Wingstop Inc. Q1 FY2021 Earnings Call

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Wingstop Inc. Fiscal First Quarter 2021 Earnings Conference Call. Please note this conference is being recorded today, Wednesday, April 28, 2021. On the call, we have Charlie Morrison, Chairman and Chief Executive Officer; and Michael Skipworth, Executive Vice President and Chief Financial Officer. I would now like to turn the conference over to Michael. Please go ahead, sir.

Thank you, and welcome. Everyone should have access to our fiscal first quarter 2021 earnings release. A copy is posted under the Investor Relations tab on our website at ir.wingstop.com. Our discussion today includes forward-looking statements. These forward-looking 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. Finally, we will discuss preliminary sales results for the first four weeks of the second fiscal quarter. We have not, of course, completed closing procedures for the second fiscal quarter, so preliminary sales results discussed today are subject to change pending finalization, and actual results could differ materially. 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, Michael. We had a fantastic first quarter for Wingstop and a carryover of the incredible momentum we experienced during 2020. While the COVID-19 pandemic is far from over, we are glad to see that an economic recovery appears to be well underway, and our long-term growth strategies continue to fuel strong results for the brand. During the first quarter, we opened 41 net new Wingstop restaurants, an all-time record first quarter that translated to year-over-year unit growth of 11.7%. This growth is representative of our strongest new restaurant development pipeline in the history of our brand, with over 700 commitments at the beginning of 2021. This compares to 610 development commitments a year ago. We anticipate our new unit growth to achieve record levels this year. And as such, we are providing guidance of 11%-plus unit growth for 2021, highlighting our confidence in this acceleration. Same-store sales grew by 20.7% in the first quarter, which represents a 30.6% two-year comp, an acceleration from the fourth quarter of 2020. Our average unit volume of $1.5 million, combined with an average initial investment of under $400,000, can generally yield cash-on-cash returns in excess of 50% for our brand partners, fueling the acceleration in restaurant development. The growth in our average unit volume has created efficiencies in our restaurant P&L that have resulted in growth in four-wall profits for our franchisees despite record high bone-in chicken wing prices. We value the strong relationships we have with our supplier partners, which have allowed us to successfully mitigate this inflationary period with landing prices for our wings that are well below the spot market prices. We believe that these prices are likely to continue to be elevated in 2021 as suppliers are struggling, just as many in our industry are, to hire people to process chicken, thus placing unexpected pressure on the amount of birds that can be processed and negatively affecting the supply of all parts of the chicken in the U.S., not just wings. However, at these current higher wing prices, we believe our brand partners have seen an increase in profit dollars, thanks to our strong two-year same-store sales growth of more than 30%. While there is a significant amount of government stimulus in the economy right now, driving people to avoid accepting open positions for employment and fueling a near-term sales tailwind for almost all restaurant brands, we remain focused on our long-term strategy as we continue to pull a number of levers we have to drive sustainable growth and deliver on our three- to five-year target of mid-single-digit domestic same-store sales growth. Our digital mix of over 60% has fueled the growth of a database of unique users to Wingstop totaling over 20 million, which enables us to leverage our robust CRM architecture to increase customer retention levels to a 12-month high in the first quarter. We also put our multimillion-dollar surplus of advertising dollars from 2020 to work at the end of the first