Q3 2019 Earnings Call
Good morning, ladies and gentlemen.
Thank you for standing by welcome to the Wingstop Inc. fiscal third quarter 2019 earnings Conference call. Please note that this conference is being recorded today Wednesday September Thirtyth 2019.
Call today, we have Charlie Morrison, Chairman and Chief Executive Officer, and Michael Skip our executive Vice President and Chief Financial Officer, I would now like to turn the call over to Michael Michael. Please go ahead.
Thank you and welcome everyone should have access to our fiscal third quarter 2019 earnings release, a copy is posted under the Investor Relations tab on our website at Wingstop Dot com.
Our discussion today will include forward looking statements. These forward looking statements are not guarantees of future performance and therefore, you should not place undue reliance on them.
These statements are off the subject to numerous risks and uncertainties that could cause our actual results could differ materially from what we expect our recent SEC filings contain a detailed discussion of the risk that could affect our future operating results in financial condition.
We also use certain non-GAAP financial measures that we believe can be useful in evaluating our performance.
The presentation of this information this additional information should not be considered an isolation oriented stuff that you put results prepared in accordance with gap.
Reconciliations to comparable GAAP measures are contained in our earnings release.
Lastly for the Q when they session. We ask that you. Please each keep to one question and a follow up question to allow as many participants that's possible to ask a question.
With that I'd like to turn the call over to Charlie.
Thank you Michael and good morning, we appreciate you joining us for our quarterly earnings call.
We celebrated our 25th anniversary as a brand in the third quarter and yet you have read the release that Michael just referenced then you can understand the we have a lot to celebrate here at Wingstop. Our third quarter performance was exceptional we opened 37 net new restaurants, ending the quarter with 1340 Wingstop restaurant.
Our system wide sales grew by 21.6%.
Same store sales for the quarter increased 12.3% driven primarily by transaction growth and represents an acceleration in the two year comp.
We are well underway to delivering an industry, leading 16th consecutive year.
The same store sales growth.
This strong topline growth and leverage on our personnel translated to adjusted EBITDA of 15.4 million up 25.8% over prior year and earnings per share of 20 cents.
These strong third quarter results as well as the fact that we're raising our full year guidance is a testament to the effectiveness of our long term strategies, which include driving same store sales growth by growing brand awareness and innovation.
Maintaining best in class unit economics for our brand partners and continuing to expand our global footprint.
We're excited about the positive momentum in our business and we believe are focused on these strategic pillars, along with the investments. We made this year have helped build the foundation for sustained growth for the long term.
We previously outlined some of the changes we put in place to deliver on our first strategic pillar driving same store sales growth through brand awareness and innovation.
As you May recall on January 1st of this year.
We increased the national advertising fun contribution rate from our brand partners from 3% to 4% of topline sales.
This additional funding enabled us to make key strategic investments to increase our level of TV media purchases and upgrade the quality of our creative messaging platform.
This investment allowed us to deliver to 12 week national TV campaigns.
Maintain our always on digital presence and increase our local market advertising in the periods, where we are not on national TV, yielding a fully integrated advertising effort to drive sustained topline growth.
We launched our second 12 week National TV campaign of the year at the beginning of September .
The campaign is focused on continuing our brand building message where flavor gets its wings, which highlights the first flight experience of the craveable flavors that makes wingstop so popular.
This campaign has been successful building brand awareness and the increasing conversion of those aware to more occasions as we have seen our frequency levels increase along with the addition of new guests to the brand all of which tie back to the acceleration in our same store sales.
We also launched a national tests during the quarter leveraging whole three part chicken wings.
This test is key to our strategy of mitigating the volatility that we see in commodity markets due to the price of bone in chicken wings and improving the overall unit economics for our brand partners.
We bundled these smaller holdings in a value offering the promoted on our app as well as digital messaging all in an effort to gauge guest engagement of the product well taking pressure off the jumbo chicken wings during their strongest seasonality.
Overall, we were pleased with what we learn from the test and will use our learnings to continue to find ways that we can leverage purchasing whole birds as a way to mitigate the volatility of wing prices.
Michael will update you later on the progress we are seeing during the fourth quarter on Jumbo wing prices that we believe is indicative of the impact this strategy can have.
We also continue to focus on technological innovation is a key driver of long term sustained growth for wingstop.
We have previously stated the goal of digitizing every transaction at Wingstop at the beginning of 2019, we launched our proprietary custom built online ordering site and mobile App, which has improved the guest experience and resulted in increased conversion from users who visit our consumer facing digital assets.
Digital orders are important because they carry a $5 higher average ticket and we think we can continue to drive digital sales without employing discounts or incentives like other brands do.
You may have seen in our earnings release digital sales accounted for 36% of domestic system wide sales in the third quarter, an increase of over 1000 basis points compared to the prior year.
The other area of innovation is the rollout of delivery to our domestic restaurants.
Based on two years of thoughtful testing, we know that delivery offers a high sales mix and highly incremental occasion to wingstop as new guests that did not preferred takeout as an option will choose delivery.
As a reminder, roughly 75% of Wingstop transactions are takeout and with our high average check and focus on feeding large groups. We believe delivery is a perfect addition to the wingstop offering.
In late 2018, we began a scaled rollout of delivery across the domestic system and ended the third quarter with 75% of our domestic restaurants offering delivery.
Excited to tell you that as of today, we have already achieved our 2019 target of offering delivery that 80% of our locations and now expect to exceed 90% of domestic locations offering delivery by the end of 2019.
This will put us in great position for 2020, where we can leverage our national TV advertising to promote the delivery channel for the first time as a brand.
These same store sales drivers combined with higher new restaurant opening sales have led to an increase in our overall domestic system average unit volumes.
