Wingstop Inc. Q4 FY2022 Earnings Call

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Wingstop Inc. Fiscal Fourth Quarter and Full Year 2022 Earnings Conference Call. Please note that this conference is being recorded today, Wednesday, February 22, 2023. On the call today are Michael Skipworth, President and Chief Executive Officer; and Alex Kaleida, Senior Vice President and Chief Financial Officer. I would now like to turn the conference over to Alex. Please go ahead.

Thank you, and welcome to the fiscal fourth quarter and full year 2022 earnings conference call for Wingstop. Our results were published earlier this morning and are available on our Investor Relations 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 1 question and a follow-up to allow as many participants as possible to ask a question. With that, I would like to now turn the call over to Michael.

Thank you, Alex, and good morning, everyone. We delivered another industry-leading year at Wingstop despite our business being faced with what we described as a perfect storm in the first half of 2022. But as you may recall, we spoke about a second half of the year story for Wingstop. I couldn't be prouder of how our team came together to deliver another record year for Wingstop. Our fourth quarter and full year 2022 results are a demonstration of the underlying strength of the Wingstop brand and showcase the resiliency of our strategy, a strategy that has remained consistent over the years, built in a way that has allowed us to continue to deliver industry-leading results that are sustainable through various economic cycles. This was supported by 2022, marking our 19th consecutive year of same-store sales growth. The same power of our strategy is what gives us confidence in achieving our goal of becoming a top 10 global restaurant brand. Before diving into our results, I'd like to first acknowledge our franchisees, whom we affectionately refer to as our brand partners, the incredible team we have here at Wingstop's Global Support Center, and each and every one of our restaurant team members, and thank them for an incredible year. The foundation of our strategy is built upon our investments in people and in our culture, which we view as a competitive advantage. We believe this is what sets us apart and enables us to deliver industry-leading results year after year. We know a lot of brands were forced to take significant price increases in 2022 as they navigated record inflation. This level of pricing in many cases translated to a loss in transactions. But not for Wingstop. Wingstop is unique. We benefited from meaningful deflation in 2022 and did not have to take price. In fact, in the fourth quarter, our same-store sales growth was 8.7%, driven entirely by transaction growth, which speaks to the unique sales levers we have at Wingstop and a true demonstration of the underlying health of the brand. This top line growth was accompanied by meaningful deflation in 2022, which further strengthened our unit economic model. This was showcased through another record year for development. We opened 228 net new units globally, representing a 13.2% growth rate, achieving record years for both our domestic and international businesses. This translated to adjusted EBITDA growth of 23.1%, highlighting the strength of our asset-light model. As we enter 2023, we have an energized base of brand partners, and our global development pipeline stands strong at roughly 1,100 restaurant commitments. Our unit economic model is as strong as it's ever been with average unit volumes above $1.6 million and food costs in the low 30% range. In 2022, we saw spot market prices for bone-in wings decline by 44%, which resulted in Wingstop being one of the few brands with significant deflation. As we sit here today, the combination of leading indicators and progress against our supply chain strategy suggests a favorable commodity backdrop to continue through 2023. At an average unit volume of $1.6 million and an initial investment in the mid-$400,000 range, our brand partners are seeing returns that translate to less than a 2-year payback, truly best-in-class. 2022 showcased the resiliency of the Wingstop brand and the strength of our strategy, and it's what gives us confidence in our ability to navigate 2023, particularly due to uncertainty ahead with the current macroeconomic backdrop. While Wingstop isn't immune to these macro challenges, we have a proven playbook that's helped deliver 19 consecutive years of same-store sales growth. We have unique sales levers to drive toward our target of a $2 million-plus average unit volume, levers that are multi-year sales drivers. With the strength of our transaction growth in the second half of 2022, we are playing offense and are acquiring new guests and building frequency as a result of our growth levers. In addition to acquiring new guests and winning new occasions, we also have a proven value playbook that positions us well to navigate changing consumer sentiment in this environment. Our path to achieving our target of $2 million average unit volumes is clear and consists of driving brand awareness, menu innovation, expanding our delivery channel, a data-driven marketing approach, and further transformation of our leading digital platform. We continue to have significant opportunity to build brand awareness when we benchmark against other national brands. With a national advertising fund that grew by more than 40% in 2022, we made good progress but still have a lot of runway in front of us. As we look ahead into 2023, with the growth in system sales, the continued growth in our advertising fund will help us further build awareness and acquire new guests into the brand. In the second half of 2022, we deployed our strategy of having an always-on national media message, and 2023 will mark our first full year of this always-on strategy. Wingstop will continue to show up in live sports such as NFL and NBA games. Consistent with prior years, we will over-index our investment in streaming, digital, and social channels to maximize our presence nationally as we continue to work towards expanding brand awareness. Another lever we have on our path to $2 million average unit volumes is menu innovation. 