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.

Thanks, Michael, and good morning. As you just heard from Michael, the third quarter demonstrated the strength of our long-term strategies. We delivered a 17.7% growth in system-wide sales in the third quarter, which now totaled $2.6 billion on a trailing 12-month basis. We grew royalty revenues, franchise fees, and other revenue by $7.5 million in the third quarter. driven primarily by 215 net franchise openings since the prior year comparable period and the 6.9% increase in domestic same-store sales. As we signaled in our last call, we reversed the trend we saw in the second quarter, delivering a third-quarter comp that's largely driven by transaction growth. Company-owned restaurant sales totaled $20.2 million in Q3, an increase of $2.3 million, primarily due to a 4.3% increase in same-store sales in nine net new restaurants versus the prior year comparable period as we continue to execute our Manhattan expansion strategy. Our unique position with meaningful deflation is illustrated in our corporate restaurant margins. Cost of sales excluding pre-opening expenses and as a percentage of company and restaurant sales decreased by more than 900 basis points compared to the prior year, mainly driven by a nearly 1,100 basis point decrease in food, beverage, and packaging costs, a 150 basis point decrease in labor, which were partially offset by higher rent and other operating expenses in our New York City restaurants. We are pleased to see the sequential improvement in restaurant margins this year, which for the third quarter benefited from a 43% decrease in the cost of bone-in chicken wings. Based on everything we know today, we have a favorable commodity outlook, not only for bone-in wings, but also for breast meat, which we believe will continue into early 2023. The significant deflation in wing prices, the recent declines in breast meat prices, along with our sales drivers, will further strengthen unit economics. For modeling purposes and company restaurants, we estimate food costs to be 35.5% in the fourth quarter. As a result, we now anticipate company and restaurant costs of sales in the fourth quarter to be approximately 75%, which is an improvement of 1,000 basis points versus the fourth quarter in 2021. In the third quarter, SG&A increased by $1.7 million versus the comparable period prior year to a total of $16.7 million, driven by investments in talent and strategic projects to support the long-term growth of the business. This was partially offset by a year-over-year decrease in stock compensation expense. Adjusted EBITDA, a non-GAAP measure, was $28.4 million during the quarter, an increase of 33% versus the prior year. Adjusting for non-recurring items, we delivered adjusted earnings per diluted share, a non-GAAP measure of 45 cents, a 55% increase versus the prior year. Our highly franchised asset-light model continues to deliver strong free cash flows. As of the end of the third quarter, we had $539.7 million in net debt, Our net debt to trailing 12 months adjusted EBITDA was at 5.7 times, which is almost half a turn lower than at the end of the second quarter, which underscores our ability to quickly de-lever through a combination of adjusted EBITDA growth and strong pre-cash flow generation. We also are maintaining a strong cash balance that stands at over $170 million. This cash positions us to be opportunistic to support our supply chain strategy as we continue to explore options to take greater control of our supply chain. We remain committed to driving shareholder value and returning capital to shareholders through our regular quarterly dividend. Our board of directors has declared a dividend of 19 cents per share of common stock, a demonstration of the strong cash flow generation and strength of our business. This dividend totaling approximately $5.7 million will be paid on December 2nd, 2022 to stockholders record as of November 11th, 2022. Shifting to our outlook for 2022. We are reiterating our guidance for same source sales of low single digits and we are updating our guidance for net new units to a range of 225 to 235. from prior guidance of 220 to 235 for the full year. This translates to unit growth of 13 to 13.5% versus the prior year. We are also lowering SG&A guidance to a range of $68.5 to $70.5 million from our prior guidance of $70 to $72 million, including stock-based compensation expense of approximately $6 million. We are increasing our diluted earnings per share guidance of between $1.61 to $1.63 from prior guidance of $1.55 to $1.57. Our updated outlook for 2022 reflects our confidence in the second half of the year story for Wingstop, supported by the same strategies we are pursuing to achieve our vision of becoming a top 10 global restaurant brand. With that, I'd like to now turn to Q&A. Operator, please open the line for questions.

Thank you. 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're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. Please limit yourself to one question and one follow-up. And if you have further questions, you may re-enter the question queue. At this time, we will pause momentarily to assemble our roster. And the first question will come from John Glass with Morgan Stanley. Please go ahead.

Thanks. Good morning. I'm wondering on the chicken sandwich of a few things. First, Michael, if you can just talk about what the contribution actually was to the third quarter, recognizing it was there briefly, but it also sold out. So maybe are we over indexing to that right now or as we look at the third quarter? And can you talk about the dynamics and how it impacts check? Is it the kind of thing where it drives traffic but it's dilutive to check? Or how is it purchased, I guess, and how does it influence not just traffic but check as well, please?