quarter to deliver more TRPs and premium national advertising placements, focusing those ads on moments we all know that drive the crave for Wingstop and pointing guests to delivery as a convenient channel to get their wings. And we know these drivers are working. And coupled with the significant amount of government stimulus support, our domestic same-store sales have remained positive during the first four weeks of our second quarter, which represents an acceleration in the two-year comp. We are also pleased with the performance and continued recovery of our strategic international markets, which, like other global brands, have been more impacted by the pandemic over the past year. Our timely investments in 2020 have helped position these markets to emerge in a position of strength. The events in 2020 validated our growth strategy, which will be focused in markets where we can have a premium brand positioning and can operate a high off-premise business. As such, we will continue to be very strategic in which markets we focus our resources and efforts. An example of this is the exciting announcement yesterday of our plans to take Wingstop to Canada. This new development agreement is intended to yield 100 new restaurants over the next 10 years. Canada is a market very similar to the U.S. that is seeing high growth in off-premise and supports our premium brand positioning. Canada will be the first market to take our domestic digital platform global, something we expect to pay significant dividends in the future. The validation of our international strategy and success in our strategic markets like Mexico and the U.K. has translated into encouraging progress in our business development pipeline in other parts of the world. A significant contributor to our results has been our leading restaurant technology platform. And over the past few years, we've been making investments in our digital platform to sustain a best-in-class infrastructure, which has paid off well. Digital sales mix has sustained above 60% over the past year, demonstrating a high level of stickiness with our guests and the high-quality experience they have with our digital platform. But we won't stop at 60%-plus. We have a stated goal of digitizing every Wingstop transaction and believe it is important to protect our investment and digital foundation to operate a global restaurant brand. We believe having a global mindset and approaching these solutions from a global standpoint will give us a competitive advantage. As a result, we are doubling down on our technology efforts and we'll be investing to elevate our capabilities in this area. We are embarking on a multiyear project that will take our digital capabilities to the next level. During the next five years, we plan to invest significantly to execute initiatives that center around: first, globalizing our best-in-class domestic digital platform to ensure a blueprint for success for our international business; second, modernizing and building a leading business intelligence platform; and third, elevating and advancing the end-to-end customer experience. In 2021 alone, we expect to invest over $10 million in capital to establish the foundation for this transformational approach. Now is not a time to rest on our laurels, but instead, we must invest. We believe that brands that have gone before us regret not making such an investment and realize how hard it is to unwind multiple platforms all over the world after the fact. We're at another inflection point in our business and believe this critical investment will protect and grow our leading digital position well into the future. I'm really excited about the future of our brand and our continued efforts to position our business for long-term growth. Our two-year same-store sales growth of more than 30%, strong AUVs of $1.5 million and opening 100 net new units in just the last two quarters gives us confidence in the road ahead. We remain confident that our long-term strategic focus will continue to reward our shareholders, brand partners, and team members as we continue on our journey of becoming a top 10 global restaurant brand. With that, I'd like to turn the call over to Michael.

