Wingstop Inc. (NASDAQ:WING) Q3 2023 Earnings Call Transcript

Wingstop Inc. (NASDAQ:WING) Q3 2023 Earnings Call Transcript November 1, 2023

Wingstop Inc. beats earnings expectations. Reported EPS is $0.69, expectations were $0.52.

Operator: Good morning, ladies and gentlemen and thank you for standing by. Welcome to the Wingstop Inc. Fiscal Third Quarter 2023 Earnings Conference Call. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. Please note that this conference is being recorded today, Wednesday, November 1, 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.

Alex Kaleida: Thank you, and welcome to the Fiscal Third Quarter 2023 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.

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Reconciliations to comparable GAAP measures are contained in our earnings release. Lastly, for the Q&A session, we ask that you please each keep to one question and a follow-up to allow as many participants as possible to ask a question. With that, I would like to turn the call over to Michael.

Michael Skipworth: Good morning, and thank you for joining our call. It is an exciting time at Wingstop, and I’m honored to be leading such a talented team who delivered industry-leading results year after year. Our AUVs now average $1.8 million and we are on track for our 20th consecutive year of same-store sales growth. Wingstop continues to see double-digit transaction growth, a true sign of the underlying health and momentum of our brand. In fact, we exited the quarter with more momentum than when we started. This growth we are seeing is consistent across all vintages of restaurants and our new restaurants are opening even stronger. We are achieving record levels of new guest acquisition across all channels. Our core guests continue to engage with us and we are seeing an increase in our average frequency.

Our team has been laser-focused on operational excellence within the four walls of the restaurant and we are seeing that show up in our guest scores. Our supply chain strategy is working, translating into industry-leading unit economics and we are on pace for a record year for development. We recently held our annual brand partner convention. While it provided an opportunity to reflect on the exceptional results in our business, we and our brand partners are focused on the road ahead for Wingstop, which is even more exciting than our accomplishments to date. The visibility we have into 2024 and beyond give us confidence to deliver against our strategies of sustaining same-store sales growth, maintaining best-in-class returns and accelerating growth.

Wingstop is truly in a category of one and our results demonstrate that year-after-year. In the third quarter of last year, we expanded our delivery platform to add Uber Eats nationally and we also launched the Wingstop chicken sandwich or technically 12 chicken sandwiches. These two sales growth strategies brought a lot of new guests into the brand during the second half of 2022. This momentum has clearly continued into 2023. Throughout this year we have explained how these sales growth strategies that we are executing against are multiyear drivers, giving us confidence to increase AUVs well north of $2 million. We believe this was showcased in the third quarter as we lapped the launch of both Uber Eats and our Chicken Sandwich delivering 15.3% same-store sales growth.

That was almost driven entirely by transaction. To further the point, we acquired more new guests this past quarter, than we did during our incredibly successful launch of Chicken Sandwich in Q3 of 2022. We are unique in the industry, an industry that has experienced significant price inflation, contributing to transaction loss for many brands. But that is not, Wingstop. And as lower-income consumers pullback from those higher frequency QSR occasions or even has higher-income consumers trade down into dining visits, Wingstop is uniquely positioned to gain more new guests and introduce them to that indulgent, high-quality occasion that our core consumers have come to appreciate over the years. The momentum we are seeing in our business led us to increase our outlook, to approximately 16% domestic same-store sales growth for 2023.

Wingstop is at an exciting inflection point as a brand. Our strategies are working and have staying power, positioning us well on our path to grow AUVs in excess of $2 million. We are achieving record levels in brand health metrics. Our advertising fund is four times the size it was in 2018, our first year as a National Advertiser, giving us the fuel to continue acquiring new guests and drive top-of-mind consideration. While we are making great progress on building awareness, our opportunity remains significant to reach the awareness levels of other scaled National Restaurant brands. Our media strategy is proving highly effective, along with new breakthrough creative launched in September. Many consumers are experiencing our flavors for the first time, and they’re returning for more.