Hey, John, good morning. Thanks for the question. You know, what I would say about chicken sandwiches, the reality within the third quarter itself, we had the chicken sandwich available for only six days. Clearly, we saw the potential for Chicken Sandwich for our brand and really the long-term opportunity that we have there and really a permission from guests for us to play in that space. It's something we're really excited about, but there's not really anything I would call out materially as it related to the overall quarter for Chicken Sandwich. But what I would point out is it was another demonstration of the opportunity that we have to drive brand awareness and the gap we have to other national brands, which is still significant. And so as we launched Chicken Sandwich, we really leaned in with our full advertising muscle, and we launched it all the way from inclusive of national TV to influencers to social to even PR campaigns around giving away 100,000 free sandwiches. And so really hit it hard, and what we saw was, was almost a halo effect to our overall business, where we saw the entire business, all channels, really see growth while we were out driving awareness around the brands. It's something we're really, really encouraged about, and we see that not only as a long-term sales-driving lever for us, but we also see it playing a meaningful role for us in our supply chain strategy. You heard in our prepared remarks the mixed levels that we're seeing today. We see a path where total bonus mix can exceed 50 percent and at those levels we see a path to food costs in the low 30 percent which I know you're familiar with our story and the unit economics John that's really compelling when you think about what that can do for our brand partners returns we did see similar to our test market we did see the chicken sandwich bring in a lot of new guests and with that we saw it mix nicely on the lunch day part and so there were some individual occasions with these new guests that we brought in that we were able to capture that did have a little bit lower average check. But again, it wasn't a significant number that I would call out on the quarter itself.

Thank you for all that. And Michael, just to follow up on what you just mentioned, on this path to getting food costs down to the low 30s, which I think is pretty remarkable just given how profound that would impact unit economics. one is the key driver to that, the chicken sandwich, is that part of the boneless strategy? Is there something else like you're just talking about boneless wings? And is there a timeframe you think about when that can occur? Is it in the next couple of years? Is it a very long-term strategy? How do you think about how that can materialize?

Yeah, absolutely. I think it's all of that, John. It includes the sandwich, our boneless wings, our tenders. And we have regions, we have restaurants today that have boneless mix in excess of 50% and do enjoy food costs today in the low 30s. And so it is happening, but for the broader system, we do see this as an opportunity and again, a long-term driver for our brand, not just a current quarter hit, but a long-term driver to continue to drive chicken sandwich mix. From there, a lot of these new guests that we're bringing in are also users of tenders that we see opportunity there. And so we can see over time as we continue to bring in these new guests, convert them to Wingstop users, the opportunity for that mix to continue to thrive.

Great. Thank you. Thank you very much.

The next question will come from David Tarantino with Baird. Please go ahead.

Hi. Good morning. A couple questions. First, on the Q4 comps outlook, your full year range of low single digits, kind of leaves a pretty wide range of outcomes possible in the fourth quarter so I was hoping that you could comment maybe more specifically on on what your expectation is for the quarter in broad terms you know especially now that it doesn't seem like you're running much pricing across the system yeah David good morning thanks for the question you know we're we're pretty excited about

you know, the work the team has executed against both here at the GC and our brand partners around, you know, reversing the trend that we saw in Q2. And as we progressed through Q3, we saw the comp sequentially improve throughout the quarter. And it was really as we began to execute against these sales drivers that we called out in our prepared remarks and also leverage the benefit of this elevated ad spend that we had year over year, not to mention the balanced message around value, which we think is really important in this environment. And we did talk about as we exited Q3, we saw the impact of 2021 pricing trail off, and basically our entire comp, being fueled by transaction growth, which is something we're really excited about and what we believe is really a true demonstration of the underlying strength and momentum in our brand. What we did comment about was chicken sandwich mix through the first few weeks of October, seeing that in the high single-digit range. And really what we've seen in the comp, David, through I guess the first few weeks of October is continued strength in that transaction growth. and where we're sitting and where we kind of expect October to finish up is around a 6% comp. That said, you know, we're confident in our ability to deliver on our target of low single-digit same-store sales growth, particularly something we're proud about, particularly when you think about the challenging macro environment that we're in, and doing that in a way that's really fueled by transaction growth.

Great. That's very helpful. And then one quick clarification. On the high single-digit mix for the chicken sandwich, how much of an increment of sales is that for your business? I assume maybe some of that's not incremental, but how would you characterize the lift that you're seeing at that level of sales mix?

Yeah, we hit on it a little bit earlier in that we've kind of seen it be the chicken sandwich sales that we're seeing be highly incremental. We're really seeing a combination of two things here, David. One is bringing in a lot of new guests, which we're really excited about. But then we have a lot of existing Wingstop users who are adding chicken sandwiches on to their existing wing occasion. And so we've seen it be be highly incremental and something we're really excited about, particularly when we think about the long-term potential for the brand. And we've talked about this in the past, David, where we've often, with our wing-focused offering, have had to navigate that veto vote. We really believe offering a chicken sandwich, which is a pretty universal occasion for just about anyone, this really gives us an opportunity to address some of those issues we've seen in the past. In the past, And again, provides us a lot of confidence, not just for this quarter, but that this is something we're going to be able to build on as we progress through the balance of 2022 and into 2023. Yep.