Our domestic system average unit volume exceeded $1.2 million for the first time in the third quarter.
Growing our average unit volume allows us to leverage the efficient operating model of our 1700 square foot restaurant, which coupled with our simple menu and high off premise product consumption.
Helped sustain our best in class unit economics.
With an average initial investment of $380000.
Our domestic target year, one average unit volume for Wingstop is $820000. We believe our brand partners can achieve a year to unlevered cash on cash return of approximately 35% to 40%.
At our domestic system average unit volume of 1.2 million, we believe these returns exceed 50%.
These industry, leading returns are fueling continued new unit growth and the reason that existing franchisees continue to reinvest and grow with the Wingstop system.
As a reminder, existing franchisees comprise approximately 80% of the pipeline for new unit development.
These best in class unit level economics continue to provide us with a strong domestic pipeline for new restaurants.
But that is only half of the global expansion opportunity.
Our first international brand partner in Mexico, who is now our largest brand partner with over 85 restaurants, just signed an agreement in the third quarter to expand their development in Mexico to 200, total restaurants more than doubling our existing restaurant count in Mexico.
In addition in September we opened the second Wingstop and London.
If you recall this is the second location in the UK, where we are leveraging a new speed of service platform allows us to provide the same great wingstop experience, while reducing the average transaction time from 16 to 21 minutes to as little as five to eight minutes on average.
While we are only open for a few weeks we are encouraged by the strong started this new restaurant like its predecessor in London.
We will further expand our learnings on the speed of service platform. When we opened our first wingstop in France, which we anticipate opening in late November also leveraging this cooking method.
The continued strength of the domestic business as well as key milestones in our international business provide us the confidence in our global unit expansion strategy as well as our full year guidance, which Michael referred to later.
Finally.
We just returned earlier this month from our global brand partner Convention that was held in Las Vegas.
I'm encouraged by the energy and enthusiasm about brand partners as they look toward future growth.
Convention highlighted our focus on our core strategies, and including alerting labs, and a supplier showcase that enable brand partners to engage with us on our vision of becoming a top 10 global restaurant brand.
We also took some time to celebrate our collective success as well as the tremendous momentum in the business.
However, with that success comes the responsibility of all of us to make sure that we're focused on giving back to the community.
At the convention, we unveiled our corporate social responsibility and sustainability platform, which is aimed at establishing the efforts focused on our guest team members brand partners supplier partners shareholders and those in the community in which we serve to ensure that we act in the best interest of each.
We highlighted two key areas of our CSR strategy the expansion of Wingstop charities as our platform to give back to the community.
And to focus on reducing food waste through our supply chain.
Wingstop charities is comprised of two elements the Wingstop Foundation, which provides assistance the company and franchisee team members in times of personal crisis.
And Wingstop charities, whose mission is to engage view in our communities in the pursuit of their passions.
During our convention we saw both of these come alive and also raised the needed funds to ensure that we sustain our efforts I.
I would like to encourage you to go to Wingstop charities dot or to learn more.
We also spent time with our supplier partners celebrating our shared success based on the growth we have seen over the years.
But at the same time.
We discuss the importance of making sure that we are focused on reducing food waste at all levels of the supply chain and using every effort to get unused but otherwise good food into the hands of those who need it.
Overtime, we will begin to implement policies with our supplier partners to ensure that these efforts are tracked and measured.
We are fortunate to have such great support from our suppliers and brand partners as they play a critical role in fueling our growth as well as the positive impact that wingstop can have on the world.
In closing our great third quarter numbers are the result of our focus on the right strategic growth pillars for the brand none of this would be possible without the hard work and efforts of our brand partners and our team members and I'm confident that our continued execution against our strategy will continue to deliver best in class returns for our brand partners.
And our shareholders with that I'll turn it over to Michael.
Thank you Charlie.
As you heard from Charlie we delivered another quarter of strong growth. We ended the third quarter with a global footprint of 1340 restaurants, reflecting 37 net new restaurants in the quarter.
System wide sales increased by 21.6% over the prior year quarter totaling $383.5 million.
Complementing the unit growth with our domestic same store sales growth of 12.3% in the quarter, which was an 18.6% on a two year basis.
This top line growth translated to total revenue of $49.9 million for the quarter.
Royalties franchise fees and other revenue increased $4.1 million to $21.9 million driven primarily by 121 net new franchise restaurants openings since the third quarter of last year and the 12.3% domestic same store sales growth.
Advertising fees and related income increased $5.4 million to $14.1 million due primarily to the increase in the contribution rate. So our national AD run from 3% to 4% of gross sales in fiscal year 2019, as well as the 21.6% growth in system wide sales.
Our company owned restaurant sales increased $2.1 million or 17.7% to $13.9 million. This increase was due to the same store sales growth of 11.9% and the acquisition of four franchise restaurants since Q3 2018.
In August we completed the acquisition of a restaurant from a single unit brand partner in our home market of Dallas Fort worth, bringing us to 30 company owned restaurants cost of sales as a percentage of company owned restaurant sales increased by 630 basis points compared to the third quarter last year. This increase was primarily.
Due to 23% increase and the cost of bone in chicken wings also contributing to the increase was the higher contribution rate to our national AD fund, increasing from 3% to 4% labor and other operating expenses related to the three Kansas City restaurants acquired in late 2018, and third party delivery Commission.
As we discussed in our last earnings call, our renegotiated terms with jordache, we're not implemented until the end of that third quarter, we expect the fourth quarter to reflect the economics associated with our updated jordache agreement.
It's Charlie alluded to earlier well wing prices did not move a penny in the third quarter. We are encouraged by the recent relief we have seen in the Urner Barry pricing for Jumbo wing.
