Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Wingstop Incorporated Fiscal Third Quarter 2017 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded today, Thursday, November 2, 2017. On the call, we have Charlie Morrison, Chairman and Chief Executive Officer; and Michael Skipworth, Chief Financial Officer. I would now like to turn the conference over to Michael. Please go ahead.

Thank you, and welcome. By now everyone should have access to our fiscal third quarter 2017 earnings release. The copy is posted under the Investor Relations tab at wingstop.com. As you know, our discussion today will include forward-looking statements. These forward-looking statements are not guarantees of future performance, and therefore, you should not place undue reliance on them. These statements are also subject to numerous risks and uncertainties that could cause our actual result to differ materially from what we expect. Our recent SEC filings contain a detailed discussion of the risks that could affect our future operating results and financial condition. As usual, we will discuss certain non-GAAP financial measures that we believe are useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. Therefore, reconciliations to comparable GAAP measures are contained in our earnings release. With that, I would like to turn the call over to Charlie.

Thank you, Michael. And good afternoon, everyone. We appreciate your interest in Wingstop and for joining us today on our call to discuss our third quarter 2017 results. We continued to execute against our strategic initiatives as we delivered another strong quarter for our global brand, posting solid results for our shareholders against a challenging backdrop. During the quarter, we witnessed the devastating effects of natural disasters on our business, including Hurricanes Harvey and Irma and the earthquake near Mexico City. Although so much property was damaged in many of our franchisees, team members and their families were displaced, thankfully, none of them were injured in these strategies. During the aftermath of the storms, our Wingstop family came together to support one another and our communities. A little over a year ago, we created the Wingstop Foundation, a charitable nonprofit, to support our team members in difficult times including strategies like these. And the foundation also assists underserved youth in our communities by providing access to higher education through individual scholarships, grants and partnerships with community and business organizations. I’m pleased that the Wingstop Foundation raised over $90,000 from our franchisees and our corporate team to support the hurricane relief. We also took the Wingstop Food Truck to affected areas and served up some delicious, hot, fresh wings to first responders and families displaced by these strategies at no cost to them. The smiles and appreciation were overwhelming. It’s no coincidence that our fourth quarter advertising campaign centers on the theme that you can’t stop when it comes to your crave for Wingstop. And we think that the way that our franchisees and our team members stepped up in the face of these natural disasters is further evidence that you can’t stop Wingstop. Despite the challenges, the underlying momentum in…

Thank you, Charlie. As previously mentioned, we continued to see strong momentum in our business, which resulted in a 19.3% increase in total revenue to $26 million in the third quarter. Royalties and franchise fees increased 19.7% to $16.4 million, driven by 136 net new restaurants since last year, representing a unit growth rate of 14.6% year-over-year. The increase in royalties and franchise fees was also driven by the 4.1% increase in domestic same-store sales, as Charlie referenced earlier. Included in our 4.1% same-store sales increase was approximately a 60 basis point benefit from the Mayweather-McGregor fight. But unfortunately, this benefit was largely offset by the impact of the hurricanes hitting Texas and Florida. We believe the 4.1% same-store sales figure is a good indicator of the underlying momentum in the business. Company-owned restaurant revenue grew $1.5 million to $9.7 million due to the same-store sales growth of 5.5% and approximately $800,000 in sales from the 2 Dallas-area restaurants that we acquired earlier in July. Cost of sales increased as a percentage of company-owned restaurant sales by 620 basis points to 80.9% versus the same period in prior year. The increase was driven primarily by a 41% increase in commodity rates for bone-in chicken wings relative to last year. For the fourth quarter, bone-in chicken wing prices remain elevated to the prior year. And if they remain at these current elevated levels for the balance of the year, we are expecting inflation of approximately 20% in bone-in wings for fiscal year 2017. Selling, general and administrative expenses in the quarter decreased 8.4% to $8.1 million from $8.9 million in the prior year. Recall that in the prior year period we had $1.4 million of transaction cost related to the refinancing of our credit agreement and the subsequent dividend payout we…

Thank you [Operator Instructions] Our first question is from David Tarantino with Robert W. Baird. Please proceed with your question.

Hi, good afternoon. My question really relates to the sales trends during the quarter. Could you maybe talk about how you progressed through the quarter when you factor out the hurricanes? Did you see a building momentum as you went through or was it more steady? And then I have a follow-up related to that.

Okay. Hi, David, it’s Charlie. To answer the question, yes, certainly the hurricane and the fight happened almost at the exact same time, and the impact of the two was basically a wash. So the fight happened the day before the hurricane arrived, Hurricane Harvey. And then the next day, then the Greater Houston area and the markets around that were affected by it. So it was about a wash. Separating that, if you look just coming in from Q2 and Q1 into Q3, we certainly did see momentum continuing to build, a lot of which driven, again, by our approach to our national advertising campaign that continues to drive increased awareness of the brand.