Thank you, Charlie. As you saw in our press release and from Charlie's remarks, we had an outstanding first quarter. We grew royalties, franchise fees, and other revenue by $7.4 million. Not only was this due to domestic same-store sales growth of 20.7% and 165 net franchise openings since the year ago comparable period, but also due to the strength we are seeing in non-comp restaurants, which are well above $1.2 million in average unit volumes as they enter the comp base. To put this into perspective, the 2019 vintage generated year one average volumes of just over $900,000, all while the investment has remained relatively the same. Company-owned restaurant sales increased $2.3 million due primarily to same-store sales growth of 13.4%, driven by a healthy mix of both transactions and ticket growth. Cost of sales as a percentage of company-owned restaurant sales increased by 220 basis points compared to the first quarter last year. Bone-in wings on the spot market increased more than 50% year-over-year, but the combination of our data-driven approach to menu pricing and the wing price mitigation strategy in place with our largest poultry suppliers helped to effectively lower the cost of wings relative to the implied market value. The effective year-over-year increase in the price we paid for wings was 25.8%. Importantly, we were very pleased to see leverage on both labor and other operating expense lines, helping offset some of the inflation in food costs, a demonstration of the strength and efficiency of our model. Until we see a marked change in the availability of labor for poultry producers, a labor shortage that we believe is largely fueled by the amount of government stimulus, we anticipate that wing prices could remain elevated for the balance of 2021. For modeling purposes, we expect food costs for our company-owned restaurants to be approximately 42% for fiscal year 2021. As you likely saw on our release, we have made a change in our reported SG&A numbers to provide more clarity into our core SG&A. We have reclassified headcount-related expenses associated with our national advertising fund into the advertising expense line on the P&L, both for the current period as well as prior periods to provide an apples-to-apples comparison. Also, moving forward, the revenue and expenses for our annual brand partner convention will no longer be presented gross on the P&L, with an equal and offsetting amount in both revenue and SG&A, again, in an effort to provide a clear picture of core SG&A. As for the first quarter, SG&A came in a little lighter than we had anticipated as we see a competitive environment out there for top talent, particularly in the area of technology, an area where we are investing. However, we expect SG&A for the year to fall within our prior guidance when adjusted for the national advertising-related headcount reclass to advertising expense previously mentioned. We do not provide quarterly guidance, but as for the cadence throughout the year, we expect SG&A to be relatively consistent for each quarter for the balance of the year. Please refer to the Investor Toolkit under Investor Resources in our IR site for additional information and a reconciliation of prior periods to conform to this presentation. These recast amounts had no impact on consolidated operating income, balance sheet, or statement of cash flows. Our ability to build cash on the balance sheet as a result of our asset-light model, combined with industry-leading results, enables us to continue to make the necessary strategic investments in technology and people to grow the brand and maximize shareholder value. The investments in our technology stack have enabled a world-class digital platform, which now handles over $1 billion in annual digital sales. As you heard from Charlie, we have kicked off a multiyear project that will significantly boost our digital, tech, and business intelligence capabilities. In 2021, we expect this investment to be approximately $10 million, largely in the form of capital expenditures, to support these initiatives. Our SG&A guidance has contemplated expenses associated with this technology project. As we have noted over the past year, it's not just the strategic tech investments we've made over the years, it's our people who are behind Wingstop's stellar performance. In 2019, we acquired a 78,000 square foot state-of-the-art office building. And in 2021, we are investing approximately $10 million in capital to ensure this space is an environment that supports our next phase of growth, positions us to live our core values on a daily basis, and attracts top talent. We are excited to have a space that represents the growth and pride we have in the Wingstop brand. Now turning to guidance. As noted in the release this morning, we are reaffirming our target of mid-single-digit domestic same-store sales growth for the three- to five-year outlook. And we are adding unit growth guidance of 11%-plus for fiscal year 2021. We estimate reported SG&A to be between $64.8 million and $66.8 million compared to $61.1 million for 2020. Note these estimates and prior year amounts now exclude brand partner convention and advertising expenses, but continue to include our stock compensation expense, which is estimated to be between $9.7 million and $10.2 million in 2021. 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 $0.14 per share of common stock. This dividend, totaling approximately $4.2 million, will be paid on June 4 to stockholders of record as of May 14, 2021. We are extremely encouraged by the continued strength of the Wingstop business model. As we look ahead to the balance of 2021 and beyond, we believe we are well positioned for continued growth and achieving our vision of becoming a top 10 global restaurant brand. With that, I'd like to turn the call over for Q&A.

