Q1 2022 Wingstop Inc Earnings Call
Good morning, ladies and gentlemen, and thank you for standing by and welcome to the Wingstop incorporated fiscal first quarter 2022 earnings Conference call.
All participants will be in listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero. Please note that this event is being recorded today Wednesday may 4th 2022.
I would now like to turn the conference over to Susana Arebalo, Vice President of F. P N to AC and Investor Relations. Please go ahead.
Thank you and welcome to the fiscal first quarter 2022 earnings conference call for Wingstop.
On the call today are Michael Skipworth, President and Chief Executive Officer, and Alex Collider, Senior Vice President and Chief Financial Officer.
Our fiscal first quarter 2022 results were published earlier this morning and are available under the Investor Relations tab on our Investor Relations website at IR Dot Wingstop dotcom.
Our discussion today includes forward looking statements. These statements are not guarantees of future performance and are subject to numerous risks and uncertainties that could cause our actual results to differ materially from what we currently expect.
Our SEC filings describe various risks that could affect our future operating results and financial condition.
We use certain non-GAAP financial measures that we believe can be useful in evaluating our performance.
He then patient of such information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP.
Reconciliations to comparable GAAP measures are contained in our earnings release.
Lastly for the Q&A session. We ask that you. Please each keep to one question and a follow up to allow as many participants as possible to ask a question with that I would like to turn the call over to Michael.
Thank you Susanna and good morning, everyone. It is truly an exciting time to be a part of Wingstop and I'm humbled by the opportunity to be hosting the call today is president and CEO of this incredible brand that I've now had the opportunity to be a part of for almost eight years.
I've now been in my new role for almost two months and during this time one of the most common questions I've been asked is whether I plan to fundamentally change anything around wingstop strategic growth priorities.
The short answer is no the strategy at Wingstop, one I have had the opportunity to help shape and build over the years has staying power and positions us well to execute the long term growth opportunity for Wingstop.
We will remain focused on sustaining same store sales growth maintaining best in class returns and accelerating development as we build wingstop into a top 10 global restaurant brand.
We have carefully constructed our strategies with their technology forward and growth oriented mindset and that is precisely what has enabled this success of the model and our industry leading growth.
It is what has driven 18 consecutive years of domestic same store sales growth a feat that few if any restaurant peers can lay claim to it is also what's fueled our culture, how we behave in the core values that are at the forefront of every decision at Wingstop. Our strategy is built upon a founder.
Sure rooted in both living the Wingstop way and investing in people as a competitive advantage. This enables our core growth pillars. So preserving our culture is key.
Our first core pillar in our strategy is sustaining same store sales growth.
Building brand awareness continues to be a big opportunity for Wingstop is we have a large gap to other national brands. We have made good progress over the years on closing this gap, but there remains a meaningful opportunity for us to continue to attack in a span of a few years, we have doubled the size of our national AD fund going from less than.
$60 million in 2019, so what we anticipate will be over $120 million in 2022, giving us the firepower to build our awareness as we continue to close the gap to national brands.
2022 provides another inflection point in our national advertising, we're beginning in the second quarter, we will consolidate the local 1% advertising spend into the National AD fund taken the National AD fund contribution rate to 5%.
Which will deliver more efficient advertising and allow for premium placement, while deploying an always on media approach.
Another component of our same store sales growth is our digital business, which has sustained mixed levels of more than 60% and has allowed us to grow our database to over 27 million guests. We continue to invest in technology to advance our best in class digital platform, we are working to transform our.
Our digital marketing with data rich strategies.
Scalable global platforms.
These new insights will further improve our customer targeting guest acquisition, new guest retention levels and frequency among our core we are in the early stages of this transformation and are excited about the growth opportunities, we anticipate for our brand in coming years.
The next core element of our strategy is maintaining our best in class returns as you have seen over the years wings are a highly volatile commodity while we are currently enjoying meaningful deflation in wings. We remain committed to our supply chain strategy, we believe that mitigating long term cost volatility for a restaurant.
This will further accelerate our pace of restaurant development.
We will also continue to fine tune our model and explore ways. We can shrink the size of the box changed the workflow and adapt new technologies or areas of innovation that can help enhance our unit economics.
We believe our strategies of sustaining same store sales growth and maintaining best in class returns translates to an acceleration in unit growth.
One we are already seeing with the record Q1 openings of 60, net and an increase in our unit outlook for this year of 220, plus net new restaurants, with only 1791 restaurants today and line of sight to 7000, plus global restaurants in the future. We are just.
Getting started with the global growth opportunity for Wingstop.
Our first quarter performance is a strong demonstration of the excitement of our brand partners to grow with Wingstop and highlights the unit growth potential despite coming out of a year with record inflation in 2021, we posted a record unit development year and entered 2022 with one of the strongest development pipeline.
We've ever had.
This was showcased by a record first quarter with 60 net new restaurants.
We find ourselves in a unique position in 2022, while most in our industry are facing inflationary headwinds and margin pressures, we anticipate significant deflation in our core commodity bone in wings, while we will see some level of inflation in our business. We expect this will be more than offset by the <unk>.
Deflation, we are seen in wings to provide some context the spot market for wings hit a record $3.22 per pound in 2021, and as we sit here today the spot market is that one dollar in 64 cents per pound this significant deflation in wing prices.
As we exited the first quarter has bolstered restaurant level cash flows to the tune of delivering a payback of less than two years on an initial investment to build out of Wingstop.
These factors support our confidence as well as that of our brand partners and we are increasing our unit guidance to 220, plus global net new restaurants for 2022, which translates to accelerated growth of over 12, 5% and another record year.
While we see a lot of strength in the underlying fundamentals of our domestic business. This is only half of the long term growth story, we have an international business that a supercharged for growth sales for our international markets are now at or exceeding pre pandemic levels. In fact in the first quarter International same store sales growth.
Was 23, 8%.
Our U K, our U K market is a clear demonstration of the power of our international growth strategy, one focused on a heavy off premise digital business with premium positioning.
U K brand partner now operates 20 restaurants with 15 openings slated for 2022.
