Wingstop Inc. Q3 FY2021 Earnings Call

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Wingstop Inc. Fiscal Third Quarter 2021 Earnings Conference Call. Please note that this conference is being recorded today, Wednesday, 3rd, 2021. On the call, we have Charlie Morrison, Chairman and Chief Executive Officer; Michael Skipworth, President and Chief Operations Officer; and Alex Kaleida, Senior Vice President and Chief Financial Officer. I would now like to turn the call over to Alex. Alex, please go ahead. (Technical difficulty) Apologies, ladies and gentlemen, for the interruption. Please hold the line while I connect.

Thank you, and welcome. Everyone should have access to our Fiscal Third Quarter 2021 Earnings Release. A copy is posted under the Investor Relations tab on our website at ir.wingstop.com. Our discussion today includes forward-looking statements. These statements are not guarantees of future performance and are subject to numerous risks and uncertainties that could cause our actual results to differ materially from what we currently expect. Our SEC filings describe various risks that could affect our future operating results and financial condition. We use certain non-GAAP financial measures that we believe can be useful in evaluating our performance. Presentation of such information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. Reconciliations to comparable GAAP measures are contained in our earnings release. Lastly, for the Q&A session, we ask that you please each keep to one question and a follow-up to allow as many participants as possible to ask a question. With that, I would like to turn the call over to Charlie.

Thank you, and good morning. We continue to be extremely pleased with our strategies, fueling exceptional results for Wingstop. The third quarter continued our streak for record-breaking restaurant development, which is a great demonstration of the resiliency of our model. These results we have shared today underscore the sustaining power of our growth strategies and the interest of our brand partners in continuing to grow with Wingstop. Thanks to our proactive investments in technology and delivery platforms, Wingstop was well-positioned to navigate this pandemic. I'm pleased to say that, just as we did last quarter, we continue to lap the remarkable growth from last year. In the third quarter of 2021, we recorded domestic same-store sales growth of 3.9%, which on a two-year basis represents growth of 29.3%, what we believe to be best-in-class. This outsized comp growth has raised the average unit volumes for our domestic restaurants to approximately $1.6 million, and these volumes are generated from an average initial investment of only $400,000. The third quarter was another record quarter for development for this time of year. We opened 49 net new restaurants, resulting in 13.1% total unit growth, despite experiencing unprecedented inflation in the cost of bone-in wings. Our restaurant development is a testament to the continued focus of our brand partners on the long term, and the strength of our unit economics to navigate these challenging times. We are seeing extraordinary results not only in the U.S., but also in key international markets. In the U.K., we have opened 10 restaurants in the last 18 months alone, and the market is generating average unit volumes exceeding $2 million, well above the average we see in the U.S. This market has only been open since 2018, which underscores the tremendous long-term potential. As we communicated earlier this year, we made a minority investment in our U.K. operations. We believe this strategic use of our capital will continue to strengthen the development pipeline as we look to double the U.K. footprint in 2022. We are excited to support our brand partner in achieving the potential for the Wingstop brand in the U.K., a market we believe will serve as a model for our Western European expansion and other parts of the world. Earlier this year, we announced our expansion into Canada with a 100-restaurant development agreement. Our first location in Toronto is on track to open early next year. We recently served our flavor to Canada with a visit from the Wingstop food truck and we couldn't be more excited by the consumer response to our products. Canada is a market well-poised to replicate the success we have had in markets like the U.K. and the United States. We are also very encouraged to see our international markets continue to recover from the impact of the pandemic, with most of our existing markets already generating sales volumes above their pre-pandemic levels. Our largest market, Mexico, which was one of the hardest impacted by the pandemic, is on track to open nine restaurants this year, again a testament to the resiliency of our model and the portability of our brand. While we are facing near-term inflationary pressures, our growth fundamentals and long-term potential of operating over 6,000 restaurants worldwide remains unchanged and our brand partners share that vision. We are very pleased with this record pace of restaurant development and the top-line growth our brand has seen which has provided relief from the inflationary environment we operate in today. The strength of our model is a differentiating factor for Wingstop and positioned us well to navigate this unprecedented environment. Since the end of the third quarter, leading indicators such as cold storage inventory levels for wings are beginning to approach 2019 levels for the first time of the year. We have seen sequential improvement in the spot price for bone-in wings and it now stands at $2.87 per pound. This $0.35 drop versus the third quarter equates to approximately $75 million of cash flowing back into the system annually, enough to build 185 new restaurants. While the price of wings is trending in the right direction, we remain laser-focused on executing against our previously communicated goal of managing cost volatility with greater utilization of the whole bird and controlling more of the chicken pricing and supply process. We believe that the key to unlocking a less volatile food cost for the brand is predicated on the utilization of more parts of the chicken. At the end of the second quarter this year, we launched a virtual brand called Thighstop, initially available only on thighstop.com and in DoorDash's marketplace. In addition to what we're calling bone-in thighs, we're also offering thigh bites which are a juicier, flavorful complement to our traditional boneless wings. Just as we pioneered wings as the center of the plate, we also believe we can make thighs a center-of-the-plate item and make them a fan favorite for a long time to come. In September, we integrated thighs into our regular Wingstop menu, doubling our thigh sales and allowing us to further progress on our strategy of buying more parts of the bird. Staying true to our entrepreneurial spirit, we are evaluating every phase of the chicken supply chain and looking at others even outside our industry to take a page from successful playbooks like those of the retail industry to be disruptive and gain greater control over our destiny. We are following a similar proactive approach to remain competitive in this tight labor market and leading the way in company-owned restaurants. Unlike other restaurant concepts, we have a very streamlined kitchen operation with small roster sizes, which have enabled our system to better weather the severe labor challenges some of our peers are facing. With a long-term view in mind, we have increased the hourly wages and salaries of our company-owned restaurant team members, as we believe investing now will help us retain and attract talent to continue offering a great customer experience and maintain our top-line momentum. With the top-line momentum and the effectiveness of our strategy, we were able to leverage the surplus in our ad fund and rebate a portion back to brand partners in the third quarter in order to continue to fuel development. This ad fund rebate did not impact our overall media plans and provided immediate relief in this time of unprecedented inflation. It's a proactive example of keeping our brand partners focused on development and the long-term growth ahead of us. We also anticipate brand partners will take an additional 4% to 5% in menu pricing, thanks to the disciplined approach in our past by the brand partners and pricing power we believe Wingstop has with consumers. With the ongoing momentum in top-line growth, 2021 has seen greater levels of premium media placements and we continue to invest heavily in our one-to-many and one-to-one communications. We recently decided to take a page from the org structure of many leading tech companies which often house marketing and digital IT functions together to create a martech structure. This structure allows Wingstop to further its transition from the traditional promotion-based marketing approach that is typically seen in the restaurant industry to a digital platform-based strategy. We are already seeing an impact with our first-party database of more than 25 million guests and continuing to grow. Thanks to our investments in CRM and our digital platforms, we continued to sustain digital sales above 60%. Due to the strong results in the third quarter and the results we have seen as we enter the fourth quarter, we are now expecting our same-store sales growth for the full year 2021 to be between 7% and 8%, up from our prior guidance of mid single-digits. With our robust development pipeline, we are reiterating our guidance for restaurant development growth of 12% plus in 2021. At Wingstop, people are the foundation of our strategy and we serve our flavor in communities throughout the world. Wingstop Charities is dedicated to enhancing and elevating the community work of our brand partners to make a difference in the lives of our youth. We recently completed our grant cycle and achieved a new milestone in the number of organizations we are supporting. Wingstop Charities has provided over $1 million in community grants and team member assistance. We are thrilled with this tremendous milestone for the organization. I'm excited by the momentum in the business both on our top-line and development growth, as well as our progress we are making against our whole bird strategy that will position us better to weather the next inflationary period in wings. More importantly, I'm encouraged by the strong foundational investments we are making for our long-term growth. We remain confident in our strategies that will continue to reward our shareholders, brand partners, and team members as we continue on our way to become a top 10 global restaurant brand. With that, I'll turn it over to Alex.

