Q3 2021 Wingstop Inc Earnings Call
Okay.
Good morning, ladies and gentlemen, and thank you for that.
By welcome to the Wingstop, Inc. Fiscal third quarter 2021 earnings Conference call. Please note that this conference is being recorded today Wednesday, SGR 2021.
Nicole we have Charlie Morrison, Chairman and Chief Executive Officer, Michael Skipworth, President and Chief Operations Officer, and Alex Kadena, Senior Vice President and Chief Financial Officer, I would now like turn the call over to Alex Alex. Please go ahead.
Okay.
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Apologies, ladies and gentlemen for the interruption. Please hold the line while I cannot.
Okay.
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Thank you and welcome everyone should have access to our fiscal third quarter 2021 earnings release.
A copy is posted under the Investor Relations tab on our website at IR Wingstop Dot com.
Our discussion today includes forward looking statements.
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 Charlie.
Thank you and good morning, we continue to be extremely pleased with our strategies fueling exceptional results for Wingstop. The third quarter continued our streak for record breaking restaurant development, which is a great demonstration of the resiliency for our model.
These the results we have shared today underscore the sustaining power of our growth strategies and the interest of our brand partners and continuing growing with Wingstop.
Thanks to our proactive investments in technology and delivery platforms Wingstop was well positioned to navigate this pandemic I am pleased to say that just as we did last quarter. We continue to lap the remarkable growth from last year.
In the third quarter of 2021, we recorded domestic same store sales growth of three 9%, which on a two year basis represents growth of 29, 3%, what we believe to be best in class.
This outsized comp growth has raise the average unit volumes for our domestic restaurants to approximately $1 $6 million and these volumes are generated from an average initial investment of only $400000.
The third quarter was another record quarter for development for this time of year, We opened 49 net new restaurants, resulting in 13.1% total unit growth despite experiencing unprecedented inflation in the cost of bone in wings.
Our restaurant development is a testament to the continued focus of our brand partners on the long term and strength of our unit economics to navigate these challenging times.
We are seeing extraordinary results not only in the U S. But also in key international markets in the U K. So we have opened 10 restaurants in last 18 months alone and the market is generating average unit volumes exceeding $2 million well above the average we see in the U S.
This market hasn't been only opened since 2018, which underscores the tremendous long term potential is.
As we communicated earlier this year, we made a minority investment in our U K operations. We believe this strategic use of our capital will continue to strengthen the development pipeline as we look to double the UK footprint in 2022.
We are excited to support our brand partner in achieving the potential for the Wingstop brand in the UK a market. We believe will serve as a model for our western European expansion and other parts of the world.
Earlier this year, we announced our expansion into Canada with a 100 restaurant development agreement.
Our first location in Toronto is on track to open early next year.
We recently served our flavor to Canada with a visit from the Wingstop food truck and we couldnt be more excited by the consumer response to our products.
Canada is a market well poised to replicate the success, we have had in markets like the U K and the United States.
We are also very encouraged to see our international markets continue to recover from the impact of the pandemic with most of our existing markets already generating sales volumes above their pre pandemic levels in our largest market, Mexico, which was one of the hardest markets impacted by the pandemic is on track to open in <unk>.
Nine restaurants this year again, a testament to the resiliency of our model and the portability of our brand.
While we are facing near term inflationary pressures our growth fundamentals and long term potential of operating over 6000 restaurants worldwide remains unchanged and our brand partners share that vision. We are very pleased with this record pace of restaurant development and the topline growth our brand has seen which certainly.
Provided relief from the inflationary environment, we operate in today.
The strength of our model is a differentiating factor for Wingstop and positioned us well to navigate this unprecedented environment.
Since the end of the third quarter, leading indicators such as cold storage inventory levels for wings are beginning to approach 2019 levels for the first time of the year.
We have seen sequential improvement in the spot price for bone in wings and it now stands at $2.87 per pound.
This 35% drop versus the third quarter equates to approximately $75 million of cash flowing back into the system and that's annually to build 185, new restaurants.
The price of wings is trending in the right direction, we remain laser focused on executing against our previously communicated goal of managing cost volatility with greater utilization of the whole bird and controlling more of the chicken pricing and supply process.
We believe that the key to unlocking the less volatile food costs for the brand is predicated on the utilization of more parts of the chicken at the end of the second quarter. This year, we launched a virtual brand called thigh stop initially available only on thigh stopped dot com and indoor Dash is marketplace. In addition to what we are.
Calling bohnen size, we're also offering Thai bites, which are a juicy or flavor full complement to our traditional boneless wings.
Just as we pioneered wings as a center of the plate. We also believe we can make size a center of the plate items and makes them a fan favorite for a long time to come.
In September we integrated ties into our regular wingstop menu doubling our thigh sales and allowing us to further progress on our strategy of buying more parts of the bird.
Staying true to our entrepreneurial spirit, we are evaluating every phase of the chicken supply chain and looking at others, even outside our industry to take a page from successful playbooks like those of the retail industry to be disruptive and gain greater control over our destiny.
We are following a similar proactive approach to remain competitive in this tight labor market and leading the way in company owned restaurants. Unlike other restaurant concepts, we have a very streamlined kitchen operation with small roster sizes, which have enabled our system to better weather the severe labor challenges some of our peers are.
Facing.
With a long term view in mind, we have increased the hourly wages and salaries of our company owned restaurant team members as we believe investing now will help us retain and attract talent to continue offering a great customer experience and maintain our topline momentum.
With the top line momentum and the effectiveness of our strategy, we were able to leverage the surplus in our AD fund and rebate a portion back to brand partners in the third quarter in order to continue to fuel development.
This AD fund rebate did not impact our overall media plans and provided immediate relief in this time of unprecedented inflation. It's.
It's a proactive example of keeping our brand partners focus on development and the long term growth ahead of us.
We also anticipate brand partners will take an additional 4% to 5% menu pricing. Thanks to the disciplined approach in our in our past by the brand partners and pricing power, we believe wingstop has with consumers.