The first question will come from David Tarantino with Baird.

Congrats on a great start to the year. My question is about the dynamics around lean costs and your supply arrangement. So I guess, Michael, I think you mentioned that you expected your food cost to be around 42% for the year and that's close to what you did in the first quarter. So is that meant to imply that the supply arrangement you have in place is expected to continue for the balance of the year? And if so, could you talk about kind of when that contract might expire or that arrangement might change?

David, thanks for the question. Yes, I think, for us, obviously, we're going to do everything we can to mitigate the impact of inflation on food costs. Obviously, these are unprecedented times that we're in. And I think the real question for us is around whether or not there's going to be additional stimulus and the implications of that on the labor market, particularly the labor market for our poultry suppliers. But we feel confident that we've got the right strategic partnerships with our suppliers. And we have assured supply, and we're going to continue to lean into that, but we feel comfortable as we sit here today with our ability to manage to the number we guided to of food cost of roughly 42%. But again, I think the X factor, if you will, is whether or not there's any further stimulus.

Fair enough. And then Charlie or Michael, the elevated wing costs, obviously, some of that's being offset by leverage in the rest of the P&L for your franchisees. But can you just maybe talk about how wing cost inflation is affecting or not affecting the psyche of franchisees and their willingness to continue investing in new unit development?

David, there are a couple of things to consider. Reflecting on Michael's comment regarding our expectations for the remainder of the year related to food costs, this level is not unprecedented as we have encountered similar situations in past years. In fact, we have experienced greater impacts on our profit and loss statement in previous years due to wing inflation. The efforts we have made to manage the Urner Barry cost of chicken wings with our strategic suppliers have been significant and acknowledged by our brand partners. Furthermore, the growth in average unit volumes, reaching our target of $1.5 million, generates significantly more cash flow to the bottom line. This is markedly different from what we experienced in previous years with similar inflation levels and continues to drive business growth. Therefore, both these factors are important. While there is some leverage, the notable increase in average unit volume and the absolute dollars contributed to the bottom line give us confidence in the ongoing growth trajectory we are observing.

Makes sense.

The next question will come from Andy Barish with Jefferies.

Congratulations on the development pipeline. Can you provide more details on the cadence of development this year? Typically, the domestic business sees its highest activity in Q4, but you mentioned you're off to a good start. Even if you project the first quarter straight through, you're still significantly above the 11% target. I’m curious if there were any shifts from last year into the first quarter and whether things will moderate afterward. Could you provide more insight into the openings planned for this year domestically?

Andy, yes, the cadence, obviously, is a little different at the start this year. There was some expected pull forward in Q1 associated with the complete shutdown in Q2 of last year. And we saw some of that. But we also would reinforce the fact that our pipeline for development at the beginning of the year was extremely strong, a record high, over 700 restaurants in the pipeline. So that is fueling our strong development and our guide towards the 11%-plus number. We won't see an even balance throughout the year. We never do. We usually see a little softening in that around the third quarter, but a strong fourth quarter is typical for us. So I do think the cadence is a little different than last year and, hence, why our guide is on the plus side of 11%.

Okay. And then just a quick follow-up on the international side of things, which was off to a little bit of a start. Do you still expect gross openings to exceed last year's levels or kind of get back to that 30% mark you were running at prior to the pandemic?

Yes. It's an excellent question. We do expect the gross openings to be consistent with what we've seen in prior years. The pipeline is still strong. And as these markets are emerging now and starting to pick up their pace, we're seeing development activity follow suit with that. We did note some closures in the first quarter. We would expect more of those to get the net number down a little bit from what we've done in the past. But some of those are specifically associated with the impact of the pandemic and the prolonged closure of the restaurants. But on a gross basis, which I think is the most important metric, we expect it to be consistent with prior years.

The next question will come from Andrew Charles with Cowen.

Charlie, last quarter, you spoke about your aspirations for mid-single-digit comps in 2021. And curious how you rate your confidence in this aspiration now versus 90 days ago, recognizing, as you said, that there's been a temporary jolt from stimulus impacting the industry over the last month.

I remain confident in our long-term and near-term guidance of mid-single-digit comparable sales growth for the year. We have observed positive results so far this quarter, along with an acceleration in our two-year quarter-to-date figures. This reflects our efforts to maximize our resources, particularly since we started the year with an advertising budget surplus. We strategically allocated those funds to boost our performance during this challenging comparison period from last year, especially in the second quarter. While we couldn't predict exactly when stimulus measures would take effect, it's clear that they are contributing to strong performance across many brands. However, it's important to note that this stimulus not only drives top-line results but also influences other aspects of the industry at this time. We are optimistic about our long-term outlook, particularly for this year. That said, the uncertainty regarding the timing of when stimulus will cease could affect our top-line performance for the remainder of the year.

That's helpful. I have a follow-up regarding the long-term outlook. What was the mix of delivery sales in the first quarter? We noticed better-than-expected other operating expenses in that quarter. I'm curious if this indicates a decrease from the 25% mix you experienced in the latter half of 2020. Additionally, how do you envision the delivery sales mix stabilizing in comparison to the approximately 15% level that was in place just before the pandemic?

Well, we've been running in the mid-20s ever since the beginning of the pandemic, and that was also our launch of delivery nationally. So prior to Q2 of last year, we were still ramping up delivery. We did not see any sort of shift in the delivery mix during the quarter that would have an impact on the P&L. The P&L results are strictly because of our strong top-line performance and the mitigation strategies we put in place to affect food costs. So long term, we noted the investments in technology that we are going to make to continue to drive a digital transaction of which we believe delivery will be a sizable portion of those digital transactions, as it already has been, and expect it to grow over time. We don't expect it to subside back to where we were pre-pandemic for any reason.