They have eased in the U K, our $2 million. Despite the market just opening in late 2018. This market provides us with a solid playbook and a blueprint for success as we accelerate our global growth as a brand.
This past quarter, we celebrated the opening of our 200 International restaurant, a proof point for the portability of our brand and the strength of our business model and just last week, we announced a new development agreement for Indonesia, a new agreement is expected to take the market from its current restaurant count of 50 to 102.
We couldnt be more excited for the Wingstop brand long term potential in the Asia Pacific region, and continued to be encouraged by business development conversations in key growth markets.
Our domestic business delivered one 2% same store sales growth for the quarter or 32% on a three year stack basis.
<unk> now exceeding $1 $6 million and further strengthening the unit economic model as we entered 2020 to the first two months were delivering on our expectations and was consistent with our growth rate as we exited 2021 and that's despite challenges associated with the omnicare.
One variance. However, this trend changed in March driven by the combination of very strong comps in the year ago period fueled by stimulus and a shift in consumer behaviors.
In March we observed an industry data a significant amount of pent up demand for dining occasions as cases associated with omicron variance subsided to some degree. We believe this resulted in a near term and near an acceleration in dine in on premise occasions.
We saw this is the right time to reopen our dining rooms, which we did at the end of March if you recall pre pandemic our dine in sales mix was approximately 20% and this represents an opportunity to capture our share of these dining occasions, which we believe are highly incremental.
That said history tells us that one of the first areas consumers will pull back on spending when navigating sustained sustained inflation is dining out.
While we believe we will continue to grow as we build awareness of the availability of this occasion within our restaurants.
We will remain focused on investing behind our digital and off premise businesses, which was successful pre pandemic and will be so in the future.
We also saw a shift in consumer sentiment as a result of the Russian invasion of Ukraine, the high inflation, including $4 gas prices that created an immediate and measurable impact to disposable income for many consumer segments, particularly those in lower income demographics like many others. We saw an initial.
Pullback in spending but this is not the first time in our history, where we have observed. These behaviors. We have a playbook that has proven to be successful in times like these and has allowed us to navigate environments like this and grow same store sales for 18 consecutive years, we can showcase value across.
There are a variety of menu options and drive consideration that preserves wingstop as an indulgent occasion, and we have started to execute these tactics. As an example, we recently launched a bundle that includes 20 boneless wings for flavors and two dips all for only $15 99.
Without TV support the bundle is driving transactions and achieving mixed levels above 5%. We are very pleased with these early results.
There's no question the industry will be faced with some volatility the remainder of this year and recognizing this we have updated our domestic same store sales guidance to low single digits. Despite this volatile backdrop, we have confidence in our strategies and our ability to deliver our 19th consecutive year of same store sales growth.
And when coupled with our increase in unit development for 2022, we believe we are well positioned to deliver another industry leading year.
As I mentioned earlier, our growth strategy is unchanged and long term algorithm remains intact. We are focused on sustaining same store sales growth maintaining best in class returns and accelerating development. These strategies have staying power and position us well to execute our long term growth opportunity for <unk>.
Stop before.
Before I turn it over to Alex I would like to thank our brand partners team members and shareholders for their support as we continue to drive long term growth and deliver against our vision of becoming a top 10 global restaurant brands. It.
It is an exciting time to be at Wingstop, and we look forward to seeing many of you at our upcoming Investor day on May 17th with that I'll turn the call over to Alex.
Thank you Michael as you saw in our press release and heard from Michael Today, We continue to build upon the topline acceleration in our business over the last couple of years and sustained momentum with an acceleration of global restaurant development.
We grew royalties franchise fees and other revenue by $3 $5 million in the first quarter.
This was driven by same store sales growth of one 2% at 208 net franchise openings since the prior year comparable period a record for the brand.
Our new restaurants are producing average unit volumes of $1 $3 million as they enter the comp base.
To put this in perspective, the 2019 vintage generated year, one average volumes of just over $900000. While the average initial investment has remained relatively the same in the low $400000 range.
Advertising fees totaled $22 $5 million, an increase of $1 million from the comparable period prior year due primarily to higher domestic system sales.
As Michael mentioned, we shifted a 1% local advertising requirement to a national advertising contribution this year, which took effect in the second quarter.
Not only will this change enable an always on national media approach and help close our gap and awareness to top national brands. We also believe we can invest $6, 40% to 50% more efficiently than the prior local advertising investments.
In the first quarter company owned restaurant sales increased by $1 million due.
Merrily to four net new restaurants, and same store sales growth of two 1%.
Which is especially strong given the <unk> for comparable company owned restaurants average more than $2 $2 million.
Cost of sales as a percentage of company owned restaurant sales increased by 870 basis points compared to the first quarter last year, driven primarily by increased labor investments preopening expenses and to a lesser extent food costs.
During the quarter with the ongoing pandemic, we had elevated wages higher overtime and training expenses to ensure our restaurants were properly staffed that impacted cost of labor as well as enhanced COVID-19 sick thing.
The combination of these elevated labor expenses drove an additional three five percentage points above our historical run rate.
We have continued to make training investments to develop our presence in Manhattan, where we now operate five restaurants with plans to operate approximately 10 by the end of the year.
The affected year over year increase in the price we paid for wings was 14% as we lap lower wing prices in the early part of the quarter.
But as we exited the quarter wing prices have declined dramatically and continues to provide a tailwind the.
The combination of adequate frozen inventory levels for wings and record level prices for breast meat suggests a favorable commodity backdrop for wings in 2022.
We are excited by the improvement in restaurant margins as we exited the quarter and since our peak in 2021 food costs are 800 basis points lower.
SG&A in the first quarter increased $4 $3 million to $18 $1 million, mainly due to investments in talent to support the growth of the business investments in our strategic initiatives and additional travel compared to the prior year as we lapped a period with limited global travel.
With the acceleration we've experienced in our business during the last couple of years, we intend to continue to invest in people, which is foundational to our strategies.
Adjusted EBITDA, a non-GAAP measure was $22 $1 million for the first quarter, a decrease of seven 6% adjust.