Based on recent trends, we expect wing inflation for the fourth quarter to be 15%, which aligns with our prior full year estimate of 30% inflation for 2019.
Advertising expenses increased $4.2 million to $12.7 million in conjunction with the increase in the AD Fund contribution rate also it's to remind everyone advertising expenses I recognize the same time the related advertising revenue is recognized and does not necessarily correspond to the actual timing.
Related advertising.
Selling general and administrative expenses were $13.5 million in the quarter, which is a 3.2 million dollar increase versus the third quarter of 2018.
This was driven primarily by an increase in stock based compensation expense of $1.3 million relating to the company's year to date performance and a $1.4 million increase in advertising related expenses recorded an S. DNA, which has an equal on offsetting amount recorded an advertising fee revenue.
The balance of the increase was driven by investments in technology and other strategic initiatives as we continue to position the organization for the next phase of growth.
Adjusted EBITDA, a non-GAAP measure increased 25.8% to $15.4 million for the third quarter.
There is a reconciliation table between adjusted EBITDA and net income it's most directly comparable GAAP measures included in our earnings release.
Net income in the third quarter was $5.9 million or 20 cents per diluted share down from 21 cents in the prior year period.
This decline was the result at the higher interest expense in 2019, which we guided to on our prior earnings call as well as our effective tax rate for the quarter of 23.4% compared to a 19.4% tax rate and the third quarter of last year. The higher interest expense is the result of a higher debt balance and applicable interest.
Great related to our securitized debt that we completed in November of last year, which has a full year impact of 19 cents per share when comparing 2019 earnings per share so the prior year.
As of end of the third quarter, we had $309 million a net debt. We ended the third quarter with our net debt to trailing 12 month adjusted EBITDA at 5.6 times.
We remain comfortable with this level of leverage and we believe over the long term, we will continue to de lever through a combination of adjusted EBITDA growth and strong free cash flow generation.
We remain committed to returning capital to shareholders through our quarterly dividend, which is targeted at approximately 40% of free cash flow. Our board of directors declared a quarterly dividend of 11 cents per share of common stock. This dividend totaling approximately $3.2 million will be paid on December 13th to stockholders of record as of November 29.
Right.
We have consistently evaluating the best use of excess capital and fill our quarterly dividend is an important part of our commitment to our shareholders.
Now turning to guidance.
As Charlie referenced earlier, we are reiterating our prior unit growth outlook for the full year 2019 of 136 to 142 net new restaurant.
Based on the strong momentum in the business through the first three quarters of 2019, we're raising our full year outlook for the following domestic same store sales growth is now expected to be between 10 and 11% previously high single digits.
And fully diluted adjusted earnings per share is now estimated to be between 75, and 77 cents up from 74 to 76 cents, reflecting 29.8 million shares outstanding.
Additionally, we are also updating our SGN a guidance, we now expect SGN eight to be between 53.5 and $55.5 million previously between 52 and $55 million consistent with the last quarter. We included a reconciliation on our earnings release from SGN a as reported.
To an adjusted SGN, a number that excludes transaction fees noncash stock based compensation and is further adjusted for convention and marketing related items, which items that an equal on offsetting contribution in revenue and do not impact profitability metrics.
Let me provide a few updates on each of the components that are included in the SGN a reconciliation.
Convincing cost of $1.7 million previously $2 million.
Expenses related to national advertising of between 7.7 and $8.2 million prior estimate was between $7.3 million to $7.7 million.
Stock based comp of $6.5 million to $6.7 million previously 5.9 $6.4 million adjusting for these components, we expect adjusted EPS DNA for 2019 to be between 37.6 and $38.9 million narrowing our ranged from our prior guidance.
Before opening the call for questions. We wanted to comment on our new corporate headquarters that we announced in June .
We closed on the 80000 square foot building on September 10th funding, the 18.3 million dollar purchase price with cash on hand, we're not anticipating any significant PNM impact for the new headquarters in 2019.
As we finalize the design plans to build out the new space and overall timing of our move we will provide an update as part of our 2020 outlook and our next earnings call.
In closing we are focused on the right strategic pillars that give us confidence in our long term growth algorithm of low single digit same store sales and 10% plus unit growth, which we believe we'll continue to deliver best in class returns.
Thank you all for joining US today, we will now be happy to answer any questions that you may have.
Thank you we will now begin the question and answer session.
Ask the question you May Press Star then one on your touched outside if you're using a state your phone. Please pick up your handset before pressing the case.
It was Jive. Your question. Please press Star then too.
Please limit yourself to one question and one follow up.
At this time, we'll pause momentarily to assemble our roster.
The first question today comes from David Tarantino with Baird. Please go ahead.
Hi, good morning, congratulations on such strong results.
Charlie I, just wonder conceptually if you could talk about your plan for 2020 at this point.
Is there going to recycling some very big comparisons so.
Perhaps can you talk about was what the sales driving initiatives are that you think Ken.
To sustain the positive comp.
A rollover these comparisons.
Hi, Good morning, David Thanks for the question.
Well I can't provide specific insight into the outlook for 2020.
What I can point to is the strength of these strategic pillars that we have.
Been talking about frankly since our IPO.
Centered on continuing to scale, our national advertising efforts.
The expansion of digital and delivery.
As as key drivers of our overall business platform and I think youre seen even this year even in this most recent quarter.
We have been able to demonstrate the ability to lap strong performance with equally if not better strong performance and that has been a hallmark of this brand for a number of years and I think it demonstrates just the potential upside we have working our way towards our long term vision.
Of being a top 10 restaurant brand.
That said.
A couple areas to call out number one.