Thank you, Charlie. We are pleased to report strong third quarter results, especially when considering the extraordinary results we are lapping from the third quarter in 2020. Our top-line momentum is continuing into the fourth quarter with October comps at 7%, despite lapping comps in the high teens last year. These results put us well on our way to achieving our 18th consecutive year of positive domestic same-store sales growth and underscore the sustaining power of our growth strategies. For the third quarter of 2021 we grew royalty revenue, franchise fees, and other revenue by $4 million or 14% versus the prior year. The increase was driven by domestic same-store sales growth of 3.9%, 193 global net franchise openings since the year-ago comparable period, and by the continued strength we are seeing in new restaurants, which are now producing AUVs of $1.2 million as they enter the comp base. As a reminder, just a couple of years ago, our 2019 vintage generated $900,000 in sales during their first year of operations, a testament to the uniqueness of our model when you consider the average initial investment of approximately $400,000 that Charlie mentioned earlier. It's these unit economics that have fueled the 49 net new restaurants we opened in the third quarter, which is a continuation of our record restaurant development at Wingstop this year. Company-owned restaurant sales increased $1.9 million, primarily due to the acquisition of three franchise restaurants in the third quarter of 2021 and the openings of three new restaurants since the prior year comparable period. In the third quarter, we recorded a gain on sale of $3.6 million as part of the refranchising of six company-owned restaurants in the Denver market. As part of this transaction, the brand partner signed a new 20-restaurant development agreement for the Denver market. This transaction is another example of a strategic use of our balance sheet to acquire restaurants, invest to showcase their potential, place them back in the hands of an existing brand partner, and position the market for accelerated development. As we have shared, we will continue to leverage this playbook and use our balance sheet to facilitate growth. Food, beverage, and packaging costs as a percentage of company-owned restaurant sales increased by 11.7 percentage points compared to the third quarter last year. The average spot price in the third quarter for bone-in wings set a new record high at $3.22 per pound, an increase of 84% versus the prior year. Thanks to the price mitigation strategy in place with our largest poultry suppliers, our restaurants were able to partially offset this inflation and saw an effective year-over-year increase in the price of wings of 49%. We also are pleased to see sequential improvement in the spot price for bone-in wings with the price now at $2.87 per pound, a $0.35 reduction from the record highs we saw in the third quarter. While below optimal levels, we are seeing frozen inventory stocks building and beginning to approach 2019 levels for this time of year, a leading indicator to deflation. With this trending in the right direction, we anticipate wing costs to continue declining in the fourth quarter. In the third quarter, labor costs as a percentage of company-owned restaurant sales were 24.6%, a decrease of 1.2 percentage points compared to the third quarter last year. This decrease was primarily due to the lap of incentive pay provided to restaurant team members in response to the pandemic. This is partially offset by the investments Charlie mentioned we have made in wages, hiring bonuses, and training to continue attracting and retaining top talent. During the third quarter, we made additional investments in company-owned restaurant margins, which totaled approximately three percentage points. These expenses were more elevated for the quarter in connection with training and repairs and maintenance related to three recently acquired restaurants as well as deferred maintenance for our restaurant portfolio following a year of lower spend due to the pandemic. We also made investments to prepare for our Manhattan launch. We are excited for our first restaurant in the heart of Manhattan to open in the next couple of weeks near Times Square. We are encouraged by the potential of this market where we have identified approximately 25 trade areas. We anticipate restaurant margins for full year to be in the high teens to 20%, reflecting the improved outlook for the price of bone-in wings, additional menu pricing, and the continued investment in restaurant labor to remain competitive. Shifting to SG&A: We saw a decrease of $1.5 million over the prior year, mainly due to lower variable-based compensation expense and lapping COVID-19-related costs and support for our international brand partners. These decreases were partially offset by continued investments in people to support our growth and higher travel compared to 2020 when travel was limited as a result of the pandemic. For 2021, we had anticipated investing in strategic projects to support our international business. However, the ongoing pandemic has delayed the timing for these projects. Additionally, we have experienced delays in hiring. As such, we are lowering our full year guidance for SG&A from $64.8 to $66.8 million to $62.2 to $63.2 million, inclusive of stock compensation expense, which is estimated to be between $9.7 million and $10.2 million in 2021. Adjusted EBITDA grew 16.2% to $21.4 million and we recorded earnings per share of $0.38, an increase of 11.7% versus the prior-year comparable period. We remain committed to driving shareholder value and returning capital to shareholders through our quarterly dividend, which is targeted at approximately 40% of free cash flow. Our Board of Directors has declared a dividend of $0.17 per share of common stock. This dividend, totaling approximately $5.1 million, will be paid on December 10, 2021 to stockholders of record as of November 19, 2021. With the continued strength and resiliency of the Wingstop model in these unprecedented times and as we look ahead to the balance of 2021 and beyond, we are well-positioned to execute against our strategic long-term growth initiatives. With that, I'd like to turn the call over for Q&A.