2022 was an exciting year for Wingstop. We launched a chicken sandwich, and not just the plain and spicy version, but 12 chicken sandwiches, soft and tossed in our bold, distinctive, and craveable flavors. Our chicken sandwich launched in August of 2022, and we remain incredibly excited about the long-term opportunity that the chicken sandwich provides. It's a product that can introduce Wingstop to over 160 million chicken sandwich consumers and be a game changer from a supply chain strategy perspective. As we continue to win more chicken sandwich occasions, we see a path to a boneless mix in excess of 50%, which we believe would yield long-term food costs in the low 30% range, further strengthening our leading unit economics. In 2022, we also innovated with flavors, introducing our most successful limited-time offering, Hot Honey Dry Rub. We followed our Hot Honey launch with our Carolina Barbecue flavor, and in both cases, achieved sales mix levels that doubled our typical flavor limited-time offers. We have a fully-stocked pantry of flavors with high marks from consumer testing. We will continue to look to satisfy the cravings of Wingstop flavor fans in 2023 with additional flavor limited-time offers. Another growth lever for Wingstop is in our delivery channel. In 2022, we took the opportunity to expand our delivery channel to a second provider with Uber Eats. We are just scratching the surface on delivery, and we see an opportunity to almost double the size of our delivery business. DoorDash and Uber Eats marketplaces are additional avenues for us to build awareness and capture incremental occasions. Our best-in-class digital platform continues to be a competitive advantage for us with nearly $1.7 billion generated from digital sales in 2022. The increased level of national advertising, the launch of the chicken sandwich, and investments in our technology platform were catalysts for significant growth in our new digital guest acquisition rates and retention during the quarter. As the industry has seen consumers revert back to pre-pandemic behaviors, what we've experienced at Wingstop is different. Our digital mix has sustained above 60%, in fact, it reached an all-time high in Q4 and represents the stickiness of the new guests we've acquired. We believe the investments in our digital platform to in-source strategic components and build greater personalization will further expand frequency and help us achieve our aspirational goal of digitizing every transaction. Each of these levers has combined to drive significant transaction growth and we believe have multiyear sales growth opportunities, giving us confidence in achieving targeted average unit volumes in excess of $2 million, which will only further strengthen our unit economics. I'm also really excited about the progress in our international markets. In the last 6 months, we've launched 2 new international markets: Canada and Korea. I've had the opportunity to visit both markets for their openings, and I could not be more excited for the potential for Wingstop in both of these markets. Our Canadian market is already pacing ahead of their development schedule. We opened our Korean market in mid-January and are pleased with the pipeline of sites. Both markets showcase the opportunity for the Wingstop brand globally, following our successful playbook from the U.K. market, where the restaurant count is now 28 and average unit volumes above $2 million. Our new markets speak to the investments we've been making to support our growth, and their early successes will help continue to fuel our business development pipeline. There remains a lot of exciting demand for the Wingstop brand outside of the U.S., and I believe our international business is primed for growth. If you consider the growth in transactions driven by our sales levers, the strength of the unit economics, and the enthusiasm of our brand partners to continue to grow, Wingstop is well positioned to have another record year. We're exiting 2022 with great momentum. This, combined with the strength of our strategy, is what gives us confidence in guiding to a mid-single-digit same-store sales growth outlook for 2023 and our ability to navigate any macroeconomic uncertainty ahead. We also see an opportunity to maintain this accelerated pace of unit growth and anticipate opening approximately 240 net new restaurants in 2023, which is well above our 3- to 5-year targeted growth rate. Before I hand the call to Alex, I'd like to share some exciting news around our ESG efforts, what we refer to as Flavor for Good. A key focus area in our Flavor for Good platform is giving back to the communities in which we serve. Our Wingstop Charities' mission is to engage the youth in our communities in pursuit of their passions. Our charities' core programs consist of community grants, team member assistance, and a scholarship program supporting team members who are the first generation in their families to attend college. This past December, we launched the capability in our website and app for a guest to round up their check to donate to Wingstop Charities. I'm thrilled to share, in just a couple of months since launch, we are pacing towards contributions that in only 1 year could more than triple the grants we have provided to date, a remarkable opportunity to have a bigger impact in the communities we serve. I'd like to close by thanking the team members in the restaurants and our Global Support Center as well as our brand partners for all their incredible work and commitment to position us to deliver these results. I couldn't be more excited about the opportunity ahead for Wingstop in 2023 and beyond. With that, I'll turn the call over to Alex.

