. And as we benchmark the more established off-premise businesses where their delivery channel is upwards of 50% of sales mix, we see a path with significant growth in front of us in this channel. The third strategy I want to touch on is expanding brand awareness. We have made great progress in increasing our brand awareness the last few years. yet our gap to national peers still remains a significant opportunity for us. At the start of the second quarter, we converted the local 1% advertising fund to our national ad fund, bringing our national ad fund contribution rate to 5%. This 1% increase, combined with our growth in system sales, has provided a meaningful increase in the amount of ad fund dollars we can invest. Historically, we had concentrated the majority of our local dollars in the July and August timeframe. Q3 represented our first quarter, lapping our historical local media investment window with the increased national spend. Not only does this give us the opportunity to drive these dollars more efficiently, we are also able to invest in more premium placements, such as live sports like the NFL, where you've likely seen us show up. This elevated level of investment will continue into Q4. And with our continued growth in system sales, we are on track for an additional step up in 2023 in our advertising investment that provides the firepower to drive brand awareness. We are excited about the strategic levers we are pulling to sustain same-store sales growth. As we exited Q3, the impact of any 2021 pricing has tailed off and our sales growth was driven entirely by transactions, which is a true signal of the underlying momentum in our business. We also believe it highlights the unique long-term sales driving levers we have as a brand. We continue to strengthen our competitive advantage with a best-in-class digital platform. While you're starting to see consumers resort back to their pre-pandemic behaviors, Our digital business has sustained above 60%, demonstrating the stickiness of our new guests. We're committed to our aspirational goal of 100% digital transactions where we enjoy a $5 higher average check. This continued expansion of our digital business allows us to continue to build upon our first-party database that's over 30 million strong. Sales-driving levers such as menu innovation through the chicken sandwich is another opportunity to capture new guests and further expand our digital database. Another important aspect of our growth story is global development, where we have a long-term target of over 7,000 restaurants. We opened 40 net new restaurants during the third quarter, which brings our total to 167 net new restaurants through the first nine months of this year. That's a 13.5% growth rate with both our domestic and international business on track to have record restaurant development for 2022. And our global pipeline has further strengthened, which, as we look ahead into 2023, positions us for another strong year. With average unit volumes of $1.6 million and an initial investment of approximately $400,000, Our brand partners are seeing cash-on-cash returns averaging 70%. These cash-on-cash returns have continued to strengthen this year as we are one of the few brands experiencing significant deflation in 2022. This is driving quite a bit of excitement among our brand partners. As we sit here today, the Urnaberry price for Jumbo Bone & Wings is $1.05 per pound. and represents a year-over-year COGS improvement of over 1,000 basis points. We are also seeing breast meat prices come down from their highs earlier this year and continue to see leading indicators that suggest a favorable commodity backdrop for the balance of this year and into early 2023. Despite the challenging macroeconomic backdrop, Wingstop remains well-positioned to deliver another industry-leading year, driven by our simple operating model, best-in-class unit economics, levers to sustain same-store sales growth, and record unit development. As the industry is navigating 40-year high inflation, forcing other brands to take price to manage margins while consumer sentiment is shifting, Wingstop is different. We are in a position where we do not necessarily have to take price. We have a proven playbook where we lean into that indulgent wingstop occasion, presenting our guests with value that has allowed us to successfully navigate prior economic cycles. Additionally, we have a lot of runway in front of us to bring new guests and capture new occasions with strategic growth levers such as expanding our delivery provider base and menu innovation like our chicken sandwich. We believe this highlights the opportunity we have in front of us here at Wingstop and the long-term growth story. We are reiterating our guidance of low single-digit same-store sales growth for 2022, which would mark our 19th consecutive year of same-store sales growth. And with the visibility into our pipeline at this point in the year, we are raising the low end of our estimate and now expect net new restaurant openings to be between 225 and 235, putting us in a position to exceed our 10% plus development target. I couldn't be more excited about how the back half of 2022 is playing out for Wingstop. Just a few weeks ago, we held our brand partner convention. At our convention, we outlined the strategies we are executing against to deliver this next phase of growth for Wingstop, And I couldn't be more excited with the shared vision and confidence our brand partners have in Wingstop. Our unit economics continue to strengthen against a backdrop of meaningful deflation in our core commodity. We have clear line of sight to $2 million-plus AUVs and strategies that will help us navigate uncertain times ahead. We remain confident in our strategies that will reward our shareholders, franchisees, and team members as we continue on our path to become a top 10 global restaurant brand. Before I hand it over to Alex, I want to thank our brand partners, our team members in the restaurant, and the team members at the Global Support Center for all their incredible work and commitment that has put us in a strong position to deliver another industry-leading year for Wingstop. With that, I'd like to turn the call over to Alex.