Makes sense. Thank you very much.

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

Great. Thank you. Two questions. The first one, just following up on the comp trends. Sounds like, I think you mentioned trends improve sequentially through the third quarter and you've given us some insight into October. Just wondering whether you see any signs of a slowing macro. I know you guys talk about 30% plus of your sales or maybe a lower income and recognizing that's clearly down from where it was five plus years ago, which is a net positive, but just trying to get a sense for what you would be looking for in your comp in the traffic or in the mix or anything like that. I know you said you have 30 million plus database users, so whether that's your toolbox to kind of assess trends by customer, just trying to get a sense if you're seeing any sign of a macro slowdown at all within that very strong comp. And then I had one follow-up.

Yeah, Jeff. I think we're in a pretty unique spot at Wingstop where, you know, if we look at certain geographies, certain income levels, we can see less growth. But We really have two elements at play in our brand that I think really strengthen our positioning. And one is that proven value playbook. And if you think about how consumers engage with our brand, it's really our frequency is about three times a quarter. It's an indulgent occasion. And usually when consumers are starting to feel pressure or they want to pull back, they mostly most immediately look at more high-frequency occasions, such as QSR four to five times a week visits, and we'll pull back there. And as long as we're presenting them with value, we've been able to retain those indulgent occasions. But then in addition to that, and I think what we demonstrated in the third quarter, is the opportunity we have around just bringing in new guests, whether that's closing the gap on brand awareness, whether it's capturing these chicken sandwich occasions, or even the addition of an additional delivery service provider such as Uber Eats that's allowing us to access a consumer base that we weren't previously offering Wingstop to. And so we have these two elements working in concert, if you will, and all supported by a significant increase in our ad fund dollars that we're able to invest this year that really help us have confidence in our outlook for 2022. despite any pullback from the broader consumer or any recession concerns that are out there.

Understood. And then my follow-up, kind of a follow-up from last quarter. I feel like I asked the same question, but I think it's just as relevant now. In terms of the conversations with franchisees, and I think you mentioned you just had a franchise convention, so I'm sure it was pretty upbeat, but any sign that the difficult broader operating environment or perhaps rising rates may temper at all the appetite for new unit growth into 23. I know this year you were raising the range and now you just tightened to the upper end. So we're talking about 13 to 14% type growth, but I would think some franchisees might just be intimidated by the macro we're heading into and perhaps be a little bit more cautious. Just wondering whether you're seeing anything like that or whether we should expect another year next year of solid double digit unit growth. Again, no formal guidance, just any conversations you've had that would give you any kind of early intel.

Yeah, Jeff, I appreciate the question. And, you know, we're really excited about, you know, having delivered for the first three quarters record unit development for the brand, not just in our domestic business but also in our international business, record pace of development for both areas there, which we're really excited about. And we did comment in our prepared remarks that on – or on the tails of that record pace of development, we actually sit here today with a stronger pipeline than we did this time a year ago, which I think really speaks to brand partners' sentiment, their excitement around reinvesting and continuing to grow with Wingstop. And I really think that is, if you will, the exclamation point on the fact that we've not only been able to benefit from call it low to mid 30% increase in sales over the last three years. But we sit here today with meaningful deflation in our business. And so right now, our unit economics are about as strong as they've ever been. And as we indicated, these leading indicators we watch around poultry seem to suggest, through the balance of this year and into early 2023, we should have a favorable commodity backdrop, which is really encouraging. And the last element I would add to the Wingstop development, and we've talked about this before, Jeff, is there's not a lot of leverage on the businesses for our brand partners. A lot of them use existing cash flow to reinvest and drive their growth. And so leverage rates is not a common conversation that we have with our brand partners. And I think knowing that, the rising rate environment that we're in right now doesn't give us a lot of concern around our ability to continue to deliver on our long-term algorithm of double-digit development growth.

That's great. Thank you.

Thank you. The next question will come from Jared Garber with Goldman Sachs. Please go ahead.

Great. Thanks for the question. Sort of wanted to follow up on the development conversation and the unit growth conversation that you just touched on a bit. Wanted to get a sense of maybe how the third quarter unit growth numbers sort of tracked versus your internal estimates as they came in a little bit below where we had been expecting, but at the same time you maintained and even to a degree raised your full year outlook on unit growth. So just want to get a sense of maybe how the third quarter played out and what gives you the confidence um for the level of opens that you'll need to see in the fourth quarter and then i guess beyond that um you know with the returns i mean the new returns sort of speak for themselves with the phenomenal phenomenal returns and the top line continues to grow so i guess what the question really is what's the path towards accelerating unit growth from here and and How what are the conversations you're having like with franchise partners, maybe larger more sophisticated partners to take this brand? On a more accelerated unit growth path.