Thank you, Michael. 2022 results are a great demonstration of the strength of our long-term strategies and how Wingstop is uniquely positioned. We hit our 19th consecutive year of same-store sales growth, opened more than 200 net new restaurants for the first time, and we generated more than $100 million in adjusted EBITDA during the year. Before I dive into the financials, a brief reminder that 2022 results include an extra operating week or a 53rd week, which for the fourth quarter represents a 14-week period versus a 13-week period in the prior year. As a result, year-over-year comparisons are not strictly apples-to-apples unless identified. Our growth in system-wide sales during the fourth quarter was 28.9% versus the prior year. When excluding the $57 million impact from the 53rd week, full-year 2022 system-wide sales totaled nearly $2.7 billion, reflecting a growth rate of 14.4%. Royalty revenues, franchise fees, and other revenue increased by $14 million in the fourth quarter, driven primarily by 221 net franchise openings since the prior year comparable period, the 8.7% increase in domestic same-store sales, and an estimated $3 million of additional revenue associated with the 53rd week. Our fourth quarter comp was entirely driven by transaction growth, reflecting the strength of our second-half performance. Company-owned restaurant sales increased by $5.3 million in Q4 due to a 2.6% increase in same-store sales primarily driven by transaction growth, 7 net new restaurants versus the prior year comparable period, and $1.5 million of additional sales from the 53rd week. Cost of sales, excluding preopening expenses and as a percentage of company-owned restaurant sales decreased by 900 basis points in Q4 compared to the prior year, primarily driven by food costs and a 49% decrease in the cost of bone-in chicken wings. We were one of the few brands to experience significant deflation in our core commodity, and our unit economics are exiting 2022 from a position of strength. The near-term commodity outlook is favorable not only for bone-in wings but also for breast meat. Based on what we know today and for modeling purposes, we anticipate full-year 2023 cost of sales to be approximately 75%, implying an improvement of more than 300 basis points versus 2022. SG&A increased by $300,000 versus the comparable prior year period to a total of $18.3 million, driven by investments in talent and an approximately $1 million impact from the 53rd week. This was partially offset by a year-over-year decrease in stock compensation expense. Adjusted EBITDA, a non-GAAP measure, was $34.7 million in the quarter, an increase of nearly 72% versus the prior year. This includes the estimated impact of the 53rd week, which totaled $2.6 million. When excluding the impact, adjusted EBITDA increased by 59% in the fourth quarter. We delivered adjusted earnings per diluted share, a non-GAAP measure, of $0.60, a 150% increase versus the prior year. When excluding an estimated $0.03 impact from the 53rd week, adjusted earnings per diluted share increased by 138%. Our highly franchised asset-light model continues to deliver strong free cash flows. As of the end of the fourth quarter, we had $526.8 million in net debt. Our net debt to trailing 12-month adjusted EBITDA was at 4.8x, which is a full 1.5x lower than at the end of the first quarter. The timing for our last debt transaction underscores our ability to quickly delever through a combination of adjusted EBITDA growth and strong free cash flow generation. We remain committed to driving shareholder value and returning capital to shareholders through our regular quarterly dividend. Today, our Board of Directors has declared a dividend of $0.19 per share of common stock, a demonstration of the strength of our model. This dividend totaling approximately $5.7 million will be paid on March 31, 2023, to stockholders of record as of March 10, 2023. Now turning to our outlook for 2023. As you heard from us today, we remain confident in our strategy and our outlook of mid-single-digit same-store sales growth for 2023. We also anticipate maintaining an increased pace of development with approximately 240 net new units. This translates to a unit growth of more than 12% versus the prior year. For modeling purposes, we anticipate opening 3 new company-owned restaurants with openings likely to occur in the fourth quarter of 2023. SG&A guidance is estimated to be between $82 million and $84 million, including an estimated $11.5 million to $12.5 million of stock-based compensation expense. This outlook translates to approximately 15% growth in adjusted EBITDA versus 2022 when excluding the impact of the 53rd week. I'd like to thank the incredible team members and brand partners throughout the Wingstop system that have helped us deliver another record year. Their dedication and commitment give us the confidence in achieving our vision of becoming a top 10 global restaurant brand. With that, I'd like to now turn to Q&A. Operator, please open the line for questions.

Our first question comes from David Tarantino from Baird.

Congratulations on such strong results. My question's related to the comps outlook. And I was wondering, first, if you could describe how you expect the year to play out and how you've started 2023. And then secondly, one of the questions I hear a lot from investors is whether you've pulled all the key major levers that you had in the portfolio to drive comps in the second half of 2022. And how are you planning to cycle that when you get to the second half of this year? Any color, I guess, on your confidence in cycling such strong performance in the second half of the year would be great.