With a year under our belt with Chicken Sandwich, we are learning a lot about these new guests. About half of our new chicken sandwich guests, purchase only a Sandwich in their first visit, but we are seeing the majority of them in their second visit navigate the rest of our menu and purchase other proteins. Chicken Sandwich has helped create a halo effect around our brand and is positioning linkup to win more of these guest occasions. The acquisition of these new guests is translating into stronger new guest retention and increasing frequency. And there’s plenty of runway ahead of us, as we look to gain our fair share of the 2.8 billion servings of chicken sandwiches annually in the US. These new guests we are attracting tends to be Gen Z or Millennial, middle income and are less likely to have kids in their households than our existing guests.

Their average ticket and boneless mix are higher than our existing guests and they tend to engage with us through our digital ordering platform. This consumer is right in the sweet spot for our brand. But it is not just with our new chicken sandwich. We are seeing strong new guest acquisition across all channels. We continue to see growth in average weekly transactions with DoorDash. And since the launch of Uber Eats, we have sustained Uber Eats delivery transactions at a level that’s double the initial launch last year. We see the delivery channel as another opportunity to build awareness for Wingstop and we are nowhere close to a point of maturity. While these strategies are supporting our path to $2 million-plus AUVs, we are also excited about the progress we are making to continue to scale our best-in-class digital platform, which we believe will help protect the moat around our category of one position.

During the third quarter our digital sales mix achieved a new record at 67% and we remain focused on our aspirational goal to digitize every transaction. We took a step three years ago to begin investing $50 million to build our proprietary tech platform. This investment serves two purposes: protect our digital business that has quickly scaled to $2 billion in system-wide sales and unlock new capabilities that tap into our digital database of more than 35 million users to enable further AUV growth. Our proprietary tech stack will deploy an increased level of hyper-personalization that we believe will improve conversion retention rates and ultimately drive frequency. We built a platform with the most modern technology within our tech stack. I’m thrilled to share that we are now in a pilot phase testing our platform in restaurants which positions us for our anticipated launch in Q2 of 2024.

We are just scratching the surface on personalization and we see this as a key part of our strategy for sustaining same-store sales growth. The strength of our AUVs and unit economics are translating into accelerated growth in our development pipeline. The visibility we have into our construction pipeline at this time positions us to deliver on our 2023 guidance of 240 to 250 net new units which would be a record year for Wingstop. We expect to exit 2023 at our highest level of development agreements ever. Our supply chain strategy is proving to be highly effective and we have clear line of sight into our food costs for 2024 that lines up with our target of mid-30% range delivering predictability for our brand partners. Our corporate restaurants are a great example of the impact this strategy is having with margins in the mid-20% range for 2023.

At its system AUV of $1.8 million food comps in the mid-30% range and based on an initial investment in the mid-$400,000 range, brand partners are seeing an industry-leading payback of less than two years. We’ve set a target for over 7,000 global restaurants, more than three times our current footprint. And the big part of our growth story is our international business. Not dissimilar from the US, our international markets are experiencing double-digit comps driven by transaction growth. They’re executing a similar playbook to the US. In our UK market, our first restaurant that opened five years ago is hitting record sales volume. New restaurants are opening stronger including in new markets such as Canada and Korea that are building an awareness.

We expect our newly signed markets Netherlands and Puerto Rico to open within the next two quarters and our business development pipeline of potential new brand partners is strong. I continue to believe our international business is supercharged for growth. With this incredible growth in our business comes responsibility. A core tenet of our ESG strategy is giving back to the communities in which we serve through Wingstop Charities. I’m proud of what the team has accomplished this past year. Wingstop Charities awarded over $1.3 million in grant so far in 2023, an increase of over — more than 400% from the prior year. In the third quarter, Wingstop Charities was able to support a tremendous cause, where 100% of contributions made through the roundup program in the months of August and September going to the No Kid Hungry organization.