With the ongoing momentum in top line growth 2021 has seen greater levels of premium media placements and we continue to invest heavily in our one to many and one to one communications.
We recently decided to take a page from the org structure of many leading tech companies, which often house marketing and digital T functions together to create a martech structure.
This structure allows wingstop to further its transition from the traditional promotion based marketing approach that is typically seen in the restaurant industry to a digital platform based strategy.
We are already seen an impact with our first party database of more than 25 million guests skin continuing to grow.
Thanks to our investments in CRM and our digital platforms, we continue to sustain digital sales above 60%.
Due to the strong results in the third quarter and the results we have seen as we enter the fourth quarter. We are now expecting our same store sales growth for the full year 2021 to be between seven and 8% up from our prior guidance of mid single digits with our robust development pipeline we are reiterate.
Our guidance for restaurant development growth of 12% plus in 2021.
At Wingstop people are the foundation of our strategy and we serve our flavor in communities throughout the world.
Stop charities is dedicated to enhancing and elevating the community work of our brand partners to make a difference in the lives of our youth. We recently completed our grant cycle and achieved a new milestone in the number of organizations we are supporting.
Wingstop charities has provided over $1 million in community grants and team member assistance, we are thrilled with his tremendous milestone for the organization.
I am excited by the momentum in the business both on our top line and development growth as well as our progress we are making against our whole bird strategy that will position us better to weather the next inflationary period and wings.
More importantly, I'm encouraged by the strong foundational investments, we are making for our long term growth.
We remain confident in our strategies that will continue to reward our shareholders brand partners and team members as we continue on our way to become a top 10 global restaurant brand.
With that I'll turn it over to Alex.
Thank you Charlie we are pleased to report strong third quarter results, especially when considering the extraordinary results. We are lapping from the third quarter in 2020.
Our topline momentum is continuing into the fourth quarter with October comps at 7% Despite lapping comps in the high teens last year.
These results put us well on our way to achieving our 18th consecutive year of positive domestic same store sales growth and underscore the sustaining power of our growth strategies.
For the third quarter 2021, we grew royalty revenue and franchise fees and other revenue by $4 million or 14% versus the prior year.
The increase was driven by domestic same store sales growth of three 9%.
193, global net franchise openings since the year ago comparable period and by the continued strength, we're seeing in new restaurants, which are now producing <unk> of $1.2 million.
As they enter the comp base.
As a reminder, just a couple of years ago, our 2019 ventas generated $900000 of sales during their first year of operations.
A testament to the uniqueness of our model when you consider the average initial investment of approximately $400000 that Charlie mentioned earlier.
It's these unit economics that are fueled the 49 net new restaurants, we opened in the third quarter, which is a continuation of our record restaurant development at Wingstop This year.
Company owned restaurant sales increased $1 9 million.
Primarily due to the acquisition of three franchise restaurants in the third quarter of 2021, and the openings of three new restaurants since the prior year comparable period.
In the third quarter, we recorded a gain on sale of $3 6 million.
As part of the Refranchising of six company owned restaurants in the Denver market.
As part of this transaction the brand partner signed a new 20 restaurant development agreement for the Denver market. This transaction is another example of a strategic use of our balance sheet to acquire restaurants invest to showcase their potential placement back in the hands of an existing brand partner and position them.
<unk> for accelerated development.
As we have shared we will continue to leverage this playbook and use our balance sheet to facilitate growth.
Food beverage and packaging costs as a percentage of company owned restaurant sales increased by 11, seven percentage points compared to the third quarter of last year.
The average spot price in the third quarter for bone in wings set a new record high at $3 22 per pound, an increase of 84% versus the prior year.
Thanks to the price mitigation strategy in place with our largest poultry suppliers are.
Our restaurants are able to partially offset this inflation and saw an effective year over year increase in the price of wings a 49%.
We also are pleased to see sequential improvement in the spot price for bone in wings with the price now at $2 87 per pound.
<unk> 35 cent reduction from the record highs we saw in the third quarter.
While below optimal levels, we are seen frozen inventory stocks building and beginning to approach 2019 levels for this time of year, a leading indicator to deflation.
With this trending in the right direction, we anticipate wing costs to continue declining in the fourth quarter.
In the third quarter labor cost as a percentage of company owned restaurant sales were 24, 6%.
Decrease of 1.2 percentage points compared to the third quarter last year.
This decrease was primarily due to the lap of incentive pay provided the restaurant team members in response to the pandemic.
This was partially offset by the investments Charlie mentioned, we have made in wages hiring bonuses and training to continue attracting and retaining top talent.
During the third quarter, we made additional investments in company owned restaurant margins, which totaled approximately three percentage points.
These expenses were more elevated for the quarter in connection with training and repairs and maintenance related to three recently acquired restaurants as well as deferred maintenance for our restaurant portfolio. Following a year of lower spend due to the pandemic.
We also made investments to prepare for our Manhattan launch.
We are excited for our first restaurant in the heart of Manhattan to open in the next couple of weeks near Times square.
We are encouraged by the potential of this market, where we have identified approximately 25 trade areas.
We anticipate restaurant margins for full year to be in the high teens to 20%, reflecting the improved outlook for the price of bone in wings additional menu pricing and the continued investment in restaurant labor to remain competitive.
Shifting to SG&A, we saw a decrease of $1 $5 million over the prior year, mainly due to lower variable based compensation expense and lapping COVID-19 related costs and support for our international brand partners.
These decreases were partially offset by continued investments in people to support our growth and higher travel compared to 2020 when travel is limited as a result of the pandemic.
For 2021, we had anticipated investing in strategic projects to support our international business. However, the ongoing pandemic has delayed the timing for these projects.
Additionally, we have experienced delays in hiring and as such we are lowering our full year guidance for SG&A from 64, 8% to $66 8 million to 62.2 to $63 2 million <unk>.