We highlighted that we wanted to be fully rolled out with delivery.
Either this year or into next year. We are ahead of schedule, which is good news.
We do anticipate leveraging our national TV advertising.
With the delivery message that won't be the sold message, but it certainly will be a component part of the message and that will be the first time that we have.
Delivered a message to the consumer pointed towards the delivery platform. So we can expect that next year and then I would also call attention to the.
Growth in system wide sales and the dollars that that continues to produce for our national advertising efforts going into next year. So system wide sales up over 21%. This quarter is a good demonstration of continuing to fuel additional growth in the future as we continue to expand our reach.
To a much broader segment of consumers, which I believe we believe is helping fuel.
At a bit of this topline growth right now.
Right and on the National advertising I think you mentioned.
Have the option of increasing the spending ratio.
Have you made any decision on whether you plan to do that for 2020.
Yes, we do not plan to do that for 2020, we feel it's in the best interest of the brand long term that we hold that option back.
And given the momentum and strength of the comp and.
What I just called out.
Going to go in terms of the growth drivers that we believe can carry us forward for some period of time, we don't see the need to have to increase the contribution at this time.
Makes sense. Thank you very much.
Thank you.
The next question comes from John Glass with Morgan Stanley . Please go ahead.
Thanks very much my first question is on delivery in the in the whole that whole ecosystem as you're well aware a large aggregator made some fairly damning comments about the state of the industry.
And it's not clear to me.
Thats sort of shaking out, but what are the commitments that came out was the relative growth rate of this the delivery industry is going to slow as or is slowing as you look at your obviously your comps are very strong tables, you'll get your oldest cohorts of stores do you see any evidence of that occurring the people are once you anniversary. This there's a slowing of.
Gross.
And when you do start to see more free offers or delivery competitor competitors quick service competitors in certain markets. Do you is does it impact your business at all or not.
Hi, John Thank you for the question.
First and foremost, we do not see delivery in our business slowing and if you do go back to some of the original test markets, which are nearing their second year of operation. We have seen continued organic growth in those markets organic because we have not been advertising deliver.
Sorry, but yet we still seen natural growth and delivery occasions.
In those test market. So we're encouraged by the sustainability of delivery as I mentioned on the previous question, we will we expect to.
Advertise delivery.
Going into next year, so in our first.
Primary window, which happens late February early March we will incorporate delivery messaging, what I will also call attention to is that wingstop.
Does not through our own delivery channel do any promotional activity to offer free delivery as a means to grow the segment and so.
Well, yes, I've seen the news of the large aggregator I wouldn't point to a very.
Very productive and very strong relationship that we have with door dash.
We chose a great partner, who is focused on the merchant, which has us at the end of the day and making sure that logistically, they're well positioned to continue to help us grow and they grow with us.
And I would further say that we've aligned our financial goals together to make sure that each brand.
Is maintaining a strong level of profitability as we grow grow the delivery segment.
Thanks for that Michael just one question SGN, a if you your outlook can you strip out all the onetime events get back to a corus gionee of call. It $38 million what was the comparable number in 2018.
My question really is as we think about the business you say you made investments this year, but some of them or things like stock comp and increased advertising, which is which isn't enough and a form of investment, but or are there more underlying investments when would need to make in the business is growing as rapidly as it is in head count and.
Fair value that you talked about facilities whatever else can you give us a sense of what the court has seen a grew 19 versus 18 and then also if there's any thoughts high level about how you think about that core number in 2020.
Yes, Thanks, Jon I think if you look back actually to our previous quarter's earnings call. We did include a similar reconciliation.
Two adjusted DNA for 2018 and that number was.
$33.6 million and so that's what you can compare from an apples to apples perspective.
The updated adjusted DNA guidance that we provided on the call I would say as far as the areas of the investments a lot of those are kind of behind us and if you will in our run rate and they do highly correlate to the strategic initiatives that Charlie alluded to earlier that are really helping deliver some of the strong topline.
And growth that we've enjoyed this year so far.
And a lot of it is and people that also in some investments that we've made whether it be technology.
We're continuing to make investments to support national advertising.
Thank you.
Welcome.
The next question comes from Jeffrey Bernstein with Barclays. Please go ahead.
Hi, this is product on for Jeff Thanks for taking the question.
Just wanted to dig a little deeper into wing costs beyond the normal dynamics and seasonality you see between.
The Super Bowl in March Madness.
Has there been any impact on.
Competitive activity in terms of many large QSR players seem to be engaged in a chicken war and if that has any impact on bone in prices and just as you look to 2020.
Have you heard anything from your relationship with performance food group to kind of help manage that thanks.
Thanks for the question. This is Michael I think what I would say about wing prices and 2019 is that they were we didnt see the usual seasonality that we typically see in the summer months when consumers shift to other grilling mates if you will.
In the summer to improve the overall economics, there and so actually the price remained pretty steady for almost six months sticking at about $1.76, a pound and as we alluded to in our prepared remarks, we think.
The strategy that we've put in place and tested in this quarter to execute against a whole bird strategy, we think demonstrated a little bit of impact on the overall market because just in the last two weeks, we've actually seen some nice relief in the pricing of jumbo chicken wings.
With that said.
We don't anticipate at least what where we're learning from all the Prognosticators that are out there about 2022 expect much from a meaningful inflation perspective, but we'll continue to monitor that as we get closer to 2020 and obviously in our next call as we provide guidance and our outlook for 2020.
Very helpful. Thank you very much.
The next question comes from.
Yes, or im sorry, with Goldman Sachs. Please go ahead.
Catherine Your line is open.
Catherine.
Next question comes from Andy Barish with Jefferies. Please go ahead.
Hey, guys.