The next question will come from Michael Tamas with Oppenheimer & Co.

You mentioned that the first quarter saw your highest customer retention through your digital platform. Is there any way to put that in context? Has it been building over the last couple of quarters? Or is this really a big change in that trend? And then part of that, can you talk about maybe what you changed to allow you to achieve that? And what does it tell you about how you can sort of manage your business going forward?

Thank you, Michael. We are currently experiencing higher retention levels. We measure this by tracking how frequently new customers return within 90 days. Over the past few quarters, we've welcomed a significant number of new customers, which is helping our rapidly growing database. We are focusing on learning more about these customers, often adding information to better understand their preferences. Consequently, we are inviting them back more proactively than before. Early signs indicate that we are gaining momentum, as we believe that if we can encourage guests to visit more frequently rather than just once a quarter, it will significantly impact our revenue. This is an important initiative for us, and we are dedicating considerable resources to it. We've already started to see the positive effects of this strategy in the first and early second quarters.

Awesome. And then you talked about using some of that advertising surplus worked over from last year and the early part of 2021 here. Is there any way you can frame up how much of that extra surplus you've used, whether either qualitatively or quantitatively?

Yes, I would say that a significant portion of it has been utilized. We carried approximately $11 million into the year from that surplus on the balance sheet. Over half of that was spent in the current media window, which is the period we are currently in. We have two major media windows each year; one begins around March Madness and extends into June, while the other starts later in the year around late August or September and lasts until late October or early November. We intentionally allocated more of those funds this quarter, but we have distributed them throughout the year.

The next question will come from Brian Harbour with Morgan Stanley.

Maybe just first question on the Canada agreement. Will those stores kind of look similar to the U.S.? And will kind of the market and trade approach to be similar to the U.S.? Obviously, I know you approach certain international markets very differently and the stores look different. But just curious on how kind of the approach there compares to some of the markets you're already in.

Yes, I think they'll be similar in terms of their look and feel to the U.S. I think there will be a blend of, for instance, what we've experienced in the U.K. in terms of the strategy for penetrating the market like Canada and the major metros first. You'll see perhaps a high street location like we did in the U.K., followed by a series of restaurants that surround that. And those could include alternative formats like ghost kitchens. So we're adopting a strategy that not only is one we've always had in the U.S., but applying as well some of the strategic thinking that we've learned in Europe as well.

Could you provide more details about the technology investments you've mentioned? Specifically, what software will you be purchasing, and what will you be building in-house? Are you expecting a significant increase in headcount for this? Will these changes happen this year, or will they be rolled out over a longer period?

Yes, we recognize that this is a multiyear initiative, and this is just the initial year. It will require capital expenditures for software development. We may acquire some component parts or create APIs to connect with leading software providers relevant to our tech stack as we advance. This will also entail increasing our workforce, which Michael noted, and this has already been included in our SG&A outlook for the year. We anticipate that we will be essentially reconstructing the tech stack to ensure it scales globally, as much of our domestic platform components do not adapt well internationally. Our goal is to create a unified global tech stack through this project, which will take several years to complete. Investments in this area will persist over the next few years, and we will need additional personnel to support the technology components for our brand partners both in the U.S. and abroad. Some of the work will focus on customer-facing applications and the underlying infrastructure. Furthermore, parts of this project will include a strong business intelligence platform that will help us excel as a brand by enhancing our ability to gather insights from our systems as we continue our journey towards digitizing all transactions.

The next question will come from Chris O'Cull with Stifel.

This is Patrick on for Chris. I was curious if you could maybe give an update on how you're thinking about the reopening of dining rooms. And within that, Michael, if it's possible to quantify rough sales and margin impact in the quarter from lower beverage attach?

Yes, sure. I think as it relates to dining rooms, I think the Q1 results and the comment we shared earlier about quarter-to-date being positive, I think, really suggest and support the case that we're not really in a rush. We do have roughly restaurants in the system where our partners have requested and we've approved them to dining rooms. The results there on the overall business are fair mix. There's not a material impact that I would call out. So to your second part of your question, I don't know that I would model or expect a material change to the results. And if anything, it's really supported the case for kind of what we're seeing and hearing from brand partners about even a smaller box and leaning into off-premise as the future for our business. And so we're not in any immediate rush or hurry to reopen our dining rooms, and we're going to continue to monitor the situation and assess as we progress through the year.