Thanks for your question. I'm pleased to address it because it's a common inquiry. It's crucial to emphasize that Wingstop is in a unique position, often described as a category of one. The growth strategies we're implementing are designed to scale our average unit volumes from $1.6 million currently to over $2 million. We still have significant opportunities to enhance our brand awareness to compete with other national brands. In 2022, we increased our advertising fund by 40%, and while we've made progress, there's more to be done. The growth in system sales from '22 to '23 adds to our advertising resources, allowing us to improve brand visibility further. We've introduced innovations like the chicken sandwich, which we see as a long-term sales driver. There are 160 million chicken sandwich consumers in the U.S., and currently, only a small percentage engage with Wingstop. We are satisfied with our chicken sandwich sales mix, which held steady in the fourth quarter, but we recognize the potential for growth. Additionally, we view the tender category as another exciting opportunity for expansion. Recently, we've added Uber Eats as our second national delivery provider. We can compare our delivery business to similar companies, where the delivery channel constitutes over 50% of sales. There’s considerable growth potential here, and discussions with Uber Eats indicate we are just beginning to tap into their user base. Moreover, in terms of digital transformation, while many businesses are seeing a decline in digital sales as consumer behavior returns to pre-pandemic norms, Wingstop's digital sales continue to grow. This expansion provides valuable data to enhance our marketing efforts, drive frequency, attract new customers, and capitalize on more occasions for sales. Overall, our strategies are not just short-term fixes but are designed for multi-year growth, providing us with a path to increase average unit volumes above $2 million. This outlook gives us the confidence to project mid-single-digit same-store sales growth for 2023, even amid current uncertainties.

Great. Any comment on how the year has started?

Yes. As we consider the comparable sales in the fourth quarter, we noted that in October, all of our growth was attributed to transaction increases. We indicated that this growth was at 6%, and we achieved an 8.7% growth for the quarter. We observed a build-up in this momentum throughout the fourth quarter. We believe this creates strong momentum as we enter 2023.

Our next question comes from Jeffrey Bernstein from Barclays.

Just on the other key revenue driver being unit growth. You mentioned another strong year in '23 with 12% growth. Just wondering if you can talk a little bit about maybe new versus existing markets, U.S. versus international. And whether there's any franchisee concern at all in the current environment, whether macro-related or elevated interest rate related? Just trying to get a sense around that unit growth more broadly. And then I have one follow-up.

Yes, the unit growth story is something we're really excited about. As you mentioned, it is a real key component of the long-term story at Wingstop. We talked about it in our prepared remarks, but the current sentiment with our brand partner community is really positive. We're seeing some really great strength, as we talked about, in the fourth quarter from a top-line perspective. But what's more importantly is what they're seeing on their P&Ls as the unit economic model is about as strong as it's ever been, creating excitement to continue to grow. That excitement isn't just in the U.S. Our outlook for 2023 with another strong development year for the brand shows our mix being pretty similar to what we delivered in 2022 from a domestic versus international perspective. We continue to expand outside of the U.S. into some of the emerging markets in the U.S. as well that we haven't really had a strong presence in. The early results of our development in those markets are really encouraging, showing some strong volumes out of the gate, and we're excited about continuing to expand our footprint.

Understood. And then the follow-up maybe for Alex. Just the cash usage, you talked about, I think you said you're at 4.8x. I believe your historical target is 6x to 7x. So I'm just wondering, as you think about cash, one, whether or not you're willing to let the ratio continue to fall in this current elevated rate environment, or whether there's an update related to your supply chain investment and how else potential cash could be used.

Thanks for the question. Since our IPO, we've returned more than $650 million of capital to shareholders. Our asset-light model is clearly built to provide best-in-class returns. That being said, we have cash on our balance sheet to be opportunistic, to maximize returns in our business and for shareholders. This could include a focus on our supply chain strategy to mitigate that volatility in our food costs or other capital allocations such as a return of capital. You've seen that cadence from us over the years on taking our leverage up. We'll continue to have that dialogue with our Board and really look to prioritize the best use of capital with that in mind.

Our next question comes from Jon Tower from Citigroup.

Just a quick clarification and then a question. The effective royalty rate in the fourth quarter stepped up pretty nicely relative to what we've been seeing in the past year or so. I'm just curious if you could explain what that is. And then one follow-up to that.

Jon, you may remember that several years ago, we had a vendor contract that we renewed and renegotiated and so you probably, in our results, saw a little bit of a pop in other revenue. We had that in this fourth quarter that impacts the flow-through a little bit. A significant chunk of that retro rebate, if you will, actually flowed into the ad fund as well. But that's what's behind the effect on the quarterly number.

So that's not going to be a sustainable level of royalty rate then going forward, just a one-timer?

Yes, Jon, you can point back to quarter 3 as a good effective rate to think about.

Okay, great. And then I guess thinking about unit growth here with targeted paybacks increasing, particularly if you look at making your way toward $2 million average unit volumes, it looks like you can get less than 2 years of paybacks on these new stores. Can you discuss the capital allocation policy of the company and why not pour more capital back into unit growth on the company side? Understanding that there may not be major market opportunities like Manhattan out there, but probably more onesie, twosies across different markets that I'm assuming would be good uses of capital, considering the paybacks.