Adjusting for nonrecurring items, we recorded adjusted earnings per diluted share a non-GAAP measure of 34 cents.
In March we completed a securitized financing transaction, which included the issuance of a new series of $250 million securitized notes and a $200 million variable funding note facility.
In connection with this transaction, we recorded $1 $1 million in debt extinguishment and financing transaction costs, including $300000 that were recorded in SG&A.
With this additional debt level, we expect interest expense of approximately $23 $5 million for 2022.
We're pleased with the execution and pricing associated with this deal, which allowed us to return capital to shareholders in the form of a $4 special dividend.
While reserving funds to support our strategic initiatives to take greater control of our supply chain.
We have a variety of options when it comes to executing our strategic supply chain initiatives, whether that be our whole bird strategy shared investments with suppliers or other mechanisms.
While this capital enables us to be opportunistic to pursue key strategic supply chain alternatives when or if they become available we would execute our strategy in a manner that allows us to preserve our asset light business model.
We remain committed to driving shareholder value and returning capital to shareholders through quarterly dividends, which are 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 June 10th to stockholders of record as of May 20th 2022.
Yeah.
In addition to updating guidance for same store sales growth to low single digits and increasing net new unit guidance to 220, plus we lowered 2022 SG&A to be between 70 and $72 million compared to prior guidance of 73 and $76 million.
This change is due primarily to our lower guidance for stock based compensation expense in connection with our CEO transition announced in March.
We now anticipate stock based compensation expense to be between seven five and $8 $5 million compared to prior guidance of 12 and $13 million.
We do not provide quarterly guidance, but as for the cadence throughout the year, we expect SG&A to be lower in the second quarter due to the adjustments of stock based compensation expense and then expect a more normalized run rate in the second half of the year.
We also introduced guidance for diluted earnings per share of between $1.55 to $1 57.
This reinforces our clarity and confidence in delivering another strong year for Wingstop.
As we look ahead to the balance of 2022 and beyond we believe we are well positioned to deliver on our growth targets and continue to make progress towards our vision of becoming a top 10 global restaurant brand.
With that let's turn to Q&A operator, please open the line for questions. Thank.
Thank you we will now begin the question and answer session.
Quick question you May Press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two please.
Please limit yourself to one question and one follow up if you have further questions you may reenter the question queue.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from David Tarantino from Baird. Please go ahead.
Hi, good morning.
Michael I just wanted to ask about the same store sales trajectory.
You mentioned sort of flowing pretty significantly in March and.
Attributing that largely to external factors.
I guess one question I had is is there anything internal to the business that you're seeing that might help to explain some of the softening or are you I'm more convinced that this is just generally related to the macro environment, but then I do have a follow up.
Hey, David Good morning, it's good good to hear your voice and thanks for the question.
As it relates to the cadence throughout the quarter, you're right. We started out pretty consistent with how we exited 2021 and then as we saw the omnicom variance subside to some degree it clearly demonstrated that there was some.
Some pent up demand around dining out and and obviously a lot of these restaurants dining rooms weren't open for the last couple of years and so it provided an opportunity for consumers to get out and dine out and as we mentioned on the call our dining rooms weren't open during this time period and so we did see that impact our trend and then I'll.
The asleep if you layer on top of that the the reality that we were going up against some really strong compares from the stimulus money from 2021 and both P. Three as well as the fourth period of the year for us and so.
It's largely demonstrated through external factors from what we've seen we do have a subset of restaurants, David that represent roughly about 300 restaurants that.
Did not take as much pricing as the rest of the system in 2021, and we didn't see a difference in performance or behavior of those restaurants and the rest of the system, which led us to believe that this is a lot of macro economic or macro environment factors that really impacted our trends.
Great. Thank you and then my follow ups about.
How you expect comps to progress as the year goes on and it seems like they're comparison in the second quarter, if I looked at it on a multi year growth basis is the most difficult.
I'm wondering you know if you wanted to comment about.
What your expectation might might look like directionally for the second quarter.
Then how that plays out as the year progresses, and then you know maybe if you could we even some commentary about what you're doing.
I guess, specifically to drive comps in the in the.
In the short run in addition to that that bundle you mentioned is there anything.
Related to kind of concentrated advertising or anything like that in the second quarter versus the rest of the year yeah.
David.
You said it well the compares are strong in the second quarter and so we do anticipate.
A softer comp if you will maybe something that's roughly flat in the second quarter. When you when you factor in the compares but I think if you take a step back David.
It feels like the reality is we're where maybe a year ahead of most other brands in that we benefited from a strong consumer a lot of stimulus last year and we were faced with inflation last year record inflation in our core commodity and took the appropriate amount of pricing too man.
Our business and then we find ourselves here today, where consumer behavior is shifted to dine in the consumer on average is still in a really good shape. However.
However.
You look at the other brands that are facing are in.
Inflation this year that they have to manage and balance and manage through margins in that pressure that puts on their business and likely will have to take price as we continue to monitor this record level of inflation and the impact on consumers and it really puts us in a unique spot David to where we can take some of this meaningful deflation.
<unk> that we're experiencing right now and give that back to consumers in the form of value and so that's a real opportunity for us I think is to lean into value. We've seen this type of behavior change if you will in our business before.
Facts and circumstances, but I go back to 2016, and we were able to deploy this playbook and lean into value and drive growth in the business, but I think in addition to that we have obviously our dine in business that is is an occasion that we can capture and we'll be opportunistic there and I think that will benefit the business.
As we referenced we're starting to collect the 1% of local advertising and the national in Q2, another inflection point for our brands from a national advertising perspective, we continue to have our first party database. That's 28 million users strong that we can tap into and really target and influence.
Consumer behaviors in an impactful way that'll drive the business and then obviously, we continue to have opportunities around menu innovation, whether it's through flavor or other proteins as an idea to look into and explore but a lot of levers for us to pause. So if I take a step back and look at.
Wingstop is potentially a leading indicator for what's kind of coming down the pipe for other brands I think we're in a pretty good spot at one 2% comp is something that's that we're we're happy with in light of everything, particularly when you look at our <unk>. The three year at north of 30% Atvs at $1 6 million.