(Operator instructions) Our first question comes from Andrew Charles of Cowen. Your line is open. Please go ahead.

Great, thanks. I'm just curious, amid the sales and margin deterioration in 3Q with sales that look like they're implied to further decelerate in 4Q despite the fact that October is up 7% — not as bad as the deceleration for the full quarter that you're guiding to — the main question is: do you see risk that 2022 openings will fall below long-term kind of 10% plus guidance? And just kind of curious what you point to that suggests that 2022 should be a normalized year of store growth. Thanks.

Good morning. I want to first comment on the top-line performance. Same-store sales at 3.9% and a 29% two-year comp is something we're very proud of and won't apologize for as it relates to the sequential change or the absolute. I know the market is trying to absorb whether two-year or one-year are the right metrics, but in our opinion both are great demonstrations of the health of our business. I would also point to a couple of factors about our overall model that we believe have caused the continued strong development from our brand partners: our average unit volume now is approaching $1.6 million per restaurant. That's up from just a few years ago at $1 million to $1.1 million. So the strong performance we've seen over the two-year trend, again above or close to 30% on a two-year same-store sales basis, feels like great results. While we are dealing with the near-term situation on wing costs, we are seeing those prices start to come down. As we commented, we are starting to take a much more proactive approach to how we can mitigate some of this volatility, not just relying purely on the spot market or some of the strategies we've put in place to mitigate that this year. All that said, our development pipeline, as it stands today, is above where it was when we look at a year ago and above where it was around the beginning of the year. Our brand partners are still actively engaged in development. We have a strong pipeline and anticipate that the near-term headwinds are not an indicator of what the long-term opportunity is for the brand.