Inclusive of stock compensation expense, which is estimated to be between $9 seven and $10 $2 million in 2021.
Adjusted EBITDA grew 16, 2% to $21 4 million and we recorded earnings per share of 38 cents, an increase of 11, 7% versus the prior year comparable period.
We remain committed to driving shareholder value and returning capital to shareholders through our quarterly dividend, which is targeted at approximately 40% of free cash flow.
Our board of Directors has declared a dividend of <unk> 17 per share of common stock. This dividend totaling approximately $5 $1 million will be paid on December 10th 2021 to stockholders of record as of November 19th 2021.
With the continued strength and resiliency of the Wingstop model in these unprecedented times and as we look ahead to the balance of 2021 and beyond we are well positioned to execute against our strategic long term growth initiatives.
With that I'd like to turn the call over for Q&A.
If you would like to ask a question. Please press star followed by one on your telephone keypad now.
Your line it is star followed by case.
These clients you limit yourself to one question per person.
Our first question comes from Andrew Charles of Cowen. Your line is open. Please go ahead.
Great. Thanks.
I guess I'm curious just amid the sales and margin deterioration in <unk>.
With sales that look like they are implied to further decelerate in <unk>. Despite the fact that October up seven not as bad as deceleration for the full quarter that you're guiding to.
The main question is do you see risk that 2022 openings will fall below long term kind of 10% plus guidance and just kind of curious what you point to that suggest that 2022 should be a normalized year.
Store growth thanks.
Good morning.
I want to first comment on the topline performance same store sales at three 9% and a 29% two year comp is something we're very proud of and won't apologize for now as it relates to the sequential change or the absolute so I know the market is trying to absorb whether two year one year.
Are the right metrics, but.
In our opinion are.
Both are great demonstrations of the health of our business and I would also point to a couple of things couple of factors about our overall model.
That we believe have.
Cause the continued strong development from our brand partners, which is our average unit volume now.
Is approaching $1 $6 million per restaurant, that's up from just a few years ago at one to $1 $1 million. So the strong performance we've seen over the two year trend again above or close to 30% on a two year same store sales basis is feeling.
Great results, while we are dealing with the near term situation on wing costs. We are seeing those prices start to come down and as we commented we are starting to take a much more proactive approach to how we can mitigate some of this volatility by not just purely relying on the spot market or some of the strategies we've actually.
Put in place to mitigate that this year.
All that said our development pipeline as it stands today.
How do I start to play out the cool you'll friction operates out of your details have dissipates, we don't actually have no information can I just take your fashion dolls name. Please.
Okay.
Hi, sorry could you mute your line please.
Okay.
Short term as to whether we develop restaurants, but really look towards the long term and what the upside potential is for this brand once we get through this transitional period.
Understood and then just a follow up I know you guys have kind of medium term and long term guidance and I know, it's too early to be getting much specificity on 'twenty two but you made a comment before that you anticipate that the near term headwinds we are not an indicator of the long term opportunity, which I don't think people are question from a long term perspective, but specific to 'twenty two is there any.
Reason to believe that the mid single digit comp for the 10% plus unit growth wouldn't be a realistic starting point to another.
<unk> seem to have found a new home so it's not like you.
You can't build off of that but just wondering if theres any early indicators that might be either the comp or the unit growth might be more of a challenge in 'twenty two because of these short term headwinds.
Yes, I think if you look at the drivers of the top line first.
As a brand.
We rebated back $6 $9 million during the quarter to our franchisees to put in their pockets to continue to field development, which we thought was a great decision and we're all aligned on that as a brand.
That didn't do was take any money out of the coffers to continue to execute our advertising strategy as we've seen in the fourth quarter with a sequential increase in our comp. So far so I think that gives us confidence that the right strategies are in place for us to continue to deliver against our both near term and long term outlook for the brand, especially on.
The top line another great lever, we have as an organization is the fact that we have a database of over 25 million users.
We are actively investing in.
To deliver a one to one marketing platform with our customers that is usually reserved for tech companies and platform brands Wingstop in that position I think that's going to be another great driver and then as was mentioned before in the comments.
We're getting very premium placements.
Leveraging properties like the NFL the.
M B, a and other really high profile properties too.
Leverage our advertising dollars next year will be somewhere in the range of $100 million to $125 million of total advertising spend.
That's a big increase from where we were even a couple of years ago. So I think all of those are great indicators as to what the potential is for the brand to continue to grow comps.
Comps at the rate that we've we've guided towards for the midterm and the long term and then if you factor in the unit development again, all the P&L is challenged right now because of some of these macro issues.
The restaurants still deliver good cash flow characteristics.
Investment economics are very efficient for Wingstop, a $400000 average unit investment with a $1 $6 million sustainable average unit volume for to one is as good as it gets and so I think our brand partners recognize and they've been through this before.
Have a gate through the tough challenges to continue to see the brand grow.
Understood. Thank you.
The next question is from John Glass of Morgan Stanley. Your line is open. Please go ahead.
Thanks, very much Charlie can you, maybe just expand on the whole bird strategy.
That's something that you can start to see benefits from next year or is there something kind of a multi year project. When can you can you also just comment on the mix of the thigh. You know that was something you said it doubled I'm not sure. If it's material is that something that might also.
Benefit cost and should we think about 'twenty two.
Well, we definitely think that the introduction of thighs through size stop was the right strategy and yields the desired outcome, we have which is not only to just create a an opportunity for a item to mix at a lower cost level than what the bone in wings are.
Which it has done.
But we also know that it has a meaningful effect on our ability to secure entire birds instead of just buying the wings and some of the breast meat off the product from the spot markets. As we look forward as I mentioned earlier, we are exploring strategies, where we can take more control of the supply chain while at.
Preliminary I think there are opportunities for us to follow the lead of some of the other large scaled both franchise and company owned brands likes of Dunkin', Starbucks and others, who in the pizza chains, who start to take more control of their supply chain for the benefit of eliminating volatility <unk>.