And our food cost is sitting in that really really sweet spot brand partners cash flows are really strong and we're sitting here in an environment, where we have levers to pull and we're confident we can drive the top line, but most importantly, we're in a very favorable commodity environment for our brand, which will fuel development and gives us confidence to raise.
Our unit growth target for the year of over 220 restaurants, and so we feel really good about the position we're in and where we are as a brand.
Great. Thank you for the detail.
The next question comes from Jeffrey Bernstein from Barclays. Please go ahead.
Great. Thank you.
First just wanted to follow up on that last question in terms of the comps I mean, it does seem like the three year trend.
Clearly huge but decelerated over the past couple of quarters.
Wondering whether the magnitude of that whether you think that was all driven by March.
And then any comment I think you said you thought the second quarter would be flattish, which that would actually be a reacceleration in that three year, which would be encouraging. So just trying to get a gauge for the magnitude of the March slowdown.
Any thoughts on.
The outlook for the rest of the year.
Yeah, Jeff I think I think we said it.
Our prepared remarks, but we.
We started the year, where we expect it to be and then we did clearly see a marked change in consumer behavior and in the.
In March post kind of the that omicron variance period, if you will and that did.
Obviously impact our trends, but as we look and when you expect the compares to be similar in <unk>.
April as they were in March and therefore, we would expect a similar trend into April but then as you get beyond April the compares get much easier, but at the same time, we're starting to pull some of those growth levers that I referenced to and so we would expect to see.
The comp trend improved as we moved through the cadence of the balance of the year.
Got it and then the the menu pricing.
I think you had previously told US it was going to be roughly 10%.
Interesting now that Youre seeing such significant wing price easing so.
Perhaps benefiting on both ends but just wondering.
If you can give a little bit more color on you.
Your insight into where the consumer might shift their mix shift or it might impact traffic I think you gave them.
You mentioned a pretty good example of some units that took less price than others. Maybe you could provide some more color on that just to demonstrate that it's really not a lower income consumer perhaps feeling pressure from the outside and menu pricing.
Yes, Jeff.
We alluded in our last call that we expected to see about the net effect of the pricing from 2021 into 2022, and the first quarter to be about 5%.
That takes into effect menu mix shift trade down if you will or anything like that and so that is pretty much what we saw flow through through the comp in the first quarter and so we expect the pricing element to tail off as we progress through the year, but as I mentioned earlier.
The subset of restaurants that took a much less pricing than that that targeted 10% that we shared before didn't behave any differently, which gives us confidence that.
The change in trend if you will the consumer sentiment.
It's really more of a macro issue than anything related to the pricing that we that we took in 2021 and one of the things that's unique about our brand is we're able to lean into our menu and the flexibility with our group packs.
And group occasions to really demonstrate value kind of in our everyday menu and that's an opportunity I think we can lean in when we see that resonate well with guests.
Got it and just lastly, I don't want to spoil the Investor day.
But any color in terms of I think you mentioned something about investing alongside your suppliers or whole bird strategy is there any kind of update on your ability to further contract or perhaps mitigate some of the wind cost volatility that you've referred to in the past. Thank you.
Of course, yeah, we're in a really good spot today with the deflation that we've seen and wings and the leading indicators, whether that's frozen inventories for wayne's or if you look at.
The spot market price for breast meat, which is at record highs all look to support a very favorable commodity environment for us in 2022, but that being said that doesn't mean, we're going to sit back and and slow down on some of the work we're doing around our supply chain strategy and we do believe there is an opportunity.
For us to lean in and take more control of our supply and ultimately deliver a more predictable landed cost for our brand partners minimizing that volatility that we've seen over the years, which we know if we're able to deliver on that it will turn this development engine into our flywheel and so at our Investor Day, We will go a little bit deeper into.
The supply chain strategy, what that means for our model for the unit economics, but one thing that we wanted to make sure is clear is that the alternatives that we're exploring around this strategy doesn't impact our asset light model that we enjoy today.
Thank you.
Welcome.
Next question comes from Andrew Charles from Cowen and company. Please go ahead.
Great. Thanks.
Michael I think I get the message that essentially there was a snap obviously in March from macro perspective, and that essentially the guidance for flattish in <unk> and then low single digit for the remainder for the year implies kind of a three year trends remain intact, but can you talk a little bit more if I kind of fast forward that and 2023 of the domestic business can return to me.
Single digit comps over the medium term.
Andrew Great question I appreciate.
The forward looking and long approach here and I think you're right. We have a lot of growth levers here and the brand I can remember like yesterday, a few short years ago talking to this group about our vision to getting to $1 5 million and a and B. When we were just at one.
And pointing to the growth drivers, we had in front of us as a brand and it's no different as we sit here today, we still have a lot of levers we can pull and we're confident that we're going to be able to continue to drive. This top line growth that will that will deliver back on that three to five year outlook that you referenced and so we're excited about.
What's in front of us as a brand.
Okay, Great and then just wanted to come back to the comments that you know obviously over a decade of positive comps great trackers that you guys have so can we talk a little about kind of a 2008 2009 experience I would love to learn more about the best practices from them from that time and how that can really help drive sales. So for instance on the value side you guys historically have focused.
On value platforms that are higher ticket and higher margin just given the nature of the bundle is that still kind of the right way to promote value and any other kind of lessons from 12 years ago, or so or sorry, 14 years ago.
That really.
It really kind of help you navigate kind of the current backdrop.
Yeah.
Yeah, Andrew It's a great question, we've we've been able to lean into value before and really really demonstrates I think compelling value for consumers in our bundle that we referenced in our prepared remarks, the boneless meal deal with 'twenty wings for flavors.
Sent a large fry for 15 99 is really strong value, but I think the thing that's really important too.
To think about and what allows us to grow and navigate some of these.
Periods, where the consumers concerned about value is how guests engage with us our frequency on average is three times a quarter and so what you tend to see particularly in some of those time periods. You referenced back in 2010 is that a consumer will more likely pulled back.