Can you give us just kind of an update on that that 20 pipeline than.
Anything different we should expect I know you know sort of last quarter, you are holding back on a little bit of the international staff until you have you saw more results on the new.
In our new back a house and things like that just broad overview would be helpful.
Good morning, Andy Yep.
We we will probably we will provide at the end of the year as we normally do an update on the new unit pipeline for the domestic business.
As it relates to international we are very pleased with the results of that second location that opened in London.
I mentioned in the call only been a few weeks, but very encouraged on the throughput that we get from that restaurant that strong volumes and one thing I would also add to our commentary regarding that new cooking platform is that our annual convention was also attended by all of our.
Our international partners as well, we showcase that platform together and talked about the importance of it as it relates to the.
Effectiveness of that platform for new concept build out across the world.
Very encouraging feedback from our brand partners on that and so we want to see again, the France restaurant open.
See how that goes and then talk more with our brand partners as we spend time with them over the course of the next couple of months about what the upside opportunity is for that as we grow.
But all indications are very positive and so it would lead therefore to us being back out in the market to expand new relationships and put those into the pipeline as we go into 2020.
Okay. Thank you very much.
The next question comes from Jake Bartlett with Suntrust. Please go ahead.
Great. Thanks for taking the question Michael I first had a follow up on the SGN a guidance and I.
I think theres, some maybe concern or question about how much the the gap between the advertising revenue in the advertising expenses impacted the results in the third quarter thing still some confusion about the interplay between those two expenses in whats in SGN, a could you give us the amount of.
National advertising expenses within SGN, a kind of year to date, you've given us the guidance for the year thing would be helpful to understand what it's been a year to date.
Yeah, Jake I think obviously, we gave the guidance for the full year and what we expect that to be but I would say year to date, it's been running at about five and a half a million dollars of advertising related expenses that are included in SGN.
Okay, and then just to clarify the difference between advertising revenue net of hedging expenses is not that much and so the the kind of the of the tie in or or the offset is going to be found in franchise revenue.
Yes, it's in the average, yes, you're right, but the unique thing we have here and it's really something thats kind of if you will cloud in our financial statements a little bit not providing clarity is.
The accounting around this is as well as our revenue grows for the total system. So to the contributions that go into.
The advertising income line in revenue and then the accounting requires us to go ahead, and just record or accrue up the equal amount of expenses and so it almost provides a false indication that DNA is growing a lot faster and then reality. It actually is which is why we've introduced this metric of adjusted SGN, Hey, just to provide more clarity on.
What the true DNA of the underlying business is growing at.
And just just to help US models, there now and I ask these kind of detailed questions because I think there's some concern about the maybe to what was the real underlying beat on on EBITDA, but as we think about the 5.5 million units you need to date in the guidance for the year. What's your how should we think about the difference between advertising revenue and expense.
In the fourth quarter, My I think there's probably a lot of range of estimates out there and just want to make sure we're getting that right.
Yeah, I think obviously you guys will be able to model system wide sales based on the comp in unit growth ranges, we've provided them from there.
Given the right kind of range. If you will have advertising expenses in SGN, a and so you're kind of left with as I mentioned before kind of if you will accruing the expenses up and advertising expense to can make all of that wash on the PNM would not impact adjusted EBIT, our net income.
Okay, and then Charlie I'm, just a a bigger picture question for delivery others have you know that we're increasingly seeing other concepts, adding delivery partners.
Is that something that you're considering and what are the.
In in deciding that.
We are not considering adding another delivery partner as I've stated before we're very comfortable with our relationship with door Dash, we consider it a strategic partnership.
With the lines financial goals between the two companies and our focus is.
Centered on making sure that the logistical side of the equation is met first so where other brands may rely on the marketplace elements of a delivery provider to bring revenue to them. Our primary focus is making sure that we have the best logistics solution that has integrated tech.
Knowledge, the and a.
Well thought through playbook for how we roll into a new market and execute delivery on a scale basis. So no anticipation of another change or another organization coming in.
The next question comes from Michael Sam's with Oppenheimer. Please go ahead.
Hi, Thanks, you've obviously had some pretty strong sales momentum year to date and your two year trends like you called out an accelerated I think the guidance for the fourth quarter implies that sort of steps down a little bit. So just wondering is there something you're seeing quarter to date.
Coming down or is this just being a little bit conservative or how should we think about that thanks.
Good morning.
Yes last year over year, we will see a step down in.
The ticket growth that we're experiencing in the prior year.
Which also goes hand in hand, with our commentary that the majority of our revenue growth our same store sales growth this quarter.
Was fueled by transaction growth now, we still have some ticket growth.
In the comp that is associated with.
Our our overall long term algorithm of points two points of price and or check driven by mix of higher ticket occasions by way of digital as well as any pricing activity that we've taken which we've commented on yes, I think the one thing I would add just as you think about the balance of this year is we do start to lap.
Our national rollout of delivery, which we launched in Q4 of last year. We ended 2018 with roughly 30% of our system offering delivery and so you're going to see that.
Be a component that we have to consider for the balance of the year.
Gotcha, Thanks, and just a follow up on delivery give any data on trial versus reorder rates. I think you said the vast majority are sort of like new customers. So just wondering you constantly sort of searching for that new customer you're seeing those customers I try to kind of stick with you. Thanks.
Well it certainly still in the process, though in most cases, what we do see as trial.
I think the comment we made earlier on the sustainability of delivery in markets that we started our test in almost two years ago, and an increasing mix of delivery, while still achieving topline growth.
As a great indicator that we do have repeat customers, but that's a very small sample set so as we continue to grow and expand delivery will learn a lot more about frequency of that occasion.