Yes. I think, Jon, over the years, you've seen us be opportunistic where we can. The fourth quarter was a great example where we saw a couple of restaurants that came up for us to acquire in the Dallas-Fort Worth area. You'll see us continue to take advantage of those opportunities as they present themselves. But I don't think you'll see us fundamentally shift our strategy or our approach because quite frankly, we're designed to be a franchisor. The required G&A investment and some of the infrastructure needed to advance our capital allocation towards company restaurants would require more of a fundamental shift than us continuing to pursue these opportunistic opportunities, which we believe are a great return for shareholders.

Our next question comes from Andrew Charles from Cowen.

I know that the industry, we've been hearing a lot in 2022 about increased CapEx and cost to build new stores. But you guys have talked pretty consistently about a mid-$400,000 range. I'm curious about what you guys have been able to do to help mitigate the industry trend and keep a pretty consistent level of CapEx per store.

Thanks for the question. I think we're not immune to inflation. We have seen build costs tick up a little bit, but I think it speaks to the efficiency of our model and the fact that we're building out in-line space, which requires a little bit less of maybe some of the more inflationary areas you've seen in construction, a lot of that being labor, quite frankly. I think that's helped us. We have been proactive from a supply chain perspective to get in front of this development from an equipment side and negotiate buys for the entire system. This not only helps us negotiate strong prices or favorable pricing but also helps us address some of the disruptions that other brands have seen from a supply chain perspective.

Okay, that's helpful. I also wanted to ask as well, we saw earlier this year a bone-in bundle. I think it's the first time we've seen that in the last couple of years, and obviously, the cost of wings is certainly prohibitive on that. But what's your decision to do bone-in wings in a bundle? Usually, you guys use value more. I always thought of kind of the defense in using these bundles is more of a defense. So curious about what drove the decision beyond just your lower cost of wings to do the bone-in bundle.

Yes, Andrew, you could say that was a little bit of a test for us to understand how a bone-in bundle would perform. It was a pretty targeted audience of those who set New Year's resolutions and wanted to bulk up, and it was a pretty contained audience, but nonetheless, it performed well and was short-lived but definitely an interesting test for us. I don't know that I would argue it's going to be a fundamental shift in our long-term approach around presenting consumers with value.

I'll definitely use that more for my New Year's resolution, so if you bring it back, I'm looking forward to it.

Our next question comes from Brian Harbour from Morgan Stanley.

In your kind of same-store sales outlook, do you think franchisees will take any price this year? Because obviously, there's still labor inflation, commodities are favorable but maybe not quite the tailwind they were last year. Do you have any assumptions around that?

Yes, Brian, we talked about this a little bit before in that we expect in 2023 to get back to what we refer to as a little bit of our historical approach around a disciplined approach to pricing. This would consist of roughly two windows of about 1 to 2 points of price, and that's what we've done historically. With 2022, we took a little bit of a different approach, considering the overall impact on the consumer.

Okay, great. And then maybe just on the delivery side. I know it looks like the digital mix did tick up a little bit from earlier in the year and maybe some of that seasonality. But could you maybe comment on how much of that might have been driven by Uber Eats and how you've seen that kind of drive delivery transactions perhaps?

Yes, Brian, it's been interesting. We are kind of in a unique spot in that we've seen similar growth across all channels, not just delivery but digital takeout and even non-digital takeout. We've seen strong growth across all channels. There's not really any one area to point out or call out that contributed to that.

The next question comes from Joshua Long from Stephens.

It sounds like the chicken sandwich and some of the menu innovation that you've been working on are resonating with consumers. I'm curious what you've learned in terms of usage. Is it bringing new guests into the brand? Or maybe what have you seen in terms of frequency and kind of usage, and maybe guests have shifted from some of the larger party orders into more individual transactions in the lunch day part?

Yes, thanks for the question. We've observed that the chicken sandwich has been highly incremental. It continues to perform well during lunch, which we appreciate. We're seeing it added to orders instead of customers opting for less. It has also helped us attract new guests and increase their visit frequency. We’re optimistic about its long-term potential not only as a sales driver but also for our supply chain. As the chicken sandwich grows and becomes a larger part of our business, we anticipate that our boneless mix could exceed 50%. In that scenario, we could implement a supply chain strategy that allows us to offer predictable food costs to our brand partners in the low 30%, which we believe could significantly benefit our development.

Great. As a follow-up, as you think about bringing new guests in with some of the menu innovation, particularly the chicken sandwich, does that speak to your desire and communicated strategy of bringing in that heavier QSR customer who may not be historically as involved or as close to Wingstop? Are you making progress on that?

Yes, it's a great question. We're seeing a lot of really great traction against that heavy QSR consumer, bringing them into the brand. Our frequency remains about once a month or 3 times a quarter. So that Wingstop occasion, that indulgent occasion is still a low-frequency occasion. This presents us uniquely in this space and allows us to engage with guests differently. As we think about chicken sandwiches, those tend to be more of a high-frequency occasion. We see it as an opportunity over time for that to influence frequency. It is something we are working against. We'll continue to provide updates as we have more, but an exciting opportunity nonetheless for us to acquire new guests and ultimately impact frequency, which you know will help us in our target of achieving average unit volumes north of $2 million.