There are four to five times <unk> visit a week, but the less likely to pull back from that indulgent occasion with wingstop once a month and so they've they've burned that they've saved their money and they want to they want to splurge and they want to indulge and so that's that's really where we lean into it's not only just presenting them with value.
Talk about the unique experience the flavor experience at Wingstop, how it's cooked to order the uniqueness of our sources are depths made from scratch.
Our French fries hand cut from potatoes in the restaurant every day and so that allows us to be uniquely positioned to navigate an environment like that.
Thank you for answering my questions as well as making me hungry.
The next question Pleasant.
The next question comes from John Glass from Morgan Stanley . Please go ahead.
Thanks very much.
Nicole can you just update us on where the demographics of the brand stand today, maybe by household income cohorts and I know, it's I know it's changed over time, so maybe what those changes have been and in this quarter did you see a difference in the behavior of your digital customers versus non digital in other words, maybe that gives them insights.
Into how different customer cohorts are behaving differently. During this period of time.
Hey, John Thanks for the question.
Yeah, we absolutely have made really great progress in diversifying our customer base and if you recall back a few years ago, we were really targeting that heavy <unk> user, which is a little bit more affluent or little bit less at ethnically diverse consumer and we've made a lot.
Good progress on that front that being said as we sit here today.
That lower income a little bit more ethnic consumer.
It's no longer you know, 50% of our customer base, but it's still a decent size and we did see.
That the reality of this unnecessary war combined with $4 gas prices impact their frequency and obviously, that's an area, where we will lean in and drive that value message that said, we also saw similarly that more affluent a little bit less ethically diverse.
Consumer foods, a little bit more financially healthy balance sheet, a little bit stronger we did see a little bit of a pullback in their frequency as it related to the dining out element that we referenced earlier and so we felt we saw kind of a near term if you will pullback in both cohorts cohorts, but obviously.
We have a have a game plan and the playbook on how to address that.
And in the change in behavior was that both reflected in change in check, meaning a lower check because of lower price point.
Value items or was it just driven by traffic and check didn't really change during this period of time.
Excluding pricing benefits of check.
Yeah, John we did not see.
Change really in check through the quarter.
Okay. Thank you.
Youre welcome.
The next question comes from Andy Barish from Jefferies. Please go ahead.
Hey, Michael I'm wondering you know on on product innovation, obviously size, where a big deal.
Last year I'm wondering if you can kind of give us an update in terms of where that product stands and mixing and kind of part of this strategy.
As wing prices have obviously come down a ton.
Yeah Andy.
We continue to be excited about size and I think it really.
Comes comes from the perspective of how it plays into our whole bird strategy, our supply chain strategy and overall mitigating the volatility that we see in wing costs, but as we sit here today.
The third product, it's still mixing at that low single digit range that we've we've referenced before and continues to to be able to play a nice role in and how we're thinking about and executing that supply chain strategy, but we.
We sit here today with wing prices at $1 64, a pound and with a $1.6 million.
As food cost in that mid 30 range cash flows for our brand partners are extremely strong right now and I have recently spent a bit of time out in market visiting with brand partners and hearing that the sentiment and the excitement about growing with Wingstop was extremely encouraging and gives us.
A lot of confidence in and what's in front of us and the ability to deliver a record development year in 2022.
Thanks, and then just one more one more quick one if I could on.
You know sort of investment in labor as you talked about you.
Franchise systems, there are sometimes different you know sometimes they run labor a lot tighter sometimes you know there's more investment in labor versus company owned stores. How do you kind of perceive your you know your brand partners in terms of that continue on Myra day, you know where are they coming up the curve.
They have to invest more and then also is there any any near term costs just in terms of reopening dining rooms or is that really a reallocation of labor.
Yeah. That's yeah, you hit on any of the the beauty of our model is we don't really have to staff our restaurants for the dining room and so this is purely a.
Incremental occasion that we can capture there, but I would say from our brand partners perspective, and labor they've made similar investments that you've seen throughout the industry and you have seen in our company owned restaurants, there, they're lower than where we are and our company owned restaurants, which I think as you alluded to is it's not abnormal.
Franchise environment, but the the Wingstop roster is one that's smaller than a typical restaurant company I think the average roster can be in the mid teens to 20 and you can run at Wingstop with as few as 310 team members in the restaurants and so the.
The labor element in our model can get as we continue to grow au vs can can almost become fixed to some degree and you can get some nice leverage on that line in the P&L, which just further enhance those unit economics.
Thank you.
The next World Cup.
The next question comes from Christopher Combe from Stifel. Please go ahead.
Yes. Thank you.
I have a clarifying question and then a follow up Michael you mentioned that April was similar to March but I also believe you mentioned the new bundled offer boosted traffic and I think that new promotions started in early to mid April so I'm just trying to reconcile those comments.
Yeah. Thanks, Chris I think we would expect.
At a macro level, we would expect April to be pretty similar to March when you think about the similar compares as well as some of the levers we're pulling youre right. The bundle did did launch in April but it launched without TV support and early on we saw mixed set.
5%, a little bit above that level, which we're really excited about and so I think that will demonstrate that it's going to resonate really well with guests, particularly guests who are looking for value and that indulgent occasion. So we're excited about that lever we have to pull.
That's helpful. And then I'm wondering why the company doesn't choose to balance its value offerings with more product innovation. It would just seem that you could increase the frequency of introducing new flavors as maybe a call to action message or even developing new products that might broaden the brand's appeal.
Yeah, Chris I think you I think you hit the nail on the head there in that we the area, where we do innovate on the menu in particular is around flavor. We launched a unique flavor on April 20th that really performed quite well.
Mix really high for us from a from an LTM perspective, and then just here. This week, we launch some flavor remix. So I do think that's an area, where we leaned in and can can create new news. If you will for guests and driving occasion and give them a reason to come into wingstop and enjoy a unique flavor.
<unk> that we offer and so that is an area that we will lean in and you'll see more of that from us for the balance of this year.
Great. Thanks, guys.
The next question comes from Jon Tower from Citi. Please go ahead.