Great. That's helpful. And then just one follow-up pertaining to potentially delivery. We heard a lot about staffing issues. And just curious if you're seeing anything within DoorDash in terms of not having the delivery drivers available to meet demand or anything else that might be causing any issues there.

Yes. We are certainly aware that the market is difficult for staffing on all fronts, driven by the fact that we have this huge stimulus that's creating challenging wage rate comparisons, if you will. And so with DoorDash in particular, we're not experiencing anything that's impacting the business. I know they've been challenged by it. But overall, our business performance, I think, demonstrates that they've been able to keep drivers staffed and supporting our business.

The next question will come from Michael Rothstein with Goldman Sachs.

I want to learn more about the menu. I noticed that you launched a $16.99 bundle of boneless wings. How has that impacted the shift in bone-in options among consumers? Are you considering additional changes to the menu? I know you've been testing different sizes to address the pressure on bone-in items.

Yes. We've had that bundle and bundles like that in the mix over the years. It does have an impact on driving more of a mix of boneless wings over the bone-in wings. And that's been effective. It's been in place for, gosh, a little over a year, if not two years on and off in our system. So it's a good driver of mix shift to help take some pressure off food cost. But at the end of the day, our customers still see us as Wingstop, and they like the bone-in wings. And so it's embedded. The impact of that is embedded in our food cost numbers that we project going forward.

The next question will come from Joshua Long with Piper Sandler.

I was curious if you could comment on your progress in attracting or getting access to some of those more heavy QSR customer or users of the QSR segment that might not have frequented Wingstop in the past. We talked about this at the Analyst Day. And there was a nice opportunity for that. I'm just curious if leaning into the digital and then also with the increased TRPs and ad placements that's allowed you to get access to them at the same rate that you expected, if you've been able to accelerate that? Maybe sort of update there in terms of that customer segmentation would be very helpful.

Yes, our growth over the past couple of years has mainly come from attracting new customers. Our advertising is specifically targeted at frequent quick-service restaurant users who either haven't tried Wingstop or don't visit us often. Our frequency rates have remained steady each quarter, but we are seeing an influx of new users. Our goal now is to make the most of this opportunity using our CRM platform to engage these new customers and encourage them to visit more often. This approach is a crucial part of our strategy, and we believe it's proving effective. In the first quarter, our retention rates reached a 12-month high, confirming this. Our advertising continues to focus on heavy quick-service restaurant users and aims to position Wingstop as a dining option for them.

And one follow-up, if I may, just to clarify the positive comps to date here in the second quarter, which is obviously very exciting. When we think about the prior year period, 2Q of '20, can you remind us the cadence of kind of progression of that near 25% comp that you posted for the quarter?

Yes. To give you a perspective, last year, we did note in April our same-store sales grew by 33.4%. And during that time frame, we experienced extraordinary comps, and some of that carried through the rest of the second quarter. And then into Q3 and Q4, it started to taper off. But that second quarter comp, being north of 30%, was a big mountain to climb for us this year. And I think we've been able to demonstrate that we had all the right levers in place so far to do that.

The next question will come from Jake Bartlett with Truist Securities.

Great. My question was about check and traffic and whether you're seeing any change there. Is the check starting to normalize a little bit, kind of being made up by traffic? Or any change in those dynamics?

Yes. As expected, Jake, we have seen, when we started rolling over the impact of the pandemic and the shift away from dine-in occasions, we immediately saw a check lift last year that was associated with that because we had, for all intents and purposes, eliminated a bunch of smaller transactions that were dine-in and replaced those with higher ticket average carryout and delivery transactions. So as we're lapping that performance, we did expect to see the check growth slow down, but we are seeing good, strong transaction growth in the business as well today. And I'll note without opening...

Great. And then my follow-up is on anything you can say regionally? Different markets obviously are at different points of the reopening of the economy. Any variances there? And then maybe in the context of that, if you could comment on maybe why the company's same-store sales is materially below where the franchisees are doing?