And we can talk about that a little later on when when we have better information.
The next question comes from Chris Ocull with Stifel. Please go ahead.
Thanks, guys. Good morning, this is Patrick on for Chris.
I would ask you really quickly about franchisee.
Profitability I know that in the past company store performance Hasnt necessarily been the best proxy. So just curious how that how their fairing in the kind of cross currents of higher sales, but also higher commodity prices and the increased ads on contribution this year. Thanks.
Sure.
Not sure I aligned with the comment that company owned restaurant margins are not a good proxy for franchise margins because we've essentially operate the same business, albeit at a higher volume.
I think it it's a great indication of food cost.
And the opportunity to leverage labor and at our average unit volume of 1.2 million our company stores enjoy an average unit volumes slightly higher than that.
They do pick up a little bit of efficiency from our simple operating model.
But at the same time I think if you look at the sequential quarter to quarter performance in our PML.
You will see improvement in other operating expenses that is indicative.
Of the efficiencies, we expected to see and delivery coming about primarily late in the quarter more of that will flow through in the fourth quarter.
So we're comfortable in the other thing I would say as it relates to the PML, obviously was strong topline growth like this you do see labor leverage.
And leverage of other fixed expenses and then lastly, as Michael commented earlier, the Urner, Barry which is the indicator or the price of chicken wings has really started to come down rather nicely.
As of yesterday, it was at a $1.59, whereas it had sat at $1.76 for over six months a pound for wings. So that is indicative as well of improving economics as we all know.
We have when enjoy one of the best operating models in the industry.
But these efficiencies are going to help further.
Improved profitability for our brand partners.
Great. Thanks for that and then also just in terms of delivery I'm wondering if you guys see any need to maybe speed up the.
Advertising of door dashboard delivery availability on the website as opposed to going straight to door dash or if there's any concern about.
Consumers building up the habit of go onto the platform as opposed to come into the website. Thanks.
No we don't.
I think our strategy is pretty clear and we're going to stick to it.
As it relates to how we want to bring delivery along in the business no need to accelerate theres no urgency to that it's more about making sure that we deliver an exceptional guest experience by way of delivery and we're going to do that like we've always done very carefully and thoughtfully.
Your next question comes from Josh All along with Piper Jaffray. Please go ahead.
Great. Thank you for taking my question I wanted to see if we might be able to talk about some of the investments.
Tool sets.
And human capital things of that nature at the store level to help support throughput you've got great topline and great transaction growth, but curious on some of the efforts and initiatives in place to help maintain those high levels and probably leave some more room for upside as you go into 2020 with some new sales driving initiatives.
Yes, I think we've commented on this over the past couple of quarters that it was important to us to make sure that we.
Increase our.
Our team.
And invest in technology, both as means to.
Assure ourselves of scaling the business.
For long term growth and so we did call out some step function increases in DNA that Michael referenced earlier now baked into the.
The run rate of our business and those in those include further investments in our.
Efforts to support the delivery platform.
Here from our corporate offices and out in the field.
As well as investments and continued investments in technology and new platforms that aid in our strategy to digitize every transaction that wingstop and so.
We spent a lot into that I think other areas that we are making investments in that we'll talk about further as we look into 2020 include.
The area of international and making sure that as we have this cooking platform optimized.
That we're putting the right.
And appropriate amount of focus on people and resources to make sure that we scale that business.
Lastly, as well.
Great. Thank you.
The next question comes from will Slabaugh with Stephens incorporated. Please go ahead.
Hey, guys. This is actually not on for well. Thanks for taking the question just a quick going here.
Pricing.
As mentioned the one to two points of price consistently taken.
Just wondering if you can give us your talks moving forward on this say if wing prices do remain a headwind or as you start to lock delivery more and more if we can expect any possible changes to the strategy long term.
Yes, let me clarify something on wing prices, we don't consider them a headwind.
On a percentage basis, they are up year over year, but that is not outside.
In terms of the absolute prices for what we would expect in our ongoing model.
For profitability.
The reason why they're up.
As high as they are is simply because the prior year, they with as low as they've been in a long time.
So it's a little bit of a false read as I mentioned a minute ago when prices and now dropped.
Almost 20 cents, a pound which has excellent for our economics. So I think our cadence of pricing that we've talked about before.
That achieves one to two points of price into the ticket each and every year by way up a very thoughtful and.
Predictable cadence of price increases will yield a long term sustainable.
Approach that will not erode transaction growth.
Perfect. Thank you.
The next question comes from John Tower with Wells Fargo. Please go ahead.
Great just a couple from me I was curious on the new kitchen equipment that obviously is being tested internationally or in a few stores internationally.
Is it being tested here in the states as well and if so what would be the impediment to further rollout here. It sounded like you showcase to that the annual convention. So that's interesting, but then point to it sounds like during the quarter you also.
Had tested or did a small online promotion of the smaller wings.
And I was curious to know how that was positioned on the menu was it a lower price point and again, what would be an impediment to seeing that potentially be thrown on the menu permanently. Thanks.
Thanks, John .
To answer your first question, Yes, we are testing that new cooking platform here in the us in three stores in Dallas.
We've been at it for a little over four or five months.
All indications are that it's able to deliver consistently with what we've seen overseas in terms of cooking times and quality of product, but we want to measure this very carefully what we're still working on his understanding.
What's the impact would be on a traditional wingstop restaurant.
Here in the us, but what I can say is that.
It definitely has the potential to help us.
Enter into non traditional locations so.
That would include.
Locations in airports or perhaps casinos or stadiums other venues like that where the cook times need to be faster. So that opens up a great opportunity for wingstop, that's not factored into our development assumptions. So I think thats. The first place we would look.