Thanks, Charlie. That's helpful.

Our next question comes from David Tarantino of Baird. Your line is open. Please go ahead.

Hi, and good morning. Charlie, I want to come back to the sales trends. I don't think anyone would debate that two-year comps of plus 29% are really, really good, but I wanted to get your thoughts on why you think that number has trended down from Q2 to Q3, and now what you're guiding to for Q4. What in your view has caused that settling versus where you were last quarter? And I have a quick follow-up to that.

Sure. Good morning, David. Thank you. I don't think we would have expected based on our performance last year to have seen something meaningfully different. In terms of the performance, keep in mind that Wingstop was very well positioned to navigate through the challenges of the pandemic and in that timeframe saw extraordinary growth for the brand because we had made the right investments and were very well positioned. That's different than perhaps the rest of the market. On a sequential basis, our focus is on the health of the business. While it does show that the sequential two-year and in some cases the one-year have gone down, we did comment on the fact that in the fourth quarter during the month of October, we've seen comps accelerate from our one-year rate to 7% and anticipate we'll have a strong quarter like we always do. I think the key for us is anchoring on the long-term outlook. Our mid-term outlook is for mid-single-digit comps. We're delivering against that, if not expected to exceed that. Also keep in mind this is our 18th consecutive year as we close this year out of positive same-store sales growth. The strength of our model: our sales-to-investment ratio for our restaurants has grown to 4:1. So a $1.6 million average unit volume against a $400,000 investment, even with a challenging margin structure driven by things that are essentially out of our control, we feel very confident in what our future looks like. We're not focused on the near term; we're focused on the long term as an organization. We're adjusting to the inflationary headwinds that are in place. Notably, we've seen wage creep like everybody else. We are paying our people, making sure that we're retaining great talent. Those are the right adjustments to make that really focus your business for the long term against some of the near-term backdrop.

Great. Thank you for that. And just my follow-up is on the pricing. You mentioned 4% to 5% for the system — is that what's planned or an incremental 4% to 5%? When did that go into place, or when will that go into place?

Over the course of the year we've been taking price. We have another opportunity in front of us where we are actively working with our franchisees and they are going to put in somewhere between four to five points of additional price, hopefully during this quarter, certainly over the next few months. That will culminate in a total of a targeted 10% overall increase, which we believe is in line with where inflation is and aligned with consumer demand as well. So, like other brands, we're taking price in this environment to offset some of the near-term headwinds.

Great. Thank you.

The next question comes from Jeffrey Bernstein of Barclays. Your line is open. Please go ahead.

Great. Thank you very much. I have one question and one follow-up. The broader question is just on franchise sentiment. It would seem like the record unit growth demonstrates their long-term bullish outlook which you reiterated. Just wondering what that says — what are the conversations like in terms of the near-term unit development challenges, whether there's anything specific in terms of ongoing delays or labor challenges in terms of staffing or other inflationary pressures they're expecting, just in terms of the conversations you're having with franchisees that give you confidence in the 10% plus over the next few years beyond just the pipeline? And then one follow-up.

Jeff, thanks for the question and I understand the context. Sentiment of course is challenged like it would be in any system, given the macro headwinds that we're facing. It is hard to hire people. We are adjusting our compensation strategies or have adjusted them so that we can make sure to get the right people in our restaurants that will help us sustain a great customer experience but also continued growth. I think the outlook is one of challenge right now in that we've got high wing prices and labor inflation, so what are we doing to control it? I think the sentiment we've had discussions about is about taking more control. We have been reliant, for the most part, on spot prices in our commodity. We believe there's an opportunity for us to exercise more control over that. We're working together with our franchisees to mitigate the volatility in the future by taking more control of the supply chain. We're still trying to figure out exactly how that manifests itself but it's incumbent upon us to not allow such volatility to continue for the long haul, which we believe we can address. As it relates to wage inflation, we see that as temporary in that we're going to have to pay up to make sure that we're paying our people at the levels that are expected and the market is dictating. There are a lot of people leaving the restaurant category to find jobs elsewhere. So we're making sure that we're competitive in that respect. Alex called that out carefully that we are making the investments in our company-owned restaurants, which are the leading indicator of overall margins in the brand, to demonstrate that we're making those investments because we believe in it for the long haul. But even with those investments and even at our current EBITDA margin levels, our restaurants are still generating great cash flow. The average unit volume for our company stores exceeds $2 million. Even at this margin structure they're generating over $200,000 in cash per restaurant on a $400,000 investment. That leads to a sense of confidence, not only amongst us but our franchisees as well, that we will weather this storm. There's probably no brand better positioned to weather the challenges. From a long-term perspective, we need not just look at the short term as to whether we develop restaurants, but really look towards the long-term upside potential once we get through this transitional period.