The next question comes from Jeff Farmer from Gordon Haskett.

Just curious, a different sort of tack on trying to understand how the restaurant is performing in early 2023. Can you just remind us how large of an impact you saw from Omicron in early 2022 last year?

Yes, yes. Jeff, thanks for the question. We actually didn't see a real impact to our business from Omicron back in 2022. If you recall at that time, the majority of our dining rooms were closed in the January, February time period, and we didn't really see an impact.

And then unrelated, I did hear the guidance for, I think you said total cost of sales at 75% in 2023, down roughly 300 basis points year-over-year. Is it safe to assume that the lion's share of that benefit is coming on the COGS line, or are you going to see it on labor or other operating as well?

Yes, that's right. You could expect to see the majority of that in the COGS line. As Michael mentioned in the prepared remarks, it will be through a combination of what we're seeing with leading indicators on our commodities as well as executing our supply chain strategy.

Our next question comes from Andrew Strelzik from BMO.

Just wanted to follow up on the comment you just made there on the cost of sales on the food line, in particular. Obviously, a lot of focus on the bone-in wings always but chicken breast prices being down as much as they are. How is that playing into your thinking there? Can you frame maybe the impact and the timing to which that really starts to kick in? And then on the broader whole bird strategy that you've talked about in terms of different options like buying a chicken plant, partnerships, various things, can you give us an update on where you stand now, which seem more or less viable at this point?

Yes. Great question. Last year, chicken breast prices reached their peaks in the midpoint of the year, so we'll be lapping a component of that. That is a component, as Michael mentioned, as we've seen our boneless mix heading with chicken sandwich launch that allows us to have different conversations with our suppliers. That is really the first component of our supply chain strategy around a more whole bird cost-plus pricing strategy. We're thinking about not only the leading indicators but also our supply chain execution. Back to our approximately 75%, that implies a low 30% food cost in 2023.

Okay, great. And just any update on maybe conversations on how you're thinking about some of the broader supply chain strategies? You talked about chicken plants and partnerships and other ways to create stability there over time.

Yes. We continue to be in active dialogue with potential partners. A lot of the conversation and willingness to structure some of our pricing agreements a little bit differently and move further and further away from the spot market or where those conversations are focused. This is a win-win because it is a very efficient way for us to execute the outcome, which is what we're trying to solve for, which is to minimize volatility in food costs. We're seeing great progress, and I think it has a lot to do with what we're able to signal in terms of targeted food costs for 2023.

Our next question comes from Nick Setyan from Wedbush Securities.

Congrats on the amazing quarter. Just a question on the differential between the average unit volume growth year-over-year and the comp. It's a couple of quarters now where average unit volume growth in terms of the comp base stores has trailed the comp by a substantial amount. Just wondering what's going on there and how we should think about that delta going forward.

Nick, thank you. We hope that delta continues to exist because what you're seeing is the strength of the new restaurant openings coming out of the gate at higher average unit volumes entering the comp base and impacting that average AUV calculation. You're seeing that dynamic at play, which we think is a good thing for the business.

So maybe just comment on the sort of year 1 average unit volumes right now and how that's been trending in the recent past and how we should think about the opening volumes going forward.

Yes. Just a few years ago, we were seeing year 1 volumes on average coming out north of $900,000. Just this recent vintage alone is coming out of year 1 at about $1.2 million, $1.3 million. So you can see a marked increase in how the restaurants are coming out of year 1, which can ultimately influence the change in average unit volume year-over-year versus just pure comp growth.

Yes. CapEx for 2023 will be fairly consistent with what you saw in 2022, in that high 20s mark.

Our next question comes from Michael Tamas from Oppenheimer & Co.

You talked about plans to double the size of your delivery business over time. Can you talk about maybe some of the specific strategies to reach that goal, particularly at a time when we're seeing some delivery headwinds across the industry? Do you think that will cause some of your consumer base to just simply shift into delivery from other methods of getting Wingstop?

Yes. The opportunity there is tied to a broader opportunity for Wingstop and that's just awareness. Our awareness on these delivery platforms is still really low. We'll continue to build that, whether through specific promotions or using some of our ad dollars to advertise on those platforms. What we've experienced is strong growth in our delivery business, something we are very excited about.

Okay. Can you talk about your new consumer base versus maybe a legacy or more mature consumer base in terms of either frequency or overall spend? Is there a noticeable difference between the two?

Yes. Over time, we've brought more of those heavy QSR guests into the brand, which are a little bit less ethnically diverse and a little bit higher income. We've seen our mix of that lower-income consumer shift down to about 30%. There is a little bit of a difference in behavior, but nothing material. The frequency is about the same. The average check is not materially different in how they engage with the brand. These new guests introduced to the brand via chicken sandwich speak to some longer-term opportunities that could be a little different than our historical or legacy customer.