Market exposure and so that's I think Wingstop brand, that's finding its way into that scale level.
And so on a on a go forward basis. The near term, yes, we're pleased with the mix of size. We're pleased with how it's performing we mentioned it doubled in volume when we took it off just the platform that is that we established at the beginning with door dash and our own into the whole wingstop format. Our guests were coming into the restaurants, saying, we're ready to order size from.
<unk> directly and that's working out well for us it's going to build over time.
And it's following a trajectory that we saw many years ago. When we introduced boneless wings. So overall, we're pleased with where that's going a long way to go.
And it is making an impact ultimately to the business by way of giving US a lot of confidence in ways. We can secure a whole birds and take more control of the supply chain.
If I can follow up it sounds that sounds like that maybe it's a buying co op. Maybe you can what youre thinking about I don't want to put words in your mouth, but if you could just sort of answer that part and then on the return.
We're trying to the AD fund money to the franchisees that are one time do you anticipate that was a one time event or do you think that continues in the fourth quarter.
Yeah I think.
The question of the buying co op is one of you or you are putting words in my mouth, but I think at the end of the day. There are a lot of options in front of us and I think if we lean into again, what scaled brands have done over time as they've grown to the size that wingstop is I think they've made some very thoughtful decisions on how they can.
Put together structures that support.
On a less volatile commodity impact and I think that's the right approach in some cases.
If I go back then to your <unk>.
Other question, yes.
I think.
Yeah.
No I think Michael you want to jump in I think John the AD Fund rebate. We gave was really around a surplus that we had and it didn't impact any of our planned advertising strategy.
I would kind of think of that as more of a onetime thing then that's something that would impact us I think the best way to think about that John is that it is.
A great lever, we have with the strength of our advertising and the strength of our top line.
But in this case is definitely a known surplus that.
That we felt like was in the best interest of the entire system to put that in place this quarter.
Okay. Thank you.
The next question is from Andy Barish of Jefferies. Your line is open. Please go ahead.
Hey, guys.
I'm wondering if you can share.
I guess the thought.
Contribution or incremental 80, whatever you're willing to share and it has it.
Has it hit that threshold I think it was the first 100 million was was royalty free I'm, just a little bit more color kind of on how.
Pfizer, helping the sales numbers. In addition to obviously the cost side of the equation.
Yes, Andy.
We're not sharing any specific mix our sales data on the size other than.
It is making a meaningful contribution to the brand by way of the utilization of more parts of the bird quite frankly, it does not require a high mix in order for us to have a big impact on the number of birds that we can commit to and Thats really how we position this from the get go.
We put some advertising behind this but primarily this was supported by public relations work and things we did in the marketplace to launch it and then a digital strategy behind it. So we haven't really done a lot of until just recently has put it on TV or do anything like that to truly grow at what we want to know.
Is.
Number one how well does it execute how well do people engage with the product I think we're happy with that and why we made that was why we made the decision to go ahead and fold. It so quickly into the total wingstop platform as we mentioned it doubled our results.
We still have a ways to go.
We're on our way towards.
Getting to that $100 million level, we didn't expect to be there by this point anyway. So we've still got some time ahead of us, but overall, it's a it's moving along at about the pace we expected it.
Great I appreciate that I appreciate that color and then the quick follow up just on the on.
On the 300 basis points, you called out on company owned margins was that.
Pretty much idiosyncratic to the <unk> and as we think about the margin improvement at the company outside of the U S.
Is that something that that sequentially.
Helps to that extent.
Good morning, Andy This is Alex Yes, you have that characterize correctly. It was specific to the third quarter. It related to some preventative maintenance work and catch up that we were doing on the.
Repairs and maintenance side as well as connecting to our three restaurant acquisition training and catch up maintenance work as well that was unique to the quarter.
Okay.
Thanks, guys.
The next question is from Jeff Farmer of Gordon Haskett. Your line is open. Please go ahead.
Thank you a quick follow up and then a question as well on the follow up.
Is the 4% to 5% incremental menu pricing.
Is that fully contemplated in the same store sales guidance for 2020 one.
Yes that is.
Okay and then on the question.
Shifting to gene can I clarify, let me clarify that for you Jeff I mean that comes in over time.
So you don't have a full quarter effect of that I just wanted to make sure that you.
You didn't expect that to be a full quarter effect.
Over the course of the quarter, we will put that four to five in.
Okay. That's helpful and then shifting to G&A. So the prior G&A guidance well prior to the G&A guidance update provided today.
At least over the last two years your senior absolute G&A dollars grew by roughly 8% to $8 million to $9 million annually and you've told US several times if that's in support of digital and some international development investments among other things. The question I have is looking forward to 2022 and 2023.
That still sort of a workable very good run rate to think about in terms of how G&A dollars will grow moving forward.
Yeah.
Yeah.
Hi, good morning, yes.
I think over time as we've called out before that we anticipate will grow into a rate of somewhere between 2% to 3% of system sales for G&A. So we'll have more details as we move into 2022, but I think about it more as a percent of system sales and that's based on where top 10 brands have mature too over time.
<unk>.
Okay. Thank you.
The next question comes from Mike, who Thomas of Oppenheimer. Your line is open. Please go ahead.
Thanks, Good morning, everyone. Thank.
Thank you mentioned that you return some of the AD fund to help with the unit development in the near term here. So I'm. Just wondering can you just talk about some of the constraints.
Following up on an earlier question how.
How much are you sort of constrained either by the near term cost rises or supply chain.
Sort of like impacting franchisees ability to get open some units here in the near term. Thanks.
Yeah.
There is no constraint to get the restaurants open I think when we made that decision again, we recognize there was a surplus anticipated in the quarter.
<unk> of dollars based on our strong growth rate that.
We were able to put back in the pockets of our franchisees to shore up the P&L and deal with some of these macro headwinds while developing new restaurants, I think our performance.