No Kid Hungry’s mission is to end child hunger and to help ensure every single child in America has the food they need to grow up healthy and strong. The contributions provided to No Kid Hungry will provide three million meals to our youth. This is just one of the many ways Wingstop Charities that’s helping support the communities we serve. As I mentioned at the start of the call, I couldn’t be more excited about the momentum we have in our brand right now. Wingstop is in a category of one and our strategies are positioning us well for our next phase of growth. Our highly franchised asset-light model generates strong free cash flow and allows us to provide what we believe are industry-leading shareholder returns. Since our IPO, we have delivered a total shareholder return in excess of 950%.

This past quarter, we announced our inaugural $250 million share repurchase program which we believe further demonstrates our commitment to enhancing shareholder returns. We have great momentum heading into 2024 with a brand that’s on the offense. The underlying health of our brand is the strongest it’s been with same-store sales being fueled by transaction growth and continued strengthening in our best-in-class unit economics. I want to thank our team members, brand partners and supplier partners for their dedication and hard work to deliver these industry-leading results. With that, I’d like to turn the call over to Alex.

Alex Kaleida: Thank you, Michael, and good morning. The third quarter is a clear reflection of the multiyear benefits our strategies are designed to achieve. Total revenue increased to $117.1 million from $92.7 million in the prior year fiscal third quarter. Royalty revenues, franchise fees and other revenue increased by $12.8 million in Q3, primarily due to $3.8 million from franchise restaurant openings and a 15.3% increase in domestic same-store sales, which was driven almost entirely by transaction growth. As a result of the strength in our same-store sales growth, we are increasing our guidance from 10% to 12% to approximately 16% in 2023. Company-owned restaurant sales totaled $24 million in Q3, an increase of $3.8 million, primarily due to a 6% increase in company-owned same-store sales, driven almost entirely by transaction growth in four net new restaurants versus the prior year comparable period.

Company-owned restaurant margins were 26.4% for the quarter showcasing the strength of our unit economic model. Cost of sales as a percentage of company-owned restaurant sales improved by 440 basis points compared to the prior year, mainly driven by a reduction in food, beverage and packaging costs, which included a 13.5% decrease in the cost of bone-in wings. We are on track to deliver a full year cost of sales of approximately 75% consistent with the prior outlook we shared earlier this year. And we continue to make progress executing our supply chain strategy to mitigate volatility in our food costs. At our recent brand partner convention, we generated quite a bit of excitement with the visibility we shared into our 2024 food costs, which for company-owned restaurants would translate to approximately 35% food cost.

Our strategy is supported by the progress we are making on increasing our boneless mix now at a record level of 44% for the system. This compares to a low 30% boneless mix just a few years ago. We believe a boneless mix in excess of 50% could yield a structural change in our food cost target to a low 30% level further enhancing our best-in-class returns for our brand partners, which we believe will continue to fuel record development for new restaurants. In the third quarter, SG&A totaled $23 million, an increase of $6.4 million versus the prior year comparable period. The current quarter included an increase in performance-based stock and short-term incentive compensation as a result of our performance as well as investments in headcount and strategic projects to support the long-term growth of the business.

As we scale, we anticipate seeing greater leverage in our SG&A investments and are continuing to target a long-term SG&A as a percentage of system-wide sales in the 2% to 2.5% range. Adjusted EBITDA a non-GAAP measure was $38.5 million during the quarter, an increase of 36.7% versus the prior year, which is building on top of adjusted EBITDA growth of 33% in the prior year period. Adjusting for non-recurring items, we delivered adjusted earnings per diluted share a non-GAAP measure of $0.69, a 53% increase versus the prior year. In August, we announced that our Board of Directors authorized our inaugural $250 million share repurchase program. Since our IPO, total shareholder returns have exceeded 950% demonstrating our commitment to returning capital to shareholders.