Thank you Yeah, thanks for the question. I would say As far as the development, you know, I would say everything really from our perspective is is right on track We provided an updated raised our outlook last earnings call, and as we've progressed through the year, we've tightened that estimate only by raising the low end as we have good visibility in what development looks like for the balance of year. And so from our perspective, everything's on track, and we're really excited about our outlook and the reality that we're going to deliver a record development year for the brand. I think that's a really strong statement. When you particularly think about the broader macro and the operating environment that we're delivering that in, I think that really speaks to the strength of the brand. And we're pretty proud of that range translating to a 13 to 13.5% unit growth. We think that's pretty strong. As it relates to accelerating growth, I think it's happening. And you are seeing... Brand partners reinvest. We are seeing international start to play a bigger part of our development story. I mentioned earlier, international is on pace for a record development year. There's a lot of excitement around the globe for expanding with Wingstop. And I think as we progress, that international story is going to be a bigger part of our development and something we're really excited about. And we're constantly having conversations with large-scaled operators who are interested in Wingstop, but the reality is we've got a lot of existing brand partners that are excited to grow. It's a really efficient way for us to grow. They know the brand, we know them, and we're really excited about continuing to grow with our existing brand partners. Again, a strong testament to the returns that they're seeing and their desire to continue to reinvest.

Great, thanks. And then I guess just following up quickly, is there any outlook you can provide on what that development pipeline looks into 23?

Yeah, I think we commented earlier how it's strengthened from this time a year ago. And so the pipeline's strong. And, you know, we're excited about finishing this year out strong. And there's nothing in front of us that would lead us to believe we're not going to deliver another strong year in 2023.

Great, thanks so much.

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

Great. Just two quick ones from me. The first, I was wondering, you know, just following up again on the unit development piece of it, we've heard from a handful of other operators some issues around opening these stores, whether it's securing the proper equipment or getting permitting. And you guys don't seem to be hitting any of that, any of those roadblocks. So I'm curious, how have you and your franchisees been able to navigate around these issues?

Hey, John. No, I appreciate the question. I think a lot of other brands, if you think about their asset, it could involve a scrape and build out on the pad. It could involve a much more involved build. Whereas if you think about our asset, it is in line. It's a shell that we're building out, and it's extremely efficient. And I think that's what allows us to enjoy really low initial investment, on average $400,000, and deliver those great returns on that efficient box. We have been extremely proactive in engaging with equipment suppliers, just ensuring that the equipment is there to support our pipeline, whether that's us, you know, leaning in and securing banks and fryers as an example, And so we've taken a really proactive approach in trying to help mitigate any issues related to supply chain. But I think it's those two things are probably what are helping us shape up to have another record development year despite the challenging macro backdrop.

Okay. So even thinking about next year, there doesn't seem to be anything cropping up that you're saying would be a reason to believe growth would slow on an absolute basis. That's right. Okay. And then just following up on the COGS commentary about potentially moving down to 30% over time, which is great to hear, I'm curious. I mean, you've already got best-in-class unit growth, and, you know, the question from there is can it step much higher from here given potential, say, human capital constraints for franchisees even opening new stores? So I guess it then begs the question of is there other aspects of the business that franchisees can be investing in that maybe hits directly within their own P&Ls or perhaps, you know, are you, you know, do you think that better line of sight in getting to 30% food costs over time potentially accelerates the willingness of franchisees to buy into doing the supply chain co-op?

Yeah, I think there's a couple of things here, John, I would point out. One is we know continuing to protect and enhance our unit economics is is, if you will, a central pillar to our long-term strategy of delivering on the opportunity we have here at roughly 1,900 restaurants today, expanding this brand to over 7,000. And so the more we enhance and protect those unit economics, the increased confidence we have in that opportunity in front of us. There obviously will be areas where our brand partners will need to invest over time. One of them that we're seeing right now is as as our existing brand partners scale, they're making investments in their above restaurant support, their infrastructure, and so continuing to enhance these unit economics don't allow or don't require or permit any of those investments to impact how they're going to deploy capital. And so there are investments that are happening. And then as we scale the brand from here, as we continue to advance our supply chain strategy, we'll work closely with our our brand partners to ensure that if investments are needed, they're clearly communicated with the business case behind them and in a way that won't impact our long-term target on unit growth.

Great. Thanks for the time.

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

Thank you. Michael, obviously very strong performance following the increase in the National Ad Fund contribution back in May that's obviously being concentrated in the back half of this year. But can you remind us just contractually when the next 50 or 100 base points raise the National Ad Fund contribution is up for grabs to go to 5.5% to 6% of sales? And your level of confidence following the convention a few weeks ago that franchises will look to increase that contribution to continue to fuel the advertising strength you're seeing?