Demonstrates that they werent pulling back at all in fact, another record quarter for Wingstop. So.
I see that as purely a a great opportunity for us to pull a lever that was beneficial to our franchisees and they appreciate that very much.
Without impacting the top line by way of our current year cadence in performance with same store sales. So all in all it was the right decision. There are some supply chain challenges associated with equipment that we are seeing but those are not meaningfully impacting <unk>.
<unk>, if anything it might cause a week or two delay to get refrigeration into restaurants and things like that that's pretty normal in the industry right now and I'm sure others are talking about that if not they're dealing with it I can assure you. So.
But that's that's that's the natural reality of what's going on with some of the log jams that we're seeing in the supply chain across multiple industries not just ours.
Yeah, absolutely. Thanks for clarifying that and then not to harp on the near term at all but.
I think that the October two year trend is a little bit above where you're guiding to for the fourth quarter.
I'm just curious if theres anything over the next two months that you guys are thinking about that we should be aware of or if that's just sort of some conservatism on your part if my math is right.
Well I think you've called that out properly.
Again, 7% in October is an exceptional performance given the two year.
Rollover, but.
There is nothing other than the price that we expect to come in throughout the quarter.
Associated with franchisees decisions to raise their prices.
And then.
We do have a strong media plan in place for this quarter.
Focused on driving the top line and as I mentioned before premium placed media, even compared to where we were a year ago or even early in the year. So all of those are strong indicators towards our confidence in the top line in the first quarter.
Thanks, so much.
Yeah.
The next question is from Chris <unk> of RBC. Your line is open. Please go ahead.
Hi, good morning, Thanks for the question.
So you noted some encouraging sequential trends and when spot prices recently, so curious as to what Youre hearing from your suppliers as to what's driving that easing in pricing is it improving labor trends on the supplier side or is there seasonality or some other dynamic on the demand side, that's impacting spot prices.
Yes. This is the fun part of describing what goes on in the chicken industry that I'd love to talk about.
It is they are seeing people coming back to work and improving but the bigger problem that was out there had to do with the breeder stock of chickens that are.
That had to be replaced and so they have.
Made great progress in what they called pullet placements, which are the chickens that create the eggs ultimately become chickens that go to work for Wingstop, that's how we'd like to put it.
And that.
That was up about 18% just in June alone, which is a good indicator than a leading indicator of more volume of chickens that are going to be coming through the system, but there's about a six month lag to that.
One interesting statistic I'd call note too, which I think is very important as well.
<unk> meat frozen inventory stock are at.
Five year lows right now.
And that that product has the highest demand and why they grow chickens is for the breast meat, primarily with frozen stocks. So low they those inventories need to be rebuilt and we anticipate that those will start to grow once these pullets yield more birds that will flow into the system and we expect that to be somewhere around the turn of the year. So December into January into the first.
Quarter, if those inventories start to rise that's good for wings because on the wing side, our frozen inventories are approaching 2019 levels now, which is really good news for us as those frozen stocks continue to rise, which we would expect that they will as more birds come online that's going to help support lower prices. So.
We expect that that'll be the case going into 2022, we've expected that all along we're starting to see the market dynamics finally play out.
To our to our benefit and as.
As we mentioned prices are now down around $2.85 a pound as of yesterday. So a couple of pennies below even what we said this morning.
Or are there already coming down so we're excited about what that potential is for wingstop, but again, we need this number to be well below.
In the two <unk> well below the $2 pound level for us to be comfortable I'll add one little data point for you for benefit.
We've done a lot of research and understanding into what it costs to actually produce the chicken. We think is somewhere in the $1 30, plus or minus a pound range. So it's hard to imagine that it cost an additional $2 to just trimmed the wings off.
We do see that there's real opportunity in the market for the prices to come down to where the feed cost inputs and everything else associated with it would be in balance.
Great. Thanks for all that detail Charlie.
For my follow up I did want to ask about labor at Wingstop. So obviously.
One of the big advantages of the brand is your lean labor model. So I'm curious as to how you and your franchisees are balancing that goal of maintaining that lean labor model, while ensuring that restaurants remain fully staffed amid theyre just broader industry labor challenge.
<unk>.
We.
We always have and always will continue to have a very lean model. The actual roster size for our restaurants is quite a bit smaller than most.
Brands out there, we usually like to have around 16 people plus or minus on our roster at.
At the volumes that we execute in our labor does become very fixed very quickly at the high volume of a very single commodity that we sell.
With simpler simplified cooking platform. So all of that is still intact that doesn't mean, we're not looking for ways to improve that.
Part of our strategy on looking at the supply chain could incorporate ways to simplify the prep side of our production and get smarter on that.
We make everything in house and it's for good reason, it's our quality.
Are there ways, we can improve that we're looking at that.
From a dining room perspective, we still only have about 200 restaurants, plus or minus to have their dining rooms open today out of 500 in the U S and so that's a good indication to us that we can further simplify our model by reducing the size of the dining rooms, and leveraging the strong delivery business that we're seeing in fact, when others are seeing their delivery.
Volumes drop Wingstop has actually seen delivery continue to increase if you look at it year over year, we're now at 27.
2% delivery, that's almost three points better than where we were a year ago and we know it carries a higher average check it's beneficial to our business. So I think our our franchisees as well as all of us Corporately feel like.
The digital side of our business is really what the long term is all about how can we create efficiencies inside the four walls of the restaurant to mitigate some of these challenges we're seeing in the near term on labor all of that said, we are seeing wage inflation and we should see wage inflation because the market is dictating that right now and so on.
Our approach is to make sure that we invest now for what's best for the long term.
Thank you.
The next question comes from Jared Gaba of Goldman Sachs. Your line is open. Please go ahead.
Good morning, Thanks for the question.
Wanted to swing back to the unit growth outlook on the international side. Obviously, you noted that some of the SG&A projects or sort of pushed or delayed and some of that related to some of the backend work you were working on related to international growth I just wanted to get a sense of if you could help frame what exactly that work that you are.