And I guess, Charlie, specifically, there’s been a lot of chatter about NFL ratings and sort of lower viewership. Does that have a big influence on your business or are you seeing any sort of impact from that when you look at your NFL days?

Yes. We do not. We – if you look at the comp trends, we have not seen any sort of meaningful impact from the NFL other than the timing of a particular game year-over-year that may swing a week here or there. But that’s common for us, simply because a team played on Monday night instead of Sunday or Sunday night instead of Sunday afternoon. But otherwise, the impact of the ratings, which I’m – which you’re referencing, has not shown to have an impact on our business.

Great. And then last question, if I may, on the unit growth outlook for this year pointing to the lower end of the range. We’ve heard the same issue at a lot of different companies of construction and development delays. Do have any sort of visibility on how long that might last? I guess, is there any risk as you move into 2018 that we’re going to see a slower activity in those markets?

I don’t expect that there will be a slower activity in those markets that’s not going to be reflected in the carryover that we referenced on the call. Certainly, construction is slow in these areas, as I know you know, but the pipeline is still strong. And so as these restaurants come about, then they’ll – they may push into 2018. But we don’t see this having a longer-term residual effect on our development, especially in those markets.

Great, thank you very much.

You’re welcome.

Our next question is from Jeffrey Bernstein with Barclays. Please proceed with your question.

Hey, guys. This is actually Jeff Priester on for Jeff Bernstein. On delivery, with that 10% comp lift, is there any reason to think that, that can’t transition to Chicago and the other smaller mature market? And then I have one follow-up.

Sure. Certainly, that would be a goal of ours, is to replicate the performance or beat it, quite frankly, from what we’ve seen in Las Vegas. We aren’t giving any specific guidance as to what we expect of that market. It just started, as we noted on the call. But we do believe that the transaction growth that we saw certainly was highly incremental. Especially when you consider that our business is 75% carryout, the incrementality associated with delivery was very encouraging for us. So we’re going to watch that and monitor that very carefully in both of the new markets that we’re going into.

Great. And then on the split menu, is there any kind of metric or numbers you can give us to compare those that have the split menu versus those that don’t, maybe on mix shift or comp difference something?

Yes. The real objective of the split menu is to take pressure off the bone-in wing by shifting mix to the boneless wings. And I’d say, the best metric to wrap your head around would be the expected improvement in food cost, which we estimate to be between 100 and 200 basis points for restaurants that implement the menu that may have some regional strength in markets where our boneless wing sales are lower. So we have some markets where it’s quite high and does well, but in the markets where we really want to strengthen the boneless wing sales, that could have an even more meaningful impact if implemented correctly.

Great. Thanks.

You bet.

Our next question is from Jake Bartlett with SunTrust Robinson Humphrey. Please proceed with your question.

Great. Thanks for taking the question. Following up on that, with the split menu pricing, bone-in versus boneless, my math suggests that it would be check -accretive, especially in the markets outside of Dallas. Can you comment on that? I mean, is this boosting check, in your view, as franchisees adopt it?

It really depends upon the market, Jake. The markets that have a high boneless mix today it likely will be more accretive than markets that have a lower boneless mix. And that is if the franchisees or the folks in that market collectively decide to have a tighter gap in pricing between the bone-in wing and the boneless wing or a broader gap. So the broader the gap, the more influence we try to push the boneless wings. But if we’re already at a high mix, we don’t want to necessarily discount existing occasions too much. So potentially, but I would call it negligible. I wouldn’t – we’re not factoring in any real check lift growth associated with it, as I mentioned on the previous question. We’re really focusing on the food cost improvement that we can see from doing it.

Okay. And the 100 to 200 basis points that you talked about in food cost improvement, did you experience that in the company or in the stores in Las Vegas that – where you implemented it?

Yes, that’s the basis for that. That is correct.

Okay. And then when we think about some of the shifts around the sports in the second quarter, the shorter NBA Finals, I’m just thinking about the World Series in Houston or with Houston involved in seven games, would that have a material impact in your sales?

No, not really. Usually, baseball is not a sport that is one that drives a lot of wing volume. We – as we’ve mentioned before, the NFL, the NBA, boxing, fighting in general, are bigger drivers. That said, we’re very thrilled that we had two prominent markets for Wingstop, Los Angeles and Houston, in the World Series and a very dramatic end to the World Series. Any big event like that is always something that we see some benefit from. So it’s helpful, but it doesn’t compare to a big fight or a Super Bowl-type event.

Okay. And then lastly, you mentioned the – an impact of the hurricanes. I think you were kind of more referring to Harvey kind of happening right after the fight. But with Irma, is that included in that math of 60 basis points being offset by a 60 basis points drag from the hurricanes? And then related to hurricanes, how have you seen trends following the hurricanes? It seems some – we’ve gotten kind of mixed messages with some brands talking about a boost in sales but some talking about a drag. So like how have sales kind of trended in those markets post hurricane?