A few questions. If I may just in terms of thinking about the incremental marketing spend that's coming through with the move of one per cent move in national are you targeting certain mediums or customers, specifically with with a lot with this incremental dollar meeting.
Are you going after the dine in occasion or you're focusing more on the delivery side, our digital obviously being a piece.
Will you be focusing more on value than than in the past just curious to kind of get some color there and then some additional questions.
Yes, John Great question I appreciate it.
I wouldn't say that our targets are really changing necessarily we're still leaning in to that it's pretty broad, but that too is heavy <unk> user as.
As well as speaking to our core consumer as well, but what I would say is what we're doing with these these extra dollars is you're going to see us show up in.
And more premium placement as well as more weeks on TV and so that would be what from kind of what youll notice would be would be the biggest change from from prior year that said, we continue to lean into performance media or digital advertising there as well.
The leverage that that first party database that we have and really get targeted around new guest acquisition as well as retention and then obviously driving frequency.
Got it and in terms of the mix side of the equation.
Dining rooms, reopen I think you said about 20% of the business pre Covid was was a dine in occasion how.
How should we think about the potential headwind coming from mix, where I'm, assuming you're getting smaller check orders.
Individuals' come to stores versus larger bundles through delivery and off premise.
Yeah, John I think we've we've obviously seen our average check grow quite nicely.
Over the over the last two years.
And I would say that delta that existed pre pandemic, it's gotten a little bit smaller, but it's still there today. Obviously, it's early I'm, having just reopened our dining rooms, but we are seeing somewhere around a four to $5 smaller average check on that dine in occasion.
Got it.
And then just last one for me.
Great to see that the unit growth guidance for the year has been picked up but.
In terms of and it doesn't appear to be the case, so far but we've heard it certainly from others in the industry that permitting has.
Been a headwind for new store openings, and even some equipment supply chain challenges.
Anything you're hearing or seeing in the marketplace. Today, that's giving you any bit of hesitancy in terms of meeting that 220.
Plus number.
Yeah, Hi.
I definitely have heard the challenges around permitting.
There's no question about that and we did see some challenges around.
Some elements of supply chain last year, but I think even if you look back to 2021, we delivered another record year of development and so we feel confident as we sit here, particularly when you think about the strength of the cash flows for our brand partners today.
And the reality that at $1.6 million.
Theyre looking at.
A little bit less than a two year payback on their initial investment for Wingstop and so we've factored in and thought about the current environment, whether it's permitting or supply chain. When we when we leaned in and and we feel really confident about the opportunity to deliver over 220 restaurants. This year.
One element to highlight or call out John is that.
One thing that we're really excited about and that's included in that number is our international business, which we believe as we sit here largely on the other side of the pandemic volumes have returned to or exceeding pre pandemic levels. We've seen incredible success in the U K, where our <unk> are.
$2 million and we have 20 restaurants today, a real proof case of the strength of our model and how the brand performs outside of the U S. We're sitting here looking at what looks like it's shaping up to be a record year for development for our international business and excited about that becoming a bigger part of this long term growth story here we have.
In front of us.
Great I'll see you in a couple of weeks. Thanks.
Thanks, John .
The next question comes from Jeff Farmer from Gordon Haskett. Please go ahead.
And thank you just shifting gears here, a little bit I'm curious what impact.
The fortress seen development strategy has had on your same store sales in recent quarters and when do you expect the magnitude of that impact to either increase or decrease as you move forward here.
Hey, Jeff I appreciate the question I Wouldnt call out if we'd looked at markets. How they performed we've looked at different geographies I would say the one thing that has impacted the difference in how in the first quarter and how some markets performed over others. It was.
How long ago those markets largely reopened.
We saw less of an impact of kind of that shift in consumer behavior in Q1, and some of the markets that had opened up earlier than maybe those that just recently opened up in March and so from a forecasting perspective, we continue to see that strength and overall brand awareness in those markets. We continue to see those markets performed.
Strongly but nothing I would call out materially different from a comp perspective.
I mean, those markets and others.
Okay, and then just just a follow up you you've just touched on this but as it relates to the international development.
Specifically in China and Western Europe .
Sounds like you know things are going well there, but are you any closer to reaching what I would consider sort of a development tipping point, where you would see.
A pretty material acceleration in unit development as we get into 'twenty, three and 'twenty four.
Yeah.
Yeah, I think we are we are getting closer to that end we've got.
Obviously, you have some really great momentum in our markets around the U S. Today, we announced just last week.
A re up if you will with our partner in Indonesia to double the size of of that agreement. We have obviously the success I alluded to earlier in the U K, we have Canada coming online later in the second quarter and then we have some really really strong progress in our business development pipeline and so as more of.
These markets come online you're exactly right, we're going to start to see that that part of the growth story play a bigger role and see some acceleration in our international growth.
Alright, thank you.
Our next question comes from Michael Tamas from Oppenheimer <unk> Company. Please go ahead.
Hi, Thanks. Good morning, you talked about on premise across the industry as a headwind to same store sales and margin I think on premise across the industry and specifically in casual dining still pretty well below pre COVID-19 levels, which suggest headwinds can remain in place for a little while so I know you're excited to have your own dining rooms open but can you just help us.
Understand some of those dynamics and then does your research show you that your consumers want to get back in and actually dine in your restaurants with all the gains you've made with off premise over the last couple of years. Thanks.
Yeah, No I think it's a good question and you know you've obviously have seen a lot of growth in an on premise dine in and and and for some of those brands you're right, they're not back at 2019 levels that said.
If you remember our our dine in business was was almost 20% pre pandemic and so we know that's an opportunity for us to.
To to capture there in those occasions to capture and you know.
The fact that we grew through the pandemic and our off premise grew.
Lot of that was through new guest acquisition and some of what I talked about earlier around.
That little bit less ethnically diverse a little bit more affluent guests that we have been targeting that heavy <unk> user and so that those behaviors will remain and will continue to engage with them and drive them into the brand, but there is an opportunity out there for us to to capture some dining occasions and what we've seen early on is.