Our next question comes from Brian Vaccaro from Raymond James.

On this call, you've laid out a couple of high-level bogeys. On delivery, you noted that peers often see greater than 50% of their sales on delivery. You also mentioned eventually getting to the boneless mix above 50%. Could you just level-set us on where each metric, delivery sales and boneless sales mix, currently stand exiting 2022? Would you also be willing to ballpark the lift you're seeing since adding Uber Eats to the delivery platform?

Yes, we've seen delivery continue to perform strong. That being tricky with the request for metrics on mix levels. Over the last year, we've reopened our dining rooms. We've also witnessed incredibly strong growth across all channels, meaning not just delivery but digital takeout and even non-digital takeout. Our delivery mix is still hovering just below 30%, which speaks to the opportunity to almost double it. In terms of the boneless mix, traditionally it has been in the low 30s, and we're excited to see that approach 40% right now.

All right, great. Alex, just a follow-up. I noticed the D&A guidance; depreciation guide implies a pretty big step-up into '23 that seems to exceed the company unit growth that you laid out. It got me thinking about just the level of investment that you're making in your tech and growing infrastructure. Could you level-set sort of where that was in '22 and how you're thinking about that into '23?

Yes, about 1/3 of that impact is related to the new restaurants that we opened in the past year, so just the wraparound effect of that. The balance is related to this tech investment that we talked about a couple of years ago, a $40 million to $50 million investment to take components of some strategic components and in-source within our tech infrastructure. We're working on that, and you're starting to see that show up a bit more in our depreciation. We're excited about the progress we've made to date and where that's heading for our system to take more control of a key component of our strategy.

Our next question comes from Chris Carril from RBC.

So on the international unit growth, could you speak to some of the learnings from the strong results you saw in the U.K. as you're thinking about strategy and next stages for growth outside the U.S.?

Absolutely. The business in the U.K. is something we refer to as a textbook deployment of our strategy, focusing on a little bit more affluent consumers, heavy off-premise, digitally-savvy consumers, and in a market where there's a strong delivery business. We've taken that criteria to target which markets we go to and prioritize for growth. As you think about our first openings in Toronto or us opening in January in Seoul, South Korea, both of those markets fit that strategy well. We're seeing strong volumes early on, indicating there is a similar opportunity in those markets as we found in the U.K.

Great. For the U.S. business, how are you thinking about pacing or cadence of the flavor limited-time offerings maybe this year on a normalized basis going forward versus past historical levels?

We historically target about two flavor limited-time offerings a year. We did a bit more than that in 2022, and we feel it resonated well with guests. They enjoy flavor news and variety. We believe it drives consideration and ultimately purchase. You could see us going very similar to what we saw in 2022 with at least three flavor limited-time offerings throughout the year.

Our next question comes from Dennis Geiger from UBS.

I want to ask another one on the consumer, but specific to the quarter if you could speak a little bit more to what you're seeing from your customers across consumer purchase behaviors, whether that's looking at promotional usage, other menu utilization worth noting? Are there any observations as it relates to the lower-income consumer that you're seeing in the quarter?

Yes, Dennis, thanks for the question. We see all the research and headlines that everyone else sees. We do a lot of consumer research on our own, and we do hear that it’s still tough out there for the consumer. However, as we look at our business, particularly the lower-income consumer, we haven't seen an impact. It involves our unique positioning, where it represents an indulgent occasion for these guests. Historically, we find that if these consumers pull back on dining out occasions, they typically target their more high-frequency occasions first—then they treat themselves later. Presenting them with value at the right time has demonstrated our ability to retain those indulgent occasions. While we read everything that everyone else reads, we haven't seen anything show up in our business yet.

Very helpful, Michael. Just one other one. I want to ask on staffing, given the strength you're seeing in traffic growth. I believe last quarter, you said staffing levels were fine so maybe that's still the case. I'm curious where staffing is, given that traffic, and if that's an opportunity to help meet the demand out there.

Yes. It's a good question. Along with our brand partners, we did a good job of getting in front of this labor environment. We focused on a consistent message about paying a fair wage. We got in front of a lot of this. You saw, as we commented last quarter, not seeing a lot of issues from a staffing perspective. Opening 61 net new units in the fourth quarter alone shows our ability to staff restaurants without significant issues. Part of what helps us do this is a unique labor profile; at a $1.6 million average unit volume, you can run a Wingstop with as few as four team members. We require a smaller roster in a much more efficient labor profile that allows us to navigate this environment differently than others.

Our next question comes from Peter Saleh from BTIG.

I wanted to ask about the national media in 2023. I think this will be the first year that you have the full benefit of the 100 basis points of transition plus clearly higher sales and more units. Can you just talk about where the opportunities are in '23 on the national media side, and what, if anything, you'll be doing differently than you did in '22?