Hey, Andrew. Appreciate the question. When we went to increase the ad fund and convert that local 1% to national, we worked through a franchise agreement amendment process with all of our franchisees, and we presented the business case, and we were extremely excited, and I think this is somewhat unheard of in the franchising space, that we obtained 100% of signatures needed to enact that amendment and get the rate moved to a 5% national contribution rate. And as we sit here right now, Andrew, we feel pretty confident that that's given us a lot of firepower to continue to drive the brand and continue to close the gap on the opportunity we have in front of us around brand awareness when we compare ourselves to other more mature brands national brands. And the thing that's going to continue to fuel that fund and fuel growth is really going to come in the form of system sales growth, which is growing not only from same-store sales growth but through our unit expansion as well. And we believe that gives us a lot of firepower just to continue to drive the business and deliver on our algorithm of same-store sales growth.

Okay, great. And thanks for that. And then, Alex, just a question on the 2022 guidance. You know, you beat 3Q by more than you raised before your APS. So I'm trying to better understand the implication for lower than expected 4Q. And so you provide the restaurant margin guidance. It's encouraging. And I'm kind of curious, does the 4Q guidance embed some hefty deterioration in underlying three-year sales trends from 3Q to 4Q, you know, recognizing that you're rolling over that 5% price increase from a year ago, or perhaps a higher tax rate in 4Q than 3Q? Just love some help as we think through the mechanics.

Good morning, Andrew. Thanks for the question. Yeah, I wouldn't necessarily point to the same-store sales estimate. We're still delivering a three-year comp in that low to mid 30% range from a same-store sales point. So I think it really points to what you've seen historically from us with the cadence of our SG&A spend and how that steps up from quarter to three to quarter four, pointing to just the investments we're making in headcount and strategic project investments. Okay, thank you.

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

Thank you. You and a lot of your peers have seen some reduced frequency from that lower income consumer. But have you seen check management or any other indication of changing behavior from the balance of your consumer segments?

Hey, Jeff. Appreciate the question. We clearly indicated in our comments that we've seen the contribution of 2021 pricing trail off. particularly as we exited the third quarter. And really what's driving that is two things. One is, and I guess overall it's really just our business is remixing a little bit. We're seeing some nice organic growth in our dine-in business, which if you recall did carry a lower average check associated with it. And then earlier I called out these – some of these new chicken sandwich occasions that we're bringing in do have a slightly lower average check associated with them as well. And so we're seeing a little bit of a remixing of the business as some of those elements come into play. But the deterioration of the ticket contribution or check contribution in our comp isn't anything as it relates to the consumer trading down. We're not seeing that in our business really in any way.

Okay, that's helpful. And then unrelated, staffing shortfalls, I know that varies from sort of market to market and restaurant to restaurant, but have staffing shortfalls prevented any of the company or franchise restaurants from fully meeting demand? I guess, in other words, do you feel are any of these restaurants or regions, markets, leaving sales on the table because staffing levels aren't quite back to where you would like them?

No, Jeff, we're actually pretty encouraged with what we see out there from a staffing perspective. It's gotten much, much easier than it was, say, a year ago. And we're not seeing that constrained restaurant volume. And I think as you look at opening 167 net new restaurants through the first nine months. It's not restricting our ability to expand our footprint either. And I really just think that that highlights the efficient labor model that we deploy. You can run a Wingstop at our average unit volume of 1.6 million with as few as three to four team members in there. And the overall roster is clearly much smaller than what a lot of other brands have to operate within their assets. And so I think that helps us, you know, navigate and feel less of an impact from any sort of staffing issues out there if there are any that continue to persist.

Okay, helpful, and thank you.

The next question will come from Andy Barish with Jefferies. Please go ahead. Pardon me, Mr. Barish, you may be muted.

Oh, sorry about that. Yeah, actually, just wondering on, you know, as you talked about sort of the amount of sequential improvement, I guess, as you went through the 3Q and obviously September, you know, higher than what October is running. So just trying to kind of match all of that up with... you know with um uh you know what happened with only the week of chicken sandwich and everything you know kind of surrounding that i guess sorry andy i think we um we had we had a couple levers we were pulling

prior to chicken sandwich launch, you know, in those six days. And we did obviously see a really strong surge in demand in those six days, which resulted in us selling out of four weeks of inventory. But what we saw was a pretty consistent trend as we progressed, where the contribution of check trailed off sequentially in the transaction contribution bill. And again, we were running at a really strong number when you include six days of chicken sandwich in September. But obviously, we point to the fact that it's fueled by transaction growth. And as we continue to navigate this environment, as we continue to execute against these growth lever strategies, We feel pretty confident and excited about our ability to deliver that 19th consecutive year of same-store sales growth. And as we thought about the relaunch of Chicken Sandwich, I mentioned earlier how we fired just about every bullet we had with the initial launch. And we saw the opportunity and we saw how many new guests we were bringing in. And so with the relaunch, we took a much more measured approach. I referenced in our prepared remarks where we turned the chicken sandwich on, and for the first week we didn't even support it with advertising. And then from there we have advanced the ad support, ensuring that this opportunity we have of bringing these new guests into Wingstop, that we win them over and convert them to loyal Wingstop users and see that as a really nice long-term sales driving opportunity for us. And I think that's consistent with how we've approached things historically, where we take a very measured approach, we're very intentional, and we like the position that it puts us in to continue to deliver strong growth, regardless of a challenging macro environment.