To further demonstrate, this commitment we entered into an accelerated share repurchase agreement to repurchase $125 million of Wingstop common stock. Under this ASR agreement as of September 30, 2023, the company retired 567,000 shares of its common stock, representing an estimated 75% of the total shares expected to be delivered. The delivery of any remaining shares will occur at the final settlement of the transaction, which is scheduled in the fourth quarter. The total remaining authorized amount for share repurchases is approximately $125 million at the end of Q3. Another component of our return of capital strategy is our regular quarterly dividend, which is targeted at approximately 40% of free cash flow. On October 31, 2023, our Board of Directors approved a quarterly dividend of $0.22 per share of common stock resulting in a total dividend of $6.5 million.

This dividend will be paid on December 8, 2023 to stockholders of record as of November 17, 2023. Our regular dividend program combined with our new share repurchase program underscores the strength of our highly franchised asset-light model in our ability to enhance shareholder returns, while preserving financial flexibility on our balance sheet to support our strategic growth initiatives. Moving to our outlook for 2023. Based on the visibility we have in our construction pipeline, we are reiterating our development outlook of 240 to 250 net new units, which represents unit growth rate of 12.5% at the midpoint of our range. SG&A guidance is estimated to be between $94.5 million and $95.5 million from prior guidance of $91 million to $93 million, including $5.2 million in nonrecurring consulting projects to support our strategic initiatives, an increase in our short-term incentive accrual based on the performance of our business and an estimated $14 million to $15 million of stock-based compensation expense, which is unchanged from prior quarter guidance.

I want to echo Michael’s sentiment earlier. It is truly an exciting time to be at Wingstop. We are building brand awareness, scaling the brand globally and increasing frequency among our guests, against what could be considered a challenging macro backdrop, showcasing Wingstop’s category of one position. Our strategies have staying power and give us the confidence to continue to deliver industry-leading results. Thank you to all our team members, brand partners and supplier partners for their tireless efforts to serve the world our flavor. With that, I’d like to now turn to Q&A. Operator, please open the line for questions.

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Q&A Session

Operator: We will now begin the question-and-answer session. [Operator Instructions] The first question today comes from Jeff Bernstein with Barclays. Please go ahead.

Pratik Patel: Hi, good morning. This is Pratik on for Jeff. I guess I can start off with a question on the comp. You’ve had another very strong quarter despite seemingly a growing number of consumer headwinds with higher interest rates, rent costs, student loan payments and pricing is obviously being lapped as well. Your fourth quarter guidance implies another quarter of double-digit growth and you seem to be unique among your peers driving your results mostly with transaction growth. Just, what do you attribute to all the strength? And how do you kind of sustain such momentum despite the seemingly growing headwinds? Thanks. And I have a follow-up.

Michael Skipworth: Good morning and thank you for the question. I think it’s a handful of things that I would call out. I mean there’s no question, as we look at industry data and we can clearly see that there’s pressure on the consumer. But I think what you’re really seeing in our business and what is making Wingstop unique is just the effectiveness of our growth strategies. We’re acquiring more new guests than ever. Obviously, we’re winning a lot of new occasions with chicken sandwich, as well as delivery. But as we said in our prepared remarks, we’re seeing more of those guests come back and navigate the rest of our menu, winning more of their occasions, which is yielding an uptick in frequency for our brand which we’re really excited about.

I think we’ve talked about over the years and it’s really showcased in the fact that we’ve delivered 19 consecutive years of same-store sales growth and we’re on pace for our 20th this year is that when there is pressure on the consumer, particularly that lower-income consumer, they do have a tendency to pull back on more high-frequency occasions. And where Wingstop plays well and where we win is we see those guests almost save up and want to treat themselves or indulge, and that’s where Wingstop shows up in a really good way. And so we’ve been able to over the years retain those indulgent quality occasions. And I think what’s really interesting in our business and what we saw in this – in Q3 was we actually saw a slight uptick in frequency with that low-income consumer, which we’re pretty excited about.