Those cases occasions are highly incremental for our business and so it made a lot of sense for us to open up our dining rooms. At this point, we have looked at a subset of restaurants, just a little over 200 that had their dining rooms open.
Throughout the first quarter and they did outperform the rest of the system. So we do see that as an opportunity in front of us, but I do think the reality is we have to think through.
The inflation, we have in front of us and I'll reference back to my comments earlier about wingstop potentially being.
A year ahead of a lot of other brands and how consumers' behavior is changing and how the implications will play out around inflation and whether or not history will repeat itself and consumers will pull back on dining out, but if that does happen. Obviously, we are well positioned to navigate that environment with our off Prem.
This business leaning into value, which I talked about earlier.
Thanks, and then just a follow up I think in response to an earlier question you mentioned that food cost in the mid 30% range is that the right way to think about the second quarter and then the rest of the year.
<unk>.
Yeah, I'm actually referencing a lot of the comments I've heard from our from brand partners over some some recent travels throughout markets, but if you look at our company owned restaurants. As an example, we have a little bit lower boneless mix. So our food costs typically runs a little bit higher.
Then the rest of the rest of the nation, if you will and our franchisees that dead, even at where were running our corporate restaurants with higher <unk> produce really strong cash flow, but as we sit here today, the commodity environment and those leading indicators look extremely favorable it's tough to forecast.
In this environment, whether or not you'll see the price of wings follow its traditional seasonal curve or whether or not we'll kind of continue to stay where we are today, which as you know.
In that dollar 60.
Four a pound range.
Regardless, we if it moves up even a little bit from here the cash flows for our brand partners and I continue to be really strong, particularly coupled with the adv growth. We've enjoyed over the last few years.
Yielding over a $1 6 million AAV today.
Great. Thanks appreciate it.
The next question comes from Nick <unk> from Wedbush Securities. Please go ahead.
Thank you.
You referenced the National AD fund contribution starting in Q2 in terms of the incremental 1% can you talk about just the weight of our marketing spend in Q2, Q3 Q4 versus Q1.
Year over year, whether it's going to be much higher.
Going forward and I'm, just given where bone in wing costs are.
Why not leaning a little bit more on on born in value versus boneless bundles.
Yeah I think.
As it relates to marketing if you recall in Q2 of last year.
<unk> was a year, where we had carried over a lot of surplus and our AD fund from 2020, and we knew we were lapping some really strong numbers and so we've deployed a lot of that surplus in Q2 of 2021 to.
To help navigate some of those compares and so as you look at 2022 versus 2021 for the second quarter I think I would expect our AD spend even in consideration of that additional 1% to be relatively flat year over year that said you will see an increase commiserate with if you will.
Overall increase in system cells and that 1% for the back half of the year, which gives us confidence in navigating some of this near term choppiness that we see an environment that we see in and leaning into some of the growth levers we have over the back half of the year.
And do we have any visibility into whether we can use going in as a value driver versus just the boneless bundles.
I think that's always an option in front of us, particularly when you look at this a favorable commodity environment that we have and I think it plays to my comment earlier, putting us in a really unique situation in 2022, where other brands are navigating inflation and margin pressure are likely going to be taking.
Price and we are experiencing meaningful deflation, we do have the opportunity to lean into that and give some of that back to consumers in the form of value and so those are all things that we're exploring as we continue to lean in and drive growth through the balance of the year.
Thank you.
The next question comes from Brian Mullan from Deutsche Bank. Please go ahead.
Okay. Thank you last call you talked about new customers that have come into the brand over the last year and a half <unk> been able to retain those.
The frequency level, that's better than what you've experienced in the past. So I was wondering could you confirm that this still remains the case today you know even with some of these recent changes in consumer behavior. That's been discussed on this call and then assuming the answer is yes is there something unique about these newer guests worth mentioning or is it perhaps just something going on with your own efforts.
Any insights would be great.
Yeah, I think it's a good question and what I would really point to is how we've been able to sustain our digital sales mix and I think that really illustrates the stickiness. If you will of our growth with those new digital guests that we've acquired and it really speaks to the power.
Our first party data and how we use the insights we can gather from that and understand who to target how to retain them and then how to drive their frequency and so we're really encouraged by the early results. If you will that we're seeing.
Leveraging this first party data and we think that is an opportunity where we do plan to lean and continue to invest and then drive.
Top line growth and continue to drive <unk> for the brand.
Okay. Thanks, and then just a question on New York I know, it's early days, but can you speak to how that market is going maybe call. It an item or two that has you, particularly encouraged both on the street locations as well as that goes the ghost kitchens and then.
Conversely is there anything more cautious that you've seen there that perhaps is going a bit differently than what you had anticipated.
Where we're really excited about Manhattan and the progress we've made there the restaurants are performing very consistent with how new restaurants perform on that trajectory. If you will encouraged by that I was actually in that market with the team a few weeks ago.
And had the opportunity to visit each one of our restaurants and meet our team members that are working in the restaurants and that's what I would highlight is how engaged our team was I was really encouraged to see how excited they were about working for wingstop being in the restaurant and serving Manhattan flavor in it.
It's exciting and so I think there's a ton of a ton of potential in front of us and we're going to continue to drive the brand there and excited about that opportunity.
Thank you.
The next question comes from Chris <unk> from RBC capital markets. Please go ahead.
Hi, Good morning, Michael you mentioned, the advantage for Wingstop, and having that more insulated indulgent occasion, but I'm curious.
So if you can comment on.
Perhaps like layering in that more frequent occasion as well is there an opportunity from a menu perspective that can also drive frequency to complement that more indulgent occasion.
Yeah. It's it's a good question, Chris and I think you really have to think about the consumer behavior.
They are spending and how frequently they do intend to actually.
And done with the restaurant and so it is it is something that I think we play well in and if we look back into history. It may not be as much around increasing frequency when we've navigated time periods like this but really just retaining the frequency we have in that indulgent occasion, and that's where I will focus.