Peter, great question. We alluded to that in our prepared remarks, where we talked about the second half of 2022. We deployed this always-on media approach, which allowed us to show up in the right places at the right moments with the right message. It wasn't just on linear TV. It was streaming, digital, paid search, and social. We're excited about 2023 as we can deploy that strategy for the full year. Consolidating that local 1% into the national ad fund gives us a little bit more ammunition. The true impact of not having that is isolated to Q1, which began in the second quarter of 2022, contributing that extra 1% to the national ad fund. You'll see us lean into what we believe was a really effective strategy in 2022 and continue to drive the business, brand awareness, and go from there.

Your volumes have increased substantially over the past several years. Are there any other tests or new equipment or processes that you're testing to help increase throughput to meet this accelerated demand?

I would say we also get asked a little differently around capacity. We've got a lot of restaurants in the system now doing well north of $3 million in that same kitchen. So we don't think there's a throughput issue. We're far from it. We haven't found it yet. We don't see that as a constraint for us to continue to drive average unit volume growth and strengthen unit economics for our brand partners.

Our next question comes from Todd Brooks from The Benchmark Company.

Just following up on two parts of the commentary: one, how strong the returns are for the brand partners right now and how good the economics are; and secondly, the success with the chicken sandwich, how it's mixing and boneless getting to north of 50% of the mix over time. I guess, Michael, as you're looking at the supply chain strategy, given these two developments, do you feel the solution needs to be aggressive as what you talked about earlier in the year as far as looking at owning chicken assets or potentially partnering more deeply with producers? Or are you in a place now where if food costs can be structured in the low 30s with the returns where they are, Wingstop can navigate without going as far to solve the supply chain issues?

It's a great question, Todd. We saw an opportunity in early 2022 to take our leverage up in advance of what we saw as a rising rate environment. That positioned us well to be opportunistic if we saw a chance to vertically integrate and take more control. That was one component of a multifaceted strategy. Currently, the majority of our efforts are focused on a less capital-intensive strategy, moving more of our buy away from the spot market to create predictability and landed food costs for the restaurants. However, that doesn't mean we won't continue to seek further opportunities to improve those returns and scale growth. More to come but nothing immediate. Our cash profile from earlier highlights that the supply chain strategy doesn't change the fundamental asset-light structure of Wingstop, which is a unique model where we grow without being capital-intensive, delivering significant cash. As Alex mentioned, we've deleveraged quickly since Q1 2022 by 1.5 turns. The profile of our model continues to deliver strong shareholder returns and will provide return capital opportunities for shareholders.

Very helpful. And Alex, a quick one for you. The G&A guidance, I know there's some incremental stock compensation in there, but it still looks like a $10 million to $12 million lift year-over-year. Can you walk through the components of what's responsible for the lift in just dollar spend for G&A?

Yes, Todd, you mentioned the stock compensation; we're lapping some forfeitures from 2022, which were about $7 million. If you normalize that, our growth rate is actually slightly below what we saw in 2022. We're going to continue to invest to support our strategies and the growth we have in front of us.

Our next question comes from Jake Bartlett from Truist Securities.

Mine was on the importance of the bundling strategy in terms of driving traffic. I'm hoping for any detail on the mix of bundles in '22 versus what you had historically, maybe in '21, or I think you started launching those back in '18. So just how the bundle mix has shifted.

Yes, Jake, thank you for the question. We talked in 2022 about the success we had around the Boneless Meal Deal, which we thought was a great way to serve that indulgent occasion and present value to guests, driving business when you saw some pressure on the lower-income consumer. We saw that bundle mix at about 5%, 6%, something we're pretty excited about, a record mix level for us. More than anything, it's a way to retain indulgent occasions when the consumer is feeling pressure to cut back.

Great. I had a question about pricing of the chicken sandwich. I believe it's in the last few weeks or a couple of weeks; it's increased pretty broadly across the system. I'm wondering is that just more of a reflection of the strong demand that franchisees are seeing? Any comment there would be helpful.

Yes, Jake, we saw an opportunity to improve unit economics and flow-through for our brand partners. We initially priced the chicken sandwich at a compelling value to drive trial. Even as we raised prices on the sandwich and the combo throughout the system, we benchmarked it and found it's still competitively priced. We haven't seen anything concerning around that pricing and found an opportunity to improve economics.

Great. Just real quick. You mentioned three openings for company stores in '23. Where do you stand in terms of Manhattan? My impression was you were going to have 20 openings; I think you have 8 open so far, 3 more coming. What is the plan in Manhattan, just to remind us on that?

Yes. We remain committed to the long-term opportunity to build that market out. We're staying close, watching the traffic within and how other businesses are faring. We'll not lean in until we find the right moment.

This concludes our question-and-answer session. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.