Yes. So I would say, very typical for Wingstop over the years, we don't see much regional variation. The only one to call out in the first quarter would be the winter storm that impacted primarily Texas and the Southern Plains had a negative effect, but I think a lot of that was reversed by the stimulus. So we didn't see that the net of those two was meaningful to the performance of the company during that time frame. But regionally, otherwise, to call attention to the company-owned restaurants, we constantly see positive growth across all regions of our restaurants continue to play out through this time frame. However, these company-owned restaurants tend to be older than most of our average restaurants, just because they're in mature markets like Dallas and Las Vegas. So their performance may be a little bit softer, but I don't think that's indicative of anything otherwise as compared to the rest of the business.

The next question will come from James Sanderson with Northcoast Research.

I wanted to drill down a little bit more on the growing number of clients in your digital database. I wonder if you could give us a sense of who these clients are, whether they're heavy wing users, new users and what strategies you're going to deploy to try to increase frequency or engagement, especially as we lap or get through some of this government stimulus. And then I do have a follow-up.

Thank you, Jim. To reiterate my earlier point regarding our target of heavy QSR users, we have certainly observed a significant increase in new users that match this profile. Heavy QSR users generally have a higher income than our typical users and engage with QSR platforms more frequently. This group is appealing to brands, and we're successfully attracting them in large numbers. We are seeing an increase in our new customer counts. Our approach to retaining these customers involves utilizing our CRM platform, which allows for personalized messaging to encourage them to return after their first visit to Wingstop. We aim to have them return within 90 days and hope to convert them into frequent users, potentially visiting us up to five times in a quarter. Our strategies are already in place and proving effective, reflected in a 12-month high for our overall retention rate.

Okay. So these new Wingstop users are coming into your system as relatively light Wingstop clients? And the idea would be to move them up to have your engagement over time. Is that the right way to look at it?

Jim, this is Michael. We didn't disclose the company quarter-to-date number. Obviously, it's not an area we want to highlight or focus, primarily because it's 30 restaurants out of the whole system and they're doing $2.2 million in AUVs. And so really, what we're focused on is the broader system, the health of our franchisee base, our brand partners, which is really kind of the long-term story here that's going to continue to help feed the unit development pipeline that we talked about earlier.

Understood. If I can just add one more quick question regarding your Canadian development, are the royalty rates on that relationship comparable to the rates we see to date? I know...

They are, yes.

The next question will come from Todd Brooks with CL King & Associates.

First, and this follows up on the Canadian deal that was announced this week, as you're looking for the other countries that were highlighted as kind of early access to drive the international expansion. Are you looking to structure those with this type of larger master franchise type of structure after striking the deal in Canada?

We are. We would call it a master development agreement. So it's one single operator that opens and develops restaurants in the market. There are no sub-franchise specific considerations in these deals.

Okay. Great. And then a second question, if I may. You talked about your success in mitigating wing cost inflation and just that raw 50% type of increase that you've seen in the Urner Barry. When it's turning that discussion about new entrants that has been asked over the couple of quarters into a different type of discussion, the competitive advantage that the Wingstop brand has with the ability to mitigate those wing costs and how do you think new entrants are dealing with this? Do you expect to drive some people out of the wing category that kind of flooded into it with virtual brands, this persistent pressure on wing cost across fiscal '21?

Yes. It's an excellent question. Again, I go back to the competitive dynamics. And if I were in the shoes of some of these other brands, I'd probably do something quite similar. But we do expect that, at these elevated prices, it will be very difficult for them to blend that into their desired margin structure. And if that's the case, then should take some pressure off chicken wings for the balance of the year. But I will say that one of the other material factors is not just the competitive nature. It has much to do with the impact of the government stimulus and creating an artificially high wage rate that is competitive to the people that are necessary to actually process chicken. And so the absolute number of chickens that are being processed is down. That's why you see pressure even in the sandwich business and everywhere else on chicken right now. Labor shortages are the real challenge we're dealing with. And so dealing with that in and of itself would alleviate some pressure on the market on its own. Because there's just not the volume of product out there before. But I think our strategic positioning, our great partnerships that we have with some very large chicken suppliers affords us the opportunity to make sure that we have adequate supply to drive our business at a reasonable price. And when the market does subside and demand for those wings goes down as we reopen the economy and get restaurants back operating again, Wingstop will always be there with them to continue to not only grow but be buyers of chicken wings.