And then also we still have the opportunity. If you look at Wingstop just from a brand awareness perspective, we still have a meaningful gap to other national brands, which is a huge opportunity for us to continue to close that gap and bring more guests in and so theres a lot of new guests that we can bring in and introduce to the <unk>.
Brand during this time period and create that indulgent occasion, if you will for them and so we feel like we're well positioned to navigate this environment.
Got it okay. Thank you and then I guess just following up on.
Just the commentary around costs and margins here, just drilling down maybe a little bit more specifically on the EPS guide for the year, you gave us clear guidance on top line and G&A, but just curious if you could comment a little bit more specifically about restaurant margins in the cadence of that over the course of the year, you've got the shifting dynamics around more favorable wing prices.
And then you have labor dynamics the layering in of the Manhattan stores. So just curious about how we should think about margins in.
And particularly for the back half of the year.
Yeah, I think I think a good way to look at that is obviously in Q1, we had some some moving pieces.
With with wings as as we we did see a little bit of pricing difference year over year, but obviously that's materially changed since the end of the first quarter to our benefit but then even in the labor line, we had a little bit of.
Inefficiencies, if you will to the tune of 350 basis points around the impact of omicron, and just navigating that environment, but I think if you normalize for those things.
And I would expect to see.
An environment, that's pretty similar from a margin perspective too.
<unk> to 2021 with the opportunity as we continue to see improvements in the price of wings to get better from there.
And then obviously layers in additional restaurant openings within Manhattan, which are at a little bit lower than the rest of our kind of core company owned restaurants and have a different margin profile.
Got it alright, thanks for all the detail.
Welcome.
The next question comes from Jared Garber from Goldman Sachs. Please go ahead.
Good morning, Thanks for taking the question Michael I, just wanted to maybe switch gears, a little bit and get a sense of how youre thinking about automation, playing a role in wingstop restaurants.
Maybe you have some insights from your.
Our recent travels over the last year or so meeting with franchisees, but I think the brand and the simplicity of the operations.
In my view at least sort of lend itself to some incremental automation, maybe even potentially ahead of some of your peers. So just wondering.
What your thoughts are on that and how we may see some of that start to play out.
And the Wingstop restaurants.
Yeah, I think innovation is clearly something that we we've been focused on over the years. The early investments we've made in technology positions us extremely well for the shift in consumer behavior as we navigated the pandemic and we continue to lean in.
Areas of innovation I think examples really all ladder up to improving the unit economics, and helping us continue to make progress against our aspiration of digitizing, a 100% of our transactions well north of 60% today, that's in line with Big Pizza and some of the other brands who.
<unk> have been added a lot longer than we have and we're going to continue to lean in there I think there's opportunities as it relates to phone orders that are still in front of us and how can we make that a digital transaction and take pressure off of the front counter and get the team member off of the phone and so that would be an example, I would point to in areas that will lean.
Then and look to innovate and automate areas within the four walls of the restaurant as well as continue to advance our two 100% digital.
Okay.
The next question comes from Brian Vaccaro from Raymond James. Please go ahead.
Thanks, and good morning.
Trying to better understand the recent change in behaviors and I'm curious, if you're seeing more of a change in weekend versus weekday business or perhaps delivery versus pickup any other dynamics that might be worth highlighting.
No. It's a good question I would say the the the area I would maybe point to that we've seen is is really that that dinner occasion, where consumers seem to be more prone and more excited about just kind of getting out and dining out that's kind of what we saw in April .
In March if you will.
Okay, Great and I know, we don't want to get too focused on monthly comps, but since there was such a meaningful change I was hoping you could just clarify so we're all on the same page and I interpret your comments to suggest that March comps were perhaps down say in the mid single digit range and then did I hear right Q2, you guided flat and I think.
<unk> April down a similar amount with May and June expected to improve is that accurate.
Yeah, I think that's accurate.
Alright, that's great and then last one for me clarifying on the Cogs ratio, Alex I heard down 800 basis points, but I wasn't clear on what base you were talking about.
So maybe you could speak directly to sort of where that Cogs ratio is currently running is it isn't that 35 36 is I was sorry, I was just a little confused about the base you were looking at.
Hi, Brian Yeah, what we anchor to is that alright anchor to that that comment was our peak in quarter three of 2021, where our Cogs was about 48% so to Michael's point, we've progressed into that.
Upper 30 range on Cogs for the restaurants, and so that that was the difference.
In my remarks on food cost.
Perfect. Thank you very much.
The next question comes from Peter Saleh from <unk>. Please go ahead.
Great. Thanks, and thanks for taking the question I want to come back to the conversation around the national AD spending.
Can you just remind us if the franchisees continue spending.
Basis points on local ads in the first quarter.
And also what exactly are they spending those dollars on I'm just trying to understand what you were trading.
The national ads in exchange for once the shift finally occurs thanks.
Yeah, I think if you reference back to.
The latter part of 2021.
We are we use that as this is an opportunity to to help our brand partners navigate some of that record inflation and so we.
We actually were able to give some of the surplus that we had in our AD fund back to them and as we moved into 2022, we were working through.
The administrative elements of making this change from 1% local to 1% national and so we didn't require them or enforce them to spend that 1% in the first quarter.
And what I would say, it's historically with the exception of the.
Two or three markets, which would spend this 1% on a local television buy during windows when we weren't on national TV. The majority of it was spent and kind of paid social paid search advertising, maybe some radio, but I think the opportunity to do that.
We've described before is when we consolidate this to national and lean into our scale and buying power at the national level, we're able to deliver the same level of advertising at 60 cents on the dollar which creates an unlock of some meaningful efficiencies there.
We can go spend that continue to drive top line drive brand awareness.
And improve <unk> and so this is again, what we believe to be another inflection point for us as a brand to drive.
Same store sales growth than what we believe puts us on track for.
Our 19th consecutive year of positive same store sales.
Great just as a follow up just for clarity.
Has that begun yet.
Transitioning.
The investment in the National media, where is that coming later this quarter.
As we alluded to in our prepared remarks, we started that at the beginning of second quarter. So it's it's started yes.
Great. Thank you very much.
Youre welcome.
This concludes our question and answer session.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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