Doing is and maybe how we should think about that cost or that project flowing into 'twenty. Two and then further to that how we should be thinking about maybe the acceleration or the level of unit openings across the international business as it relates to unit growth over the next couple of years. Thank you.
Yes. Thanks, Good question and I appreciate you, bringing up the international performance I think.
All in all we're very excited about the international potential for this brand always have been as you know and we know.
Very.
Most of the markets outside the U S have not rebounded the way the U S has in terms of reopening and.
Building their businesses back Wingstop has seen that happen now over the course of the last couple of quarters, notably our performance in the U K. Those restaurants are doing very well average unit volumes exceeding $2 million, which is a great indicator of what we believe.
Is right on strategy for the future of this brand, we're really making great progress.
The other markets Mexico. For example is a market that is now starting to approach their 2019 level volumes on the top line. They opened even nine restaurants. This year when they were probably one of the hardest hit with the pandemic. We were there to support them and now we're seeing the benefits of that support paying paying off for Wingstop and expect growth to.
Be strong into the coming year, Canada. We also mentioned our first restaurant will open in Toronto, hopefully in the first quarter.
That's a 100 store development agreement I think the key for the projects is one big area of focus is China.
You, obviously were delayed because of the pandemic and getting back into China, and just doing some of the groundwork necessary to build the organization prepare ourselves for the likes of a joint venture deal. Those typical those things typically take a lot of time, the pandemic, probably pushed us back somewhere between eight to 12 months and our progress.
Yes, we're back working on that right now and would hope to be.
In China within a reasonable period of time, but we're going to do it right and be very diligent as we go other markets are starting to reopen and we're starting to see the development engine start to pick up.
So we're excited about what the potential is for the long term overseas, but certainly the pandemic.
Put a headwind in front of us it was very difficult to navigate but I think at the end of the day, we're coming out.
Perhaps even stronger than we were before.
Great. Thanks, and then just one quick follow up.
On a different topic, but just wanted to get a sense of how we should be thinking about shareholder returns going forward.
The year on a cadence of somewhat of a every other year sort of a special dividend and I think that largely relates to.
The leverage levels I mean, it looks like we're sort of approaching those leverage level over the next quarter or so.
We might be thinking about layering that in can you can you make any comments and just help frame frame that for us if that's still the right way to be thinking about it. Thanks.
Thanks, Jay I appreciate the question you're right with the cash generated from our business, we do quickly delever from our last.
But historically, we've had a pattern of about 18 months.
Re looking at her.
Leverage on our balance sheet. So it's a conversation that's ongoing with the board and we will continue to have that dialogue on the best way to.
Generate those shareholder returns.
Great. Thanks, so much.
Okay.
The next question comes from Dennis Geiger of UBS. Your line is open. Please go ahead.
Great. Thank you first just a quick follow up on the labor staffing question. I was just wondering if you could speak a bit more to staffing levels and operations.
If you saw any impact on operations in sales in the quarter based on staffing levels across the system and if you have a sense on sort of how close the system is or maybe the system is fully staffed right now.
Yeah, we definitely have seen.
The impact of.
Really high turnover that all of us are experiencing in the industry right now that puts some pressure on the training side of the business. So there's an investment necessary to train up new team members and bringing them on board as well as compensation.
To make sure that we're attracting the right talent.
The good news of our brand is the high off premise mix.
The efficiency inside the four walls tends to insulate us from having any sort of meaningful negative impact on the guest experience.
Since we're not serving in the dining room and we're not.
<unk> long wait times like others have I think that's a great.
Strength of the Wingstop model is we're able to deal with.
Some of these challenges and deal with them with very low rosters, if we need to we don't like to have a roster is challenged in terms of their size.
We know that we can operate at lower levels and still deliver a great guest experience, but our focus not only in our company restaurants as Alex mentioned earlier.
But also in our franchise system is to get staffed up and make sure we maintain that by way of adopt adapting to the macro environment that we're seeing in front of us.
Great. Thanks, and then Charlie just just one more I think you spoke some of this but just wondering if you could talk a bit more about customer behaviors.
Kind of shifts that you've seen at all over the last couple of quarters really last several months being across channel mix, which I think you spoke to some menu use anything more on check versus traffic any any kind of notable shifts there worth calling out thank you.
I wouldn't say there are any notable shifts.
Have changed especially in the dynamic for Wingstop I think one thing we've been very pleased with is we've maintained a solid digital mix.
And also growing our delivery mix I think those are counter to what the trend has been in the marketplace as people go back out and dine in somewhere.
We've seen our business continued to not only grow.
But also to see the mix shift working to our advantage and that's what we would have expected as a brand like ours. So I think all of that factors in one could've said, well Gee you know wingstop could've been a.
<unk>.
It really impacted by the shift of consumer behavior back to a dine in format. That's just not the case, we're still growing we're growing on a strong two year basis, 29% plus.
I think that's that's indicative of the strength of this brand, but from a check perspective.
Pretty consistent with where we've been we still see at least a $5 higher average check for digital orders strong delivery performance on the check average as well.
All systems are right, where we would expect them to be the thing that is.
The challenge for us or the things, we can't necessarily control right in front of us the macro headwinds.
Great. Thank you.
Yes.
The next question comes from Chris <unk> of Stifel. Your line is open. Please go ahead.
Thanks, Good morning, guys.
Alex the margin guidance implies a fairly wide range for the fourth quarter can you help us understand the assumptions that go into the high and low end of that range and then I had a follow up.
Yeah, Chris Great question, you know part of what we wanted to indicate was we're still doing a lot of hiring and training investment not only to ready for our New York market up in but also the amount of hirings, we've instituted some bonuses as well.
At the restaurant level to help.
Attract that top talent for our restaurant and then you know as Charlie indicated theres still some volatility while we're encouraged by what we're seeing on the earner Barry.