Understood. And then just a follow-up: specific to 2022, is there any reason to believe that the mid-single-digit comp or the 10% plus unit growth wouldn't be a realistic starting point? I know AUVs seem to have found new homes. So it's not like you can't build off of that. But just wondering if there's any early indicator that may be either the comp or the unit growth might be more of a challenge in 2022 because of these short-term headwinds?

If you look at the drivers of the top line first as a brand, we rebated back $6.9 million during the quarter to our franchisees to put in their pockets to continue to fuel development, which we thought was a great decision and we all aligned on that as a brand. What that didn't do was take any money out of the coffers to continue to execute our advertising strategy, as we've seen in the fourth quarter with a sequential increase in the comp so far. That gives us confidence that the right strategies are in place for us to continue to deliver against both our near-term and long-term outlook for the brand, especially on the top line. Another great lever we have is our database of over 25 million users. We are actively investing to deliver a one-to-one marketing platform with our customers, which is usually reserved for tech companies and platform brands. Wingstop is in that position. I think that's going to be another great driver. As mentioned, we're getting very premium placements, leveraging properties like the NFL, the NBA and other really high-profile properties to leverage our advertising dollars. Next year will be somewhere in the range of $100 million to $125 million of total advertising spend. That's a big increase from where we were even a couple of years ago. So I think all of those are great indicators of the potential for the brand to continue to grow comps at the rate we've guided towards for the midterm and long term. Factor in unit development: while the P&L is challenged right now because of macro issues, the restaurants still deliver good cash flow characteristics. The investment economics are very efficient for Wingstop. A $400,000 average unit investment with a $1.6 million sustainable AUV — 4:1 — is as good as it gets. Our brand partners recognize that and we've been through this before. We'll navigate through the challenges and continue to see the brand grow.

Understood. Thank you.

The next question is from John Glass of Morgan Stanley. Your line is open. Please go ahead.

Thanks very much. Charlie, can you expand on the whole bird strategy? Do you think that's something that can start to show benefits next year or is this a multiyear project? And can you also comment on the mix from thighs? You said it doubled; is that material and might it benefit cost as we think about 2022?

We definitely think that the introduction of thighs through Thighstop was the right strategy and yields the desired outcome: not only to create an opportunity for an item at a lower cost level than bone-in wings, which it has done, but also it has a meaningful effect on our ability to secure entire birds, instead of just buying the wings and some breast meat from the spot market. As we look forward, we are exploring strategies where we can take more control of the supply chain. While it's preliminary, there are opportunities for us to follow the lead of some of the other large-scale franchise and company-owned brands like Dunkin', Starbucks and the pizza chains, who have taken more control of their supply chains to eliminate volatility and market exposure. Wingstop is a brand that's finding its way into that scale level. On a go-forward basis, in the near term, we're pleased with the mix of thighs and how it's performing. We mentioned it doubled in volume when we took it off the initial platform and folded it into the whole Wingstop menu. Guests are ready to order thighs from us directly and that's working out well. It's going to build over time and it's following a trajectory we saw when we introduced boneless wings years ago. Overall, we're pleased with where it's going; there's a long way to go and it is making an impact by giving us confidence in ways we can secure whole birds and take more control of the supply chain.

And on the buying co-op point, is that what you're thinking about? And on the ad fund rebate, was that a one-time event or do you anticipate repeating that in the fourth quarter?

The question of a buying co-op is one interpretation — there are a lot of options in front of us. If we lean into what scaled brands have done over time as they've grown to the size Wingstop is, we can put together structures that support a less volatile commodity impact. I think that's the right approach in some cases. And on the ad fund rebate —

John, the ad fund rebate we gave was really around a surplus that we had, and it didn't impact any of our planned advertising strategy. I would think of that as more of a one-time thing than something that would be ongoing.

I think the best way to think about it, John, is that it is a great lever we have with the strength of our advertising and the strength of our top line, but in this case it was a known surplus that we felt was in the best interest of the entire system to put in place this quarter.

Okay. Thank you.

The next question is from Andy Barish of Jefferies. Your line is open. Please go ahead.

Hi guys. I'm wondering if you can share thigh contribution or incrementality, whatever you're willing to share, and has it hit the $100 million threshold where it was royalty-free? Just a little more color on how thighs are helping sales in addition to the cost side of the equation.