On the on the other point on the whole wings.
I was a large national test that we did which may seem unusual but what we wanted to do is make sure that we saw a couple of things one.
The impact that guest.
Had or in terms of their engagement with the product and its effectiveness and then second we wanted to know what the market how the market would respond to the use of this product I will call attention to the fact that this product.
Comes from a chicken that is much smaller.
Than we typically buy from for our typical jumbo wing product and so we do believe that the test was effective in teaching us a little bit about consumer engagement.
I do expect that we will continue to work on ways to utilize more of the entire chicken so that.
On the road some portion of our purchases can include.
Whole birds, which is part and parcel to that strategy, we've articulated before with PSG.
And some of our key chicken supplier partners, so more to come on that but you can expect that we'll do a little bit more testing into 2020.
Sure just just a quick follow up on it which was that position schemes that product positioned at a more attractive price point than the traditional wings on the menu.
It was it was positioned only as a bundle so we did not sell them.
By the piece.
Like we would on a traditional menu. So it was a bundle of wings spray stated price point as a promotional offer and that was the only way you could acquire these swings you could add five to two an order if you wanted to digitally.
So yes, it was a an attractive price point, but not.
Not a deep discount for that matter.
Okay. Thank you.
The next question comes from Matt Difrisco with Guggenheim Securities. Please go ahead.
Thank you just a couple of follow ups there.
With respect to delivery I think the last call you guys focused a little bit on trying to migrate some of the.
Traffic off of the door dash marketplace, and better economics being on your App I just wonder can you give us some metrics around that or how that's progressing the timing of that was that an impactful in the third quarter or is that also something that might have more of a tailwind to the fourth quarter.
Hi, Matt Let me clarify one thing the desire was not to migrate more people off the platform, but was to make sure that the economics of either platform, where at least at parity and.
Complimentary to our overall business model. So the negotiation we had with door now should we put in place did improve the overall unit economics for our business.
And that in some of that is seen in this quarter more of that will be seen in the next quarter.
But as it relates to which channel at this point were fairly agnostic as to which channel customers come to us in we certainly prefer that they go through the Wingstop Dot Com channel why because we did raise prices on the marketplace.
By 10% during the quarter as part of this strategy. So the better value is had by coming through Wingstop dotcom, but again that does not affect the economic model given the new approach that we have with door dash. The other thing I'll call attention to while we do.
Enjoy all of the information we get from customers through the Wingstop Dotcom channel. We also in our partnership with door dash to share in the information as well and can leverage that to our benefits. So.
All in all we think that.
We've done here really positions us well for the long term.
So is that 10% price increase on the marketplace that was just take it in this last quarter was that a check driver then overall to your reported comp.
It is not a I would not consider it a check driver to the overall comp.
Yes. It was taken during this quarter it was taken towards the very end of the quarters. So very little time is in there associated with that.
Okay, and then I guess in Holistically last question can you just give us.
What the sort of a range of price overall is on the menu.
As far as a contributor to the comp or to mix.
Clarify that for me, you mean delivery specifically or in general overall.
In general overall, obviously being one of the factors that you're taking 10% on the delivery channel.
So how much price overall.
Keep in mind delivery currently represents a low teens mix typically in markets, where we rolled it out so it's not a large contributor to the overall.
And then a portion of that is through the marketplace, but.
We usually don't provide any sort of indication as to what the traffic or mix is other than my comment earlier that the majority.
Of our growth that we are seen in our comp is associated with transaction growth.
Matt This is Michael I want to clarify one thing the way, we're treating that 10% price on marketplace is more of the surcharge. If you will and we're not we're not letting that have kind of a false impact if you will on the comp.
So it won't that 10% pricing on the marketplace wont be considered when we're calculating same store sales growth.
Okay. So you treat that as a service fee that is netted out of your when you do the comp calculation.
Yeah, and one thing to add to that is we don't collect the royalty off that price increase so to Michael's point on the surcharge that doesn't that doesn't play into the comp that you'll see in terms of the ticket lift.
And then I guess to conclude that thought that's not then factoring into system sales growth either thats. The system sales that is going to head of us.
That is rack less that is correct. Thanks. Thank you for all that detail last question I'm, sorry second last question here.
Big Night bundle are you going to run that again in 2019.
We don't have any plans to run a bundled promotion in 2019 at this point.
Okay. Thank you.
The next question comes from Nick Setyan with Wedbush Securities. Please go ahead.
Thank you and congrats on another great comp.
I want to kind of turn a little bit too.
Some of your noncore markets and maybe the unit volumes with the national advertising obviously.
Are you surprised that the.
20, Cade new unit.
It hasn't changed all that dramatically over the past.
Five five years, or so and or maybe you are seeing into your classes.
Perform that target and also carry comments about.
Whether or not there are some comp differentials between your core markets and some of your noncore.
Our geographies. Thank you.
Hi, Nick Thank you for the questions first on the performance of the new stores and the ramp up we are seeing.
New stores open up at stronger AIU fees than what we have historically experienced that would.
And in reference to that 820000, you mentioned, we are seeing them open stronger than that this particular particular class of stores. This year is still in its infancy. So when we get to the point of getting into that first year will comment on what that looks like.
But I would also call attention to.
The fact that our domestic day UBI has grown year over year quarter over quarter by almost $100000, which is indicative not only of the same store sales growth, but the strength of those new stores opening up I'll give you one other data point just to help give some perspective here if you look at red.
Entrants that opened.
In classes prior to 2015.
The average unit volume for those restaurants on an annualized basis. This quarter would be just short of 1.4 million. So this ongoing wingstop trend of seen our performance out of the gates strong and just continuing to get stronger is as indicated by.