There's still some volatility in our wing prices so.
We just wanted to indicate a bit of what that might look like for the quarter.
Okay, and then Charlie.
It's chicken prices revert back toward historical average prices or at least the trend line and then how are you thinking about maintaining a strong value proposition with consumers given the amount of pricing taken this year to mitigate the pressure.
I'm trying to understand if the system will leave higher prices unchanged and then just be more aggressive with maybe with promotional activity or if there's other alternatives that you are considering.
Well I think there are a couple of thoughts on that number one.
We've always believed we have sufficient pricing power in the brand and have historically been on a cadence of one to two points of price per year consistently baked into the into the <unk>.
So the P&L of the brand.
This environment, we're in which we don't believe is transitory in any way shape or form is driving the need to take price where consumers are willing to draw.
Address adopt that and I think we're seeing it across the board.
This will be a level set for the future, perhaps and we will revert back to our cadence, but we've always believed that we do have pricing power in this brand.
And while.
It's challenging right now I think I think that will stabilize as we look to the wing market will it stabilize and get back to historical levels. We don't know and we're not going to just bank on that that's why we've commented several times that we're going to look at strategies, where we can take more control of the situation.
Okay. Thanks, guys.
Yeah.
The next question comes from John Powell of Wells Fargo. Your line is open. Please go ahead.
Great. Thanks for taking the question just mostly follow ups here. Many of the questions were already asked it doesn't seem to be the case, but but on development.
Did the franchisees are you deal with any supply chain issues with respect to equipment in our stores and did that impact perhaps a few stores in the margin.
In terms of opening during the period and then my other question is I know you had mentioned many times Charlie on this call. The idea of taking more control of your supply chain and that the plan is still evolving but do you potentially see requiring any capital spend on your behalf to kind of get that going.
Hey, John Thanks for the questions.
You know first and foremost on equipment I mentioned before we are we're dealing with some of the challenges everybody is but we generally because we have such a simple model and very very standardized footprint.
Tend to forward buy a lot of our equipment and so it very some of it is impacted for instance, chip shortages microchip shortages impact.
More pieces of equipment than you'd ever imagine in the restaurants, notably Pos equipment can be impacted.
Refrigeration is.
Has been a challenge for a lot of people, but ultimately what that means is really just perhaps a near term short term delay of a couple of weeks on getting an opening versus.
Being a reason to not develop.
So yeah, that's that's what we're dealing with in the macro environment, we're putting everything in place to make sure we mitigate that including.
Leveraging our balance sheet, if needed to secure more equipment and have that available to us.
On the supply chain side hard to say.
Our preference certainly would be to find ways that we can leverage more of the bird with our existing supplier relationships, but.
At this point, we're going to evaluate all to all possible options in front of us and see what makes the most sense for the long term success of the brand and I think I would just play against again, what others have done in front of us they've been faced with those exact same questions.
Some of those.
Those decisions as well.
Yeah.
Got it thank you.
The next question is from Nick set John of what the Securities. Your line is open. Please go ahead.
Thank you.
The wind cost commentary Gordon interface with traditional seasonality.
The Super Bowl and March Madness, So just to confirm do you expect when costs too.
Going the right direction here as we head into <unk>.
During March.
Yes, I think this year is a little atypical maybe a little it's a lot of atypical.
For what we've seen historically, which is a pattern of rising prices in anticipation of the big event I think with the really high wing prices.
Many have started to opt out of the wing market, if you will and modified their menus, which is helping.
Prove the supply levels that we're seeing especially in the frozen stocks I will say that we've put away all the frozen inventory we need.
To be able to navigate through the Super Bowl timeframe. We expect that most also have done the same and so the dynamic is actually appear.
Appears to be playing towards a continued pattern of a lower price for the product going into the first quarter. So a little different than what we've seen historically, but again you know.
This is this is a one time.
And then really driven by the pandemic more than the ability to get people back to work than it is any sort of natural.
The cadence of the of the market.
Thank you.
On the royalty.
Just royalties on here as a percentage of.
Our franchise system sales sequentially up ticked down a little bit.
Is that a function.
Just based off and you're not collecting royalties there because with the improvement in international I would've.
Expected that to at least hold hold steady.
Stop.
Is that a phenomenon that should kind of last into the first half of <unk>.
'twenty two.
But I think there is there are two factors affecting this both I'd say are balanced and the impact on the effective royalty rate. One is thigh stopped and yes, I do believe that'll factor in to the first half of next year second is our international business the royalty rates generally.
Our lower overseas and so the mix has modified because of the performance of the international markets and they're working their way back as I mentioned, but.
It has had a drag if you will on the effective royalty rate by their lower performance. So.
I just wanted to call those out.
Thank you very much.
The next question comes from Pizza saw a C. T. I G. Your line is open. Please go ahead.
Great. Thanks.
Charlie you mentioned he hasn't been taken price throughout the year and plan to take another.
4% to 5% and over the course of the next couple of months.
Have you seen any sort of pushback on order counts.
From customers either through delivery or pickup in your sort of noticeable impact and then I have a follow up.
No we have not I think our performance.
Is indicative of that.
On our two year rates for sure and definitely on a one year rate and then the performance in the fourth quarter. Another good indicator that we're not seeing the drag that you would otherwise expect from taking a lot of price, but I think a lot of that is because of the macro factors more so than anything there's just a lot of demand out there right now.
Great Alright.
Then just on <unk>.
On the third quarter numbers and maybe the outlook for <unk> do you feel like there was any impact either in the third quarter or your.
Outlook for fourth quarter.
From just having less stimulus.
Fewer unemployment dollars out there benefit dollars out there how does that impacted you guys at all.
No I don't think that's had any sort of impact on us in particular, if anything if it were expected I think our performance might be different but I think our brand is demonstrated.
Great resilience to even.
Not having to rely on that stimulus if you will.
Two to grow and.
So I don't I don't I don't see any impact associated with that.
Thank you very much.