Andy, we're not sharing specific mix or sales data on the thighs other than it is making a meaningful contribution to the brand by utilizing more parts of the bird. It does not require a high mix to have a big impact on the number of birds we can commit to. We put some advertising behind this, but primarily it was supported by public relations and digital strategy. We haven't yet done a full TV push to truly scale it. We wanted to ensure execution and guest engagement first. We're happy with results and that's why we folded it quickly into the total Wingstop platform. As we mentioned, it doubled our results, but we're still on our way toward the $100 million level. We didn't expect to be there by this point; we have time ahead of us. Overall it is moving along at about the pace we expected.

Thanks. Quick follow-up: the 300 basis points you called out on company-owned margins — was that idiosyncratic to 3Q? And as we think about margin improvement at the company-owned side in 4Q, is that something that sequentially helps to that extent?

Good morning Andy. Yes, that's characterized correctly. It was specific to the third quarter. It related to some preventive maintenance work and catch-up that we were doing on the repairs and maintenance side as well as training and catch-up maintenance work connected to our three restaurant acquisitions. That was unique to the quarter.

Thanks guys.

The next question is from Jeff Farmer of Gordon Haskett. Your line is open. Please go ahead.

Thank you. Quick follow-up: is the 4% to 5% incremental menu pricing fully contemplated in the same-store sales guidance for 2021?

Yes, that is. Let me clarify: that pricing comes in over time. You shouldn't expect a full-quarter effect immediately; we'll put the 4% to 5% in over the course of the quarter.

Okay. That's helpful. On G&A, over the last two years absolute G&A dollars have grown roughly $8 million to $9 million annually supporting digital and international investments. Looking forward to 2022 and 2023, is that still a workable run rate to think about G&A dollars moving forward?

Good morning. Over time we anticipate we'll grow into a rate of somewhere between 2% to 3% of system sales for G&A. We'll have more details as we move into 2022, but think about it more as a percent of system sales. That's based on where top 10 brands have matured over time.

Okay. Thank you.

The next question comes from Michael Tamas of Oppenheimer. Your line is open. Please go ahead.

Thanks, good morning. You mentioned you returned some ad fund money to help with unit development in the near term. Can you talk about constraints — how much are you constrained by near-term cost rises or supply chain issues impacting franchisees' ability to open units in the near term?

There's no constraint to get restaurants open. We recognized a surplus in the quarter and put that back in franchisees' pockets to shore up P&Ls and deal with macro headwinds while developing new restaurants. Our performance demonstrates they weren't pulling back — another record quarter. It's a great lever to support franchisees. There are some supply chain challenges associated with equipment, but those are not meaningfully impacting development. At most they might cause a week or two delay for refrigeration or similar items. That's fairly normal in the current environment and something we're seeing across industries.

Thanks for clarifying. One more: October's two-year trend is a little above what you're guiding to for the fourth quarter. Is there anything over the next two months we should be aware of, or is that conservatism on your part?

You're right: 7% in October is an exceptional performance given the two-year rollover. There's nothing other than the price that we expect during the quarter associated with franchisees decisions to raise prices. We have a strong media plan in place for this quarter focused on driving the top line, including premium placements, which gives us confidence in the fourth quarter.

Thanks so much.

The next question is from Chris Carril of RBC Capital Markets. Your line is open. Please go ahead.

Hi, good morning. You noted some encouraging sequential trends in wing prices recently. Curious what you're hearing from suppliers as to what's driving that easing? Is it improving labor trends on the supplier side, seasonality, or other demand dynamics?

They are seeing people coming back to work and improving labor, but a bigger issue earlier was breeder stock at chickens that needed to be replaced. Suppliers have made progress with pullet placements — the birds that produce the eggs that become broilers — which is a leading indicator of more volume, though there's about a six-month lag. One key point: breast meat frozen inventory stocks are at five-year lows; that product is high demand. Those frozen stocks need to be rebuilt, and we anticipate they will start to grow as more pullets yield more birds around the turn of the year — December into January and into Q1. If those inventories rise, it's good for wings because our frozen inventories for wings are approaching 2019 levels. We expect this dynamic to help support lower prices going into 2022. Prices are now down around $2.85 a pound as of yesterday, so they're already coming down. For context, our research suggests it costs somewhere around $1.30 per pound to produce a chicken, so it's hard to imagine costs should be substantially higher than that on a sustainable basis. We see opportunity for prices to come down to more balanced levels.

Thanks for that detail. On labor: given your lean model, how are you and franchisees balancing maintaining that lean model while ensuring restaurants remain staffed amid broader industry labor challenges?

We always have and will continue to have a very lean model. Roster sizes are smaller than most brands; we usually like around 16 people on a roster at typical volumes. Our labor becomes fixed quickly given high off-premise mix and a simplified cooking platform. That helps insulate us. We're looking for ways to improve efficiency, including supply chain opportunities to simplify prep and get smarter on operations. We make everything in-house for quality reasons, but we are exploring improvements. From a dining-room perspective, only about 200 restaurants have dining rooms open out of roughly 1,500 in the U.S., which suggests we can further simplify the model and leverage delivery. We're seeing delivery continue to increase — 27.2% delivery mix, almost 3 points better year-over-year — and it carries a higher average check. We are seeing wage inflation and are paying what we believe is fair to attract talent. Our approach is to invest now for the long term.