Gotcha. And then just looking out to 23, I mean, anchoring around that kind of, you know, mid-single-digit number that you've talked about, you know, in the algorithm, I mean, is that, should we be thinking of that as primarily traffic driven growth, you know, as we try to look at our model for, you know, for next year?

Yeah, Andy, I know we'll come out obviously early next year with more definitive comments around 2023. I think as we sit here today, we've referenced this meaningful deflation that we've benefited from as a brand this year, which has really put us in a unique spot where we haven't had to take price this year. And a lot of other brands have, and they've had to take a lot of price to navigate this record inflation. And you're seeing that drive a lot of their comp, and you're seeing it start to impact transaction growth. And we're obviously not in that position, but All things equal, I would expect in 2023 for us to revert back to maybe our more historical trend around pricing, and that is a very disciplined approach of one to two points of price a year. But obviously, we'll need to watch and see how things play out as we progress through the balance of 2022 and enter 2023. Thanks. Very insightful. You bet.

The next question will come from Nick Sutan with Wedbush Securities. Please go ahead.

Thank you. You know, the pleasant surprise in the comp in Q3 seems to be that it was more broad-based than just a chicken sandwich. Is there any way to maybe just parse out what the comp without the chicken sandwich may have been? That would be very helpful.

Yeah, Nick, I completely appreciate the question, and it's it's a little bit of a difficult one to solve and you know we're we're kinda work for really bullish and excited about the quarter I'm the growth levers we pulled but a great example to to give you context on how to try to pull those apart is with with our elevated and spin we were able to promote chicken sandwich on a new delivery platform and so it's really hard to tease apart what drove the comp most, but what we can say is we saw a meaningful benefit in all channels. We saw transaction growth across the board and something that we're really excited about and we think is pretty unique in this environment and gives us confidence to come out and reiterate our low single-digit target for this year and deliver our 19th consecutive year of same-store sales growth.

And speaking of the Uber partnership, I think we went to like 62% in terms of digital sales in Q3. I think the trough last quarter was 60.5%. And how should we think about the digital mix from here? Can we exit 23 in the mid-60% range? What are some strategies that you're working on to drive that higher?

Yeah, Nick, I think our digital sales mix, seeing it continue to build and sustain from these elevated levels, It's another element or aspect that really differentiates Wingstop, where we can see and demonstrate that these new guests, these new digital guests that we brought in are sticky, and we're retaining those guests, whereas you're seeing a bit of a normalization to consumer dining behaviors, maybe back to more gravitating back towards pre-pandemic behaviors, and so a lot of A lot of brands are maybe not seeing that stickiness with their digital business, and we are, which I think is a really strong statement. We continue to see opportunity to drive and scale our digital business. We mentioned the addition of Uber Eats as a national delivery provider in the third quarter. That's something that we really haven't done a lot of ad support behind. We see a lot of opportunity not only there with With DoorDash as well, when you benchmark our delivery business against other more established, mature delivery businesses, there's a ton of runway for us. And so that is just one example of the opportunity we have to continue to scale and advance our digital business.

Thank you.

The next question will come from Dennis Geiger with UBS. Please go ahead.

great thank you i just wanted to ask about wing costs bone in wing costs you know given the deflation there how we should think about sort of continued use of strategic discounting to drive you know further traffic going forward for the for the core bone in and i guess we could frame it up relative to bonus as well but just anything on on discounting promotional levers which i think you've used pretty effectively in in recent quarters what that might look like into in the next year if you have any high level comments on that

Yeah, no, absolutely. I think we want to be really careful with the terminology we use here because as a brand, and I mentioned this earlier, we know Wingstop is used as an indulgent occasion. And when we lean into value, we don't really discount as a brand. So when we lean into value, And so we're retaining those indulgent occasions, but then presenting the consumer with value, which can be a price point. It can be the cook-to-order element. It can be the craft and the attention to detail that goes into our ranch that's made from scratch in the restaurant every day. All of those elements contribute to the consumer's perception of value. And so we lean into that and can promote things like the boneless meal deal, which we did earlier this year that really reversed the trend that we saw in the second quarter, and that boneless meal deal was at a decent food cost for our P&L. It wasn't really at a discount. And so we as a brand don't discount, but we are intentional about how we think about and present the consumer with value, particularly in an environment where the consumer is being more discerning with their dining out decisions. We know that we need to be thoughtful, and I think chicken sandwich is a great example of that. Our a la carte chicken sandwich that can come in 12 different flavors, presenting the consumer with a lot of variety, but yet presenting that at a $5.49 price point or even a combo with fries and a drink at $7.99 is compelling value. But then it also not only addresses value and that value message that's important to retain our core value, it's also bringing in a lot of new guests. And so these are long-term sustaining sales drivers that we're activating against that give us a lot of confidence in what's in front of us and navigating any sort of macro challenges that play out.