The next question will come from Peter Saleh with BTIG.

I just want to come back to the conversation around delivery. Can you give us an update on how much of the delivery mix now is coming through your own website, your own app versus your third-party partners?

Yes, it has consistently been around a 70-30 mix in favor of Wingstop in the marketplace.

Great. If I could follow up on that, do you see any overlap in customers? I'm not sure if you have the data to determine that. Are the customers coming through DoorDash unique, or do you also see them visiting the Wingstop website?

Well, I think our pure desire that they come through the Wingstop website. But the way we've established this, we're a little bit agnostic as to which platform they come through. What I will say is that they enjoy a more competitive price if they come through wingstop.com than through the marketplace. And so our price differential creates an incentive for them to use the Wingstop platform. And I also would submit that through our CRM efforts, we will be pushing more and more of them into that Wingstop platform than through the marketplace.

The next question will come from Chris Carril with RBC.

So I wanted to ask about capacity and throughput. And any updated thoughts on those topics specifically? Clearly, the gap between system AUV, company AUV implies significantly more capacity remains in the restaurants? I'm curious to hear any updated thoughts around throughput and any efforts to improve throughput now that system AUVs are above the $1.5 million level.

We believe our restaurants have the potential to exceed the $2.2 million mark for our existing corporate-owned locations. As our restaurants mature, they continue to experience growth, which is a unique trend for Wingstop in this industry. Our highest volume levels reach around or above $3.5 million annually from the same platform, and only a few restaurants can achieve this. This indicates that we do not face capacity or throughput issues. With increased volume, we can enhance the number of deliveries each week and utilize our limited space more effectively. There is still significant room for growth in our domestic average unit volume before we encounter capacity constraints.

Got it. And then just on SG&A, can you help us frame up how you're thinking about this line item longer term just relative to maybe the total system sales, just in light of the reclassification of expense related to advertising noted this morning and then just the commentary to you around just investing in technology and growth?

Yes, Chris, this is Michael. We've historically shared the comment around anchoring expectations around core G&A, where we've historically had, as you pointed out, we backed out any headcount related to national advertising as well as any convention-related expenses. Now those have been removed from the number, but we do also back out noncash stock-based compensation as well. And so when you get to that core SG&A number, how we think about that longer term is really a number that we've benchmarked to more mature brands, but it's roughly around 2.5% of system sales is the target we kind of guide to.

The next question will come from Brian Vaccaro with Raymond James.

It's Dan Docherty on for Brian. I just wanted to circle back on international growth for a second. I think you mentioned the prolonged pandemic conditions as sort of the driver of the closures. Are you adapting your prioritization of certain geographies internationally as market dynamics kind of remain pretty fluid with the pandemic?

Yes, that's a fantastic question. The answer is yes. You may recall that a little over a year ago, we conducted a significant global strategic study to identify certain factors. First, we wanted to determine which markets were suitable for aggressive development and which ones to avoid. Our efforts in markets like Canada and the U.K., along with our preparations for expansion in China, are noteworthy. In Canada, we have the opportunity for premium positioning with a very high off-premise mix, which is our ideal scenario. Our early results in the U.K. indicate great success, which supports this approach. However, in some markets where we are experiencing closures, they didn't align perfectly with that ideal mix. We've faced challenges with larger sit-down restaurants or in markets where we can't maintain a premium price position, leading to some closures. Nevertheless, markets such as the U.K., Mexico, our entry into Canada, ongoing expansion in Europe, and parts of Southeast Asia, where we can maintain that price premium, are the ones that will stabilize and continue to grow for us in the long term.

Great. And then just one item. Apologies if I missed this, but did you guys provide any color on the cadence for sales within the first quarter?

We did not, no.

This concludes our question-and-answer session as well as our conference call for today. Thank you for attending today's presentation. You may now disconnect.