Thank you.

The next question is from Jared Garber of Goldman Sachs. Your line is open. Please go ahead.

Good morning. Wanted to ask about unit growth outlook internationally. You noted some SG&A projects were delayed and some hiring delays. Can you frame what work you're doing for international and how to think about that cost flowing into 2022? Also, how should we think about the acceleration or level of unit openings internationally over the next couple of years?

We're very excited about the international potential. Most markets outside the U.S. have not rebounded as quickly, but they are recovering. The U.K. restaurants are doing very well with AUVs exceeding $2 million. Mexico is approaching 2019-level volumes and is on track to open nine restaurants this year. Canada: our first restaurant in Toronto is expected in the first quarter under a 100-store development agreement. A big area of focus is China: the pandemic delayed work there and setting up the organization for deals like joint ventures takes time. The pandemic pushed us back 8 to 12 months on that effort, but we're back working on it and hope to be there within a reasonable period while being diligent. Other markets are reopening and development engines are picking up, so we're excited about long-term overseas potential but acknowledge the pandemic was a headwind that we have largely navigated.

Thanks. One quick follow-up: on shareholder returns, you historically have had a cadence of special dividends relating to leverage. Can you comment on whether that remains the right way to think about returns as leverage approaches levels where you'd consider such actions?

With the cash generated from our business we quickly deleverred from our last event. Historically, we've looked at leverage every roughly 18 months. It's an ongoing conversation with the Board and we'll continue to evaluate the best way to generate shareholder returns.

The next question is from Dennis Geiger of UBS. Your line is open. Please go ahead.

Thanks. First, on staffing: did you see any impact on operations and sales in the quarter based on staffing levels across the system? Do you have a sense of how close the system is to being fully staffed?

We have seen the impact of high turnover that's affecting training — there's investment necessary to train up new team members and associated compensation to attract talent. The good news is our high off-premise mix and efficient operations insulate us from meaningful negative impact on guest experience. Since most restaurants are not serving dining rooms and we're not seeing long wait times like others, the Wingstop model helps us manage these challenges even with low rosters. We are focused on staffing up both company and franchise restaurants, and are investing to adapt to the macro environment.

Great. One more: any notable shifts in customer behavior over the last several months — channel mix, menu usage, check versus traffic? Anything worth calling out?

No notable shifts that change the dynamic for Wingstop. We've maintained a solid digital mix and grown delivery, which is counter to market trends as people dine-in more elsewhere. We're still growing with a strong two-year basis of over 29%. Digital orders have about a $5 higher average check and delivery has strong check average as well. All systems are where we'd expect; the biggest challenges are macro headwinds we can't control.

The next question is from Chris O'Cull of Stifel. Your line is open. Please go ahead.

Alex, the margin guidance implies a fairly wide range for the fourth quarter. Can you help us understand the assumptions that go into the high and low end of that range? And a follow-up on pricing: if chicken prices revert back toward historical averages, how are you thinking about maintaining a strong value proposition given the amount of pricing taken this year? Will you leave higher prices unchanged and be more aggressive on promotions, or consider other alternatives?

Part of the range reflects continued hiring and training investments to ready for our New York market open and the amount of hirings where we've instituted some bonuses at the restaurant level to attract talent. Also, while encouraged by Urner Barry trends for wing prices, there remains volatility; we wanted to reflect that in guidance to give a sense of what the quarter might look like.

We've always believed we have sufficient pricing power in the brand and historically have baked one to two points of price per year into our P&L. This environment is driving the need to take price to address real inflation and we're seeing consumer adoption. This may be a reset for the near term, and we'll likely revert to our historical cadence, but we won't bank on wing prices reverting; that's why we're looking at strategies to take more control of the supply chain.

Okay. Thanks guys.

The next question is from Jon Tower of Wells Fargo. Your line is open. Please go ahead.

Just follow-ups: on development, did franchisees deal with any equipment supply chain issues that impacted openings or caused delays? And do you potentially see requiring any capital spend on your behalf to get more control of the supply chain?

On equipment, we typically forward buy much of our standardized equipment given our simple model, so the impacts are mainly short delays — a week or two — rather than development cancellations. POS equipment and refrigeration have been affected by supply chain issues, but we can mitigate these and are leveraging our balance sheet if needed to secure equipment. On supply chain control, our preference would be to leverage more of the bird with our existing suppliers, but we will evaluate all options and what makes the most sense long term. We'll look at what other companies have done and consider the appropriate approach for Wingstop.