Demonstration of the metric like that.
And the one thing I would add is that as it relates to the comp I think both new and emerging markets as well as some of our more established markets the comps pretty consistent and not not only as a consistent across markets, but it's also pretty consistent across every vintage as Charlie referenced just a second ago.
Thank you very much.
Welcome.
The next question comes from Andrew Strelzik BMO capital markets. Please go ahead.
Hi, This is actually down on for Andrew Today. My question is just on the digital side.
Thanks to increased digital mix over 1000 basis points over the past year, which is obviously very impressive I guess I'm just wondering how much of this digital growth do you attribute to the rapid rollout of delivery this year and understanding that you have other digital drivers in place is it reasonable to think that the pace of digital growth might slow moving into 2021 stores.
He has been rolled out to the majority of the system and maybe just as a broader follow up.
Is there a specific level of digital makes you think you can get you over the next couple of years.
Yes.
To answer the question I don't believe that the rollout of delivery would cause a slowing the pace of.
Digital growth all delivery transactions our digital.
We don't take a typical phone order or cash transactions. So.
In that regard, we believe that we'll continue to see organic growth in digital which historically has been about 400 basis points a year.
And then also we are seeing certainly the impact of delivery of driving our digital mix up this year were up as much as 1000 basis points year over year. So I think delivery is a driver of that but we don't expect the mix of delivery just to stay at these low teens numbers when we start to advertise that we expect that to grow.
Great. Thank you.
The next question comes on Peter Silly with BTG. Please go ahead.
Great. Thanks.
Congrats on the great corridor.
I just wanted to ask come back the conversation around the delivery and economics partner I think you said on multiple occasions are aligned on economics and profitability.
But how come that Youre delivery partners actually making money on this.
What's the 10% surcharge.
Paying for demand generation or just strictly logistics.
Then.
When you think about 2020.
Well.
Josh contributing any funds to national advertising.
Step up to national ads to delivery or is that coming strictly from.
Corporate and the franchisees.
I can comment on a couple of things here, they're just elements that I'm not going to comment on that or particular to our particular, our relationship with jordache, but.
We are not acquiring customers by way of buying them through the door dash to fuel delivery, we're doing a purely on organic demand for the product regardless of the channel that they go through that does not mean the door dash doesn't do some advertising for Wingstop, certainly and as we've noted before we expect to advertise wingstop.
Through Wingstop dot com to drive delivery in the future.
As it relates to shared financial goals, yes. The comment I made earlier is that we both desire to have a profitable transaction and that's what we've achieved.
And we remain very confident in our partner a door dash and their ability to deliver a long term sustainable platform for wingstop.
Great and then.
Thank you also mentioned you're getting a lot of data.
Only from.
From door dash, and you're able to leverage.
You talked a little bit about you know what you guys maybe over the past six months.
Customer ways and what's your leveraging the data that your gathering.
I think we're going to defer that to year end when we can spend a little more time. After we've got the full rollout complete.
To walk through that at this point, it's still early as we've been transitioning into new markets to be able to identify any real specific information that we would consider actionable at this point.
Alright, Thank you very much.
The next question comes from Andrew Charles with Cowen and company. Please go ahead.
Great. Thank you the whole wings and a full flavor fix with the first new protein I believe you added since becoming a public company and I was hoping you can remind us of your philosophy towards new SK use beyond flavor events for the sauces, and particularly the chicken sandwich makes sense for the brand just given your focus on diversifying product mix away from Boenning wings as well as industry Buzz around these proud.
Alex.
Hi, Andrew.
Our focus is going to be to remain the wing experts and focus on our flavor.
As a key differentiator of the brand, which would not position us to make some of the decisions that other chicken chains would make to drive.
Incremental traffic in the near term if we believe it would be a long term sustainable protein addition to the brand.
That we could integrate into our core offering.
We would do that but as of right now there are no plans for chicken sandwich.
And I would say that with the whole wing promotion, it's part of the broader whole bird strategy, where we know that weekend.
Really start to mitigate the volatility of food cost by acquiring more products from that whole chicken.
But as of right now a sandwich is not in consideration.
Makes sense and then in 2018, you post national TV advertising on and off throughout the year long 2019 concentrated national TV advertising into two distinct flights.
Is it fair to say that based on the same store sales performance. The concentration of TV advertising is it more effective tactic for the brand or are you open to contemplating Pulte again, just given a larger budget you're going to have in 2020.
Yes.
I think as we look forward.
The cadence of our advertising will remain consistent so yes in 2018 in the.
Fourth quarter third and fourth quarter, we did have a large window similar to what we've done this year in both our first part of the year and second part of the year.
But as you look at what we're going to do going forward, we will continue to.
Focus on two primary windows those create for us the efficiencies, we want to see to be able to drive TRP levels up and broaden the audience by way of.
A more effective media buy.
In create the biggest opportunity, which I think we've proven this year in our performance in the most recent as well as the first window. We did this year. So I would expect much of the same in the future.
Thanks, Charlie.
The next question comes from James Anderson with Northcoast Research. Please go ahead.
Hi, Thanks for the question I, just wanted to dig in a little bit more on delivery.
You mentioned, the 10% increase in menu prices on jordache. So we're wondering how this is impacting demand through door das versus delivering more broadly and then in general how do TV ads impact delivery demand in markets, where it's relatively new thank you.
To clarify a statement I made earlier, we have not been on TV and advertise delivery and we anticipate doing that next year. So I don't know the answer to that second question on the first question is we've had no impact on the transaction performance either through door Nash or Wingstop dotcom.
No change in mix.
No.
Thank you.
You're welcome.
This concludes our question and answer session. It also includes our conference.
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