And then at the same time, we’re seeing that higher-income consumer potentially pull back on dining out occasions, dining at home more. And we’re winning those occasions as well. And so I think all of that’s supported by an effective advertising strategy, one that we believe is really working. We have an elevated amount of ad fund investment to deploy, growing consistent with our system sales growth of roughly 30%. That’s allowing us to show up in more premium placements like live sports. We’ve shown up in the NFL in a big way. We’re showing up in NBA right now. And that’s coupled with our new breakthrough creative, which we’re really excited about. The – we’re seeing some of the highest levels of purchase intent associated with that new creative.

And one of the top things that consumers share with us when they see that new creative is it makes them hungry. And so we think that food forward showing the enjoyment of our food on national TV is really all laddering up to help us continue to drive our business with transaction growth. And as we mentioned, we saw that strengthen as we progress through the quarter and that gives us a lot of confidence in how we’ll finish 2023, which will be another record year for Wingstop.

Pratik Patel: That’s very helpful. I appreciate that. And shifting to unit growth, your demand has obviously been consistent all along. And I know you’re not going to give any guidance today, but just any I guess qualitative comments on the outlook for 2024? Are you seeing any kinds of maybe stress amongst potential developers in terms of just slowing macro higher borrowing costs. Just any color on what you’re kind of seeing right now for 2024.

Michael Skipworth: Yes, absolutely. And I think we hit on this in the prepared remarks, but we’re pretty excited about the momentum we have in development. This year is playing out exactly how we anticipated or thought it would and we’re right on track and excited about the sights that are in our pipeline and where they are in the construction cycle, which supported our reiteration of our outlook for this year of 240 to 250 net new restaurants, which will be a record year for Wingstop. And we mentioned that our development pipeline, any metric we look at development agreements, number of approved sites as we go into 2024, it’s on pace for a record levels. And that shows to us obviously, we have a lot of demand. But I think that demand is supported by the strength of our unit economics.

We still support a pretty low initial investment in that mid-$400,000 range. And when our brand partners are seeing paybacks on that initial investment of less than two years, we don’t see a lot of headwinds from some of these macro elements that you called out. And a lot of our brand partners in our system quite frankly are funding growth with existing cash flow. So there’s not a high degree of leverage in our system that this current interest rate environment might impact. And so we’re encouraged by how our pipeline is shaping up as we close out 2023.

Pratik Patel: It’s very helpful. I appreciate it. Thank you.

Operator: The next question is from David Tarantino with Baird. Please go ahead.

David Tarantino: Hi. Good morning. Congratulations on such strong results. Michael, I wanted to take maybe a different tack on the unit growth outlook question. I wanted to ask, what — the strength in the business you’ve seen over the past few years has really driven unit economics to levels that were hard to envision the last time you gave the long-term growth outlook. So, I was just wondering if you’re thinking about the US unit growth opportunity any differently than what you laid out in the past given the strength you’re seeing, especially given the strength I guess, in attracting new customers into the brand. So any thoughts on what you think the long-term opportunity might be based on what you’ve seen this year or in recent years?

Michael Skipworth: Good morning, David. Thanks for the question. Obviously, we remain extremely confident in the opportunity we see for our brand in the US. We’ve previously decided that that’s over 4,000 restaurants that we see the opportunity to expand Wingstop here in the US. And obviously, as you mentioned with the strengthening of our unit economics, there’s a significant amount of demand for that growth. But I think as we look around at the total opportunity in front of us, obviously, as we continue to build out some of our original or more mature markets like the Dallas-Fort Worth market or even Los Angeles, we continue to see really strong pace of development in those markets and we see those restaurants opening up stronger, those paybacks continuing to improve.

And so we do see that as an opportunity for us to probably lean-in in that plus if you will in our 4000 opportunity. But, as we sit here today, we remain extremely confident in being able to deliver on that long-term target of over 4,000 in the US. And then obviously, the business as we mentioned outside of the US is strengthening quite well. The markets that we’re in are on track and we’re really encouraged by how the brand is expanding outside of the US, which when you combine that with what we have here in the US combines for an opportunity for us to over triple the size of the brand as we sit here today, which is pretty exciting.