I appreciate that, Keller, very much. Just one other quick one. Just on China, any update to share there on the work you've been doing on the development opportunity there, if there's been any changes or any kind of new new commentary to share on that opportunity. Thank you.

Yeah, no, sure. I mean, China continues to be an opportunity for us that we're really excited about. We continue to have active dialogue with potential prospects to partner with in that region. That said, I wouldn't say anything's materially changed on our position there in the timing around it. Obviously, just having the party congress meeting conclude last week or earlier this week, we have to evaluate the implications and how that plays out. So we'll work through that, but I wouldn't say there's any meaningful update to provide at this time other than it remains an exciting opportunity for us. But that's just one of the many opportunities we have around the globe. And we announced earlier where we sold – the right to South Korea. We expect our first restaurant to open there in early 2023. Really excited about that opportunity. We continue to expand around that Southeast Asia region in addition to the success we're seeing in Europe, particularly in the UK, where we're 25 restaurants strong, on pace for a record development year. And even with some of the challenging challenges macro environment that the UK consumer is having to navigate, our business there continues to demonstrate strong sales. And in fact, over the past couple of months, they've actually seen margins strengthened. And so I think another really strong case behind our international growth story, and not only is our brand transportable around the globe, but the resiliency of our brand is showcasing itself in a challenging environment in the UK, just to provide that example.

Great. Thank you, Michael.

The next question will come from Michael Tomas with Oppenheimer and Company. Please go ahead.

Hi, thanks. You know, you sort of touched on this a couple questions ago, but your comments on delivery today have been pretty bullish, and you don't seem to be seeing a slowdown that others are experiencing or have talked about that they might see in the near future. Is that because you added a second delivery provider that added incremental customers, or can you help us better understand why you think this differential exists, recognizing that some of those food delivery cuisines are also a pretty good value for the consumer? Thanks.

Yeah, no, absolutely. I think there's a few things here, and they kind of tie back to earlier comments, but clearly one is expanding the delivery base and gaining access to a completely different delivery consumer has helped. But then you're also seeing just I mentioned the halo effect of some of the work we've done around national advertising leaning into that additional 1% where we commented last quarter We're expecting over 35% increase in the amount of ad dollars we can deploy in the second half of the year. And as the business is trending, I think it's going to be even higher than that, which we're excited about. And that's allowing us to bring in a lot of new guests. We're starting to lean in and activate on these delivery platforms. And so I think we are seeing new guest acquisition in these channels. That's helping us. continue to grow and see growth in the delivery channel.

Perfect. Thanks. And then, you know, your average customer transacts with you about three times a quarter. And you mentioned that traditional QSR typically sees, you know, several times per week in terms of frequency. So can you tell about any research you've done or what you've seen so far with the launch of the chicken sandwich and how maybe that platform could elevate your customer frequency going forward?

No, I think it's a great point. You know, a few weeks in it's, it's probably hard to get much of a read, particularly when you think about the frequency we just referenced with three times a quarter being the average. But we do see it as an opportunity to capture more occasions. And inherently, in capturing more occasions, you're going to impact frequency. And we talked about this being a long-term sales driver for the brand and something that works in concert with a lot of the other growth drivers that we're pulling. And it's And it's all these growth drivers in aggregate that give us confidence in our ability to scale our AUVs from what are 1.6 million today to what we believe we have a clear line of sight to, and that is to exceed $2 million. And so driving frequency through capturing more occasions is 100% part of that strategy that we're executing against.

Awesome. Thanks so much.

You bet. The next question will come from Chris Carrillo with RBC Capital Markets. Please go ahead.

Hi, thanks and good morning. So I wanted to ask about longer term strategy. So as you're looking at the changes across the menu, potential day part expansion, opportunities to drive transactions and grow awareness, could that lead you to revisit your real estate and restaurant format strategy? Is there potential to focus more on real estate and higher traffic locations or different formats like drive-through, just given how the business is evolving from here?