Got it. Thank you.

The next question is from Nick Setyan of Wedbush Securities. Your line is open. Please go ahead.

The wing cost commentary goes against traditional seasonality heading into the Super Bowl and March Madness. Do you expect wing cost to continue improving as we head into February and March?

This year is atypical. Historically, prices rise in anticipation of big events, but with very high wing prices many operators modified menus or opted out of wings, which is helping improve supply levels, especially in frozen stocks. We've put away the frozen inventory we need for Super Bowl timeframe and expect others have done the same. The dynamic appears to be playing toward continued lower prices into Q1, which is different from historical patterns and driven by pandemic-related supply dynamics and workforce impacts. We expect benefits into 2022.

On royalties: royalties and fees as a percentage of franchise system sales ticked down a bit sequentially. Is that due to Thighstop being royalty-free initially, or is it related to international mix? Should this last into the first half of 2022?

Both factors affected the effective royalty rate. One is Thighstop, and yes that will factor into the first half of next year. The second is international businesses typically have lower royalty rates, and the mix shift with international performance has had a drag on the effective royalty rate.

Thank you very much.

The next question is from Peter Saleh of BTIG. Your line is open. Please go ahead.

Charlie, you mentioned you've been taking price throughout the year and plan another 4% to 5% over the next couple of months. Have you seen pushback on order counts from customers through delivery or pickup? And as a follow-up, did fewer stimulus dollars or unemployment benefits impact your results in 3Q or your 4Q outlook?

No, we have not seen pushback. Our performance and the two-year rates indicate we aren't seeing a drag from taking price. A lot of that is due to solid demand in the market. On stimulus, I don't believe it impacted us; our performance demonstrates we haven't needed stimulus to grow, and we haven't seen an impact associated with reduced benefits.

Thank you very much.

The next question is from Joshua Long of Piper Sandler. Your line is open. Please go ahead.

Charlie, on culture and the people pipeline: you're investing in your people pipeline. Are you seeing that flow into more candidates at the store level or at corporate? Are these investments allowing you to hold the pipeline steady or accelerate it? Any real-time movement in being able to invest into that pipeline? I have a quick follow-up on hiring delays as well.

Strong cultures are best positioned to navigate challenging environments. The pandemic has tested us, including turnover at store and corporate levels. We are increasing wage rates at the store level on both company and franchise sides and are paying what we believe is proper to attract the right talent for the long term. While that creates near-term pressure, the long-term outlook is very good and we're starting to see the talent pipeline improve. The brand is still able to attract strong candidates to support long-term strategy and execution. Overall I feel good about where we are; it was harder a few months ago but we are seeing improvement.

Appreciate the color. Alex, you mentioned hiring delays tied to international investments being pushed. Any additional context on where in the organization those hiring delays occurred?

Josh, it mostly points to the challenges everyone is facing in attracting talent. We were encouraged by the pace of hiring picking up by the end of the quarter and entering Q4, which is why guidance was positioned the way it was on SG&A.

The next question is from James Rutherford of Stephens, Inc. Your line is open.

Thanks. On unit openings: openings from franchise business in the U.S. were consistent with prior quarters this quarter. Fourth quarter is usually stronger for openings. Do you maintain the number of openings into the fourth quarter that puts you at 12% plus guided growth for the year? With a seasonal step-up could you end around 13%? Thoughts for the near term?

This year we've smoothed the cadence of openings across quarters, which we've wanted to do. Historically we had a strong fourth quarter, but demand for growth has shown quarter-to-quarter consistency this year. We're confident in the outlook for the balance of the year. Any adjustments would be centered on supply chain challenges mentioned earlier, but currently we feel very good about the full year outlook.

Thanks. Small question: where is dine-in as a percentage of sales and is that a lever to add incremental sales?

Even though only about 200 restaurants have dining rooms open, we saw pickup in their mix — these historically higher dine-in mix restaurants outpaced the system average. The long-term levers will be advertising strategy, CRM, and building the delivery business, which will be the primary drivers of growth.

The next question is from Jim Sanderson of Northcoast Research. Your line is open.

Quick follow-up on menu pricing heading into the new year: any feedback on how you expect consumers to react to the full impact of the 10% price increase heading into 2022 on transaction counts?

Macro-wise, total savings rates are at all-time highs for consumers and they have money to spend. They're dealing with inflation across the board, not just restaurants. We don't see a slowdown in demand and expect consumers to tolerate necessary price increases to address real inflation, especially on the wage side. Many other brands are making similar adjustments. We don't anticipate it will materially affect transactions in the current environment.

On delivery: is the delivery mix growing or relatively stable as a percentage of sales?

We have grown delivery mix year-over-year by almost three percentage points; we're at 27% plus today. Delivery also shows a higher average check, which supports our business.

Thanks, Charlie.

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