The next question is from Joshua long of Piper Sandler. Your line is open. Please go ahead.
Great. Thank you for squeezing me in trial you had a question on the cultural aspect, which is a huge part of the story and a long term investment thesis and then a lot of the people pipeline or investments into your people pipeline that you've talked about it a couple of different ways on the call Im curious if youre.
You're seeing that flow into more candidate.
At the store level or even at maybe corporate depending on how you think about that and so are we thinking about these investments to kind of keep pace for I know you talked about getting ahead of an investing ahead of what is going to be kind of an overarching.
Dynamic here, but just curious if you're starting to see that kind of those investments allow you to hold that pipeline steady is it accelerating is it kind of what's the movement in real time in terms of being able to invest into that pipeline and then I had a quick follow up on labor as well.
Sure.
I truly believe and I appreciate the first part of the question on culture that come.
Companies with strong cultures are best positioned to be able to navigate some of the most challenging environments and I know, we've always said even prior to the pandemic.
It'll be a great test for us and the quality of our culture. If we can navigate through it with great results, which I think we've been able to prove.
But it's been tested Theres no doubt and it's tested by way of a lot of the.
Turnover that we've seen at the store level.
Even at the corporate level that a lot of companies are facing I've talked to other Ceos, who say the same thing.
All we're all in this together, but we're all dealing with a very difficult environment and.
We're going to have to adapt to the new way the world is moving and we're demonstrating that and so I do think that.
Look we're increasing we're seeing wage rates increase at the store level, both on the company and franchise side pretty consistently.
We're paying what we believe is a fair amount in a proper amount to get the right talent in the organization to.
To build for the long term, while that creates near term pressure I think the long term outlook is very good and we are starting to see the pipeline of talent improve.
Quite a bit and the brand is still able to attract the best and brightest talent to come in and work with us to develop our long term strategy and execute against it. So all in all I feel good about where we are right now it was a little harder a couple months ago, but we are starting to see some improvement.
I appreciate that color and Alex in your comments in line with some of the international investments that might have slipped you mentioned, some hiring delays and it sounded like those might be at the corporate level, but just wanted to see if there's any additional context you can share there in terms of.
What what hiring or kind of where in the organization does delays were being experienced.
Yeah, Josh I think it really just points to what Charlie said on a minute ago on you know just the challenges you know everyone's facing with tracking.
Tracking talents.
We are encouraged by what we're seeing by the end of the quarter and the pace of hiring picking up and entering into Q4, which is why kind of the guidance was positioned in the way it was an on SG&A.
Got it thank you.
Yeah.
The next question comes from James Rutherford of Stephens, Inc. Your line is open. Please go ahead.
Hey, Thanks for Slotting me in here I just wanted to ask on the unit opening piece of this unit openings on the franchise business in the U S were consistent with prior quarters. This quarter I know that usually fourth quarter is a bit stronger for openings and I was just curious if you maintain that number of openings.
Fourth quarter that puts you at your 12% or better guided growth for the year, but if you do have that seasonal step up you would close and maybe on that 13% I'm just curious for the very near term what you what your thoughts are on on unit openings. Thank you.
Yeah, I think as a brand. We've this year has demonstrated our ability and what we desired to do which is to <unk>.
If you will smooth the cadence of openings over the year.
We've always believed that should be the case, we've always had a strong fourth quarter, but I think the the demand for growth has shown that now we're starting to see this quarter to quarter cadence be fairly consistent we're quite confident in our outlook for the balance of the year.
Any adjustment to that would be centered on any supply chain challenges, we mentioned before but right now we feel very good about where we are.
For the full year outlook.
Thanks for that and then I know, it's a small part of your smaller part of your business, but can you update us on where the dine in is now as a percentage of sales and if that's another lever at the margin to add some incremental sales thanks very much.
Yes, we actually saw even though we've only had about 200 restaurants opened we saw pick up in their mix. These are restaurants that are historically higher diner and mix outpaced the system average so.
That wasn't too surprising us is they've had their dining rooms open for a longer duration, but I don't think I think the levers that Charlie mentioned in terms of same store sales on our advertising strategy our work against CRM and continue to build the delivery business are going to be the long term drivers of our growth.
The next question comes from Jim Sanderson of Northcoast Research. Your line is open. Please go ahead.
Hey, Thanks for the question I had a quick follow up question on menu pricing going into the.
New year any feedback on how you expect consumers to react as far as transaction counts as we see the full impact of the 10% price increase price increase heading into 2022.
Yes.
Yes, I think if you look at kind of what's going on on a macro basis.
Total savings rates are at all time highs for consumers. They have a lot of money and a lot of cash out there. They are spending that money, they're dealing with the inflationary environment. It's not just in restaurants, it's across the board everywhere and I don't think were seeing a slowdown in demand and I think that.
Our assessment is that that will be consistent with Wingstop I think theres a window right here, where we can deal with some of these price hikes to follow the real inflation that's out there but.
I think that from our perspective this is necessary.
Obviously to combat the inflation, especially on the on the wage side.
Like others have done were not the only ones in the market who have done that I think it's a it's a necessary adjustments so.
I don't anticipate seeing that affect transactions the way it would have.
In a more typical environment, we've seen in the past.
And as far as the delivery segment goes you mentioned strength in digital is delivery mix growing is it relatively stable as far as a percentage of sales.
I mentioned earlier, we've grown delivery mix on a year over year basis by almost three percentage points, so 27% plus is where we sit today.
And that's still with a 15% premium above which you could buy in store.
Yes, which is a good indicator of.
Consumer tolerance for that pricing so to your last question, we turned on our on the marketplace side with door Dash, we price up about 15% over our typical menu price and we're seeing it grow so thats a great indicator of what you were talking about before.
Alright, Thank you Charlie.
There are no further questions in the queue, so I'll hand back.
There are no further questions in the queue. Thank you for joining you may now disconnect your lines.
Okay.
[noise].
Okay.