I think it's an interesting question, but one that we really haven't seen the need to push very hard on, in that we're $1.6 million AUVs today in a box that's anywhere from 1,300 square feet to 1,700 square feet in line with with the majority of our business off-premise. And so as you start to introduce complexities around an asset out on the pad, drive-throughs, it starts to change the operating model. You start to add labor. You start to increase occupancy costs. And so as we talked about in some of our comments earlier, really making sure we protect and enhance these unit economics is something that's paramount for this brand and and what we believe will continue to fuel industry-leading development. So we're going to stay true to that. And we see an ability, again, to drive AUVs to levels above $2 million with the existing box we have today.

Great. Thanks for that. And then just on the rebate of the advertising funds, Was that driven by just better than expected system sales and maybe more restrained advertising of the chicken sandwich relaunch? Or going forward, do you expect to kind of fully leverage that larger pool of advertising funds? Any clarification on that would be great.

Hi, Chris. Yeah, this is Alex. Yeah, that was a function of last year, the better than expected sales growth. We built up a surplus and just were being opportunistic to return a component of that ad fund surplus last year in the midst of record inflation. But to your point, that gives us strong, you know, even greater fuel going into next year with the growth in our system sales that we have to continue to work against our awareness gap to those top QSR peers out there.

Great. Thanks very much.

The next question will come from Joshua Long with Stevens Incorporated. Please go ahead.

Great. Thank you for taking the question. I was just curious, as we think about the opportunity for that boneless mix to go north of 50% over time, pretty exciting. When we think about the, you know, what kind of investments would be needed in that poultry complex to support that, assuming that you could get to that level across the overall system?

Yeah, I don't think it involves a fundamental change in our supply chain strategy. Really what it's doing is allowing us to lean in a little bit more, a little bit further on that whole bird strategy. And so as you use more of the breast meat, which is what is in our boneless products, it really allows you to have a lot more leverage and control more of the costs that go into the whole bird. And so this is actually something that's accretive to our supply chain strategy and not really anything that would require incremental or additional investment or different ways to think about how we execute against our supply chain strategy. It's actually something that just bolsters it and gives us more confidence in the plan we're executing against.

Very helpful. I appreciate that color. When we think about some of the, you know, ghost kitchen stores that your, ghost kitchen units that you have, given that you've had some more time to work with them now, could you provide an update on the strategy, any learnings, things that maybe might lead you to either accelerate, revisit, or just kind of update how those fit into the overall unit growth strategy now that you expand your digital awareness and digital channel?

Yeah, no, I would say there hasn't been a significant change in our perspective on ghost kitchens. We still have quite a few, I would say call it roughly 30 around the globe, and the majority of those are actually outside of the U.S., where we've seen great success in deploying that efficient asset type and help drive the brand outside of the U.S. And the U.S. results, as we've said before, have been have been mixed. There's some spots and some partners where it works really well, others where it hasn't worked that well. When we think about the long-term potential for the brand, that over 7,000-plus units, we do see a role for Ghost Kitchens pretty consistent with what we've said in the past. We don't see that being a huge component of our growth, but yet something we'll continue to monitor and evaluate as we progress from here and continue to drive and deliver that on our long-term growth algorithm for unit development. Great. Thank you.

The next question will come from Jim Sanderson with North Coast Research. Please go ahead.

Hey, thanks for the question and congratulations on a great quarter. Just wanted to drill down a little bit more on the digital component of your business. I think you mentioned an acceleration in digital sales mix. Was that delivery component, did that ramp up as well, especially given the addition of Uber Eats?

Hey, Jim. I think that the point we were calling out around digital is that we did see it grow quarter on quarter. And if you think about that in light of two things, one, that remixing we saw of our business where we're seeing a little bit of dine-in come back, where we're seeing growth in all channels, carry-out, call-in, still growing there as well. It was encouraging to see that channel grow. And in addition to that, as you're starting to see consumers drift back towards maybe pre-pandemic dining behaviors, you're seeing a lot of other digital channels retract. And to see ours grow is something that we're really excited about. And I think, as I mentioned earlier, it really speaks to the stickiness of the digital growth that we've seen in our business over the last couple years is something that we're excited to continue to build on and advance from here.

Okay, so I think last year you were mixing about 27% delivery. Is that still a good run rate or is that a little too aggressive?

Hi, Jim. Yeah, as we indicated in our investor day this past year, we see a path. The benchmark suggests upwards of 50% mix, and that's what we're working towards. You know, and Michael touched on the opportunity to partner with both delivery service providers, another vehicle for us to build awareness in their marketplaces, attract the new guests. And so, you know, we see a large runway ahead of us for the delivery business.

Okay, and just one last question on the digital business. You mentioned about a $5 higher average check. Is that related primarily to higher menu prices for those delivery orders or a little bit of pricing and higher items, just a little bit more texture on what's driving that?

Yeah, no, that checklist, Jim, is something we have enjoyed in our digital business even before we had delivery as a channel. Pricing on those channels isn't something that impacts that checklist.

Understood. All right, guys. 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.