Yes. So the answer to the first part of the question is, yes, both the South Florida and Houston impacts are contemplated in our wash effect of the weather-related versus fight-related same-store sales impact. And again, we think that was a wash between the two. On the backside of the storm then, we do see some improvement and expected to see some improvement in sales. I think that’s, at least in my experience, always been pretty consistent post hurricane that restaurants do well for a little while, simply because people are not in their homes cooking food. They’re going out more often, so you do pick up a little benefit that helps offset the negativity associated with the closures that we saw.

Great, thank you very much.

You’re welcome.

Our next question is from Matthew DiFrisco with Guggenheim Securities. Please proceed with your question.

Thank you. My question’s a couple of follow-ups there. With respect to delivery, do you think there’s something potentially longer term that if it is successful and remains just incremental and boosts the sales of your existing stores, that perhaps franchisees might revisit their longer-term plans of development in a market, i.e., you wouldn’t need maybe 12 stores to address a market, you might need 10 stores if you’re a franchisee? I mean that, obviously, you’d have a return-on-invested-capital improvement story, but is that somewhat of a thing to start to consider if you start to see some pretty good incrementality from the delivery business?

Yes. It’s an interesting question. I’d say the answer quickly is no. The reason I can cite is that in the delivery business a lot of the success in delivering food is predicated on having a relatively short drive time from the restaurant to the customer. So it would actually potentially go the other direction, that is restaurants increase in volumes, and that volume becomes a capacity limitation that they may fill in additional restaurants potentially. So if anything, I’d see it go the opposite way that you described. But that’s something we’ve got to learn. But what we want is a delivery drive time that’s within 10 to 15 minutes of the restaurant. And so that’s also consistent, coincidentally, I guess, with how we establish trade areas for restaurants anyway. So again, I would only see a fill-in being more likely than a reduction in restaurants.

Makes sense. I mean, certainly, Domino’s with their success of comps they’ve seen actually rejuvenated growth also. So it would make sense, and they’re much more mature than you. I guess then, also looking at – on the flip side of that, if you look at the margin benefit that you talked about, 100 to 200 basis points improvement at the store level, would this also then maybe even – could we see franchisee development? Does this strengthen that as far as the returns that you’re seeing at the stores and the improvement of the business model? Is it being viewed as sustainable, the 100 to 200 basis point improvement?

Yes, we’re working on that and other initiatives to try and help our franchisees chip away at what we saw, which was, if you look at our company-owned restaurants, about a 680 basis point swing year-over-year in food cost, which is extraordinary in restaurants. But again, with the Wingstop model and the very efficient model we have built, we’re able to weather that storm well. As wing prices are coming down, which we’ve seen a very nice drop in wing prices today, as of today, they were at $1.88 a pound from a high of $2.16 a pound. We think that both the efforts that we’re putting in and that we talked with our franchisees about at our recent convention plus the split menu plus the reduction in prices that we’re seeing, all are good signs towards continuing our great trend that we’ve had in development into the future.

Excellent. And then just last question. Did you say that those stores – or how should we think about those stores shifting into 2018? Would they be incremental to what you had budgeted for 2018 or does everything sort of move a quarter forward?

Yes, it’s hard to say at this point. I’m not suggesting that they would necessarily be incremental, although our pipeline exiting the year will be strong. And the sentiment exiting our convention from our franchisees was positive. And especially of the things I noted as it relates to the P&L, we would expect momentum to carry into next year. But it’s a little early to tell how that’s going to manifest itself. So at this point, I would say, look, they’re shifting into the first quarter. We’ll – when we come and talk about Q4, then we’ll provide some specific guidance on that.

Thanks for the time.

You’re welcome.

The next question is from John Glass with Morgan Stanley. Please proceed with your question.

Hi, guys. Yes, this is Brian Harbour on for John. Just – I guess, another question relating to the development plan. Anything you can say about kind of commitments for 2018 or any measures or ways that we could think about that at this point?

We usually disclose our pipeline at the year-end update, and we’re going to continue to do that. But again, as we entered this year, we had a pipeline of well over 500 restaurants in development for the U.S., not to mention the international pipeline, which has grown to roughly 600 restaurants now, and the recent deals that we’ve put together. The combined force of both of those, even net of the restaurants we’ve built this year, we always add in new restaurants and continue to sell new deals into the pipeline. So we’ve continued to maintain a very consistent pace over the past few years of replenishing the pipeline, building international, which can then become another growth vehicle for us. So although we’re not giving any guidance to 2018, I think we’ve been very consistent in our approach to continuing this best-in-class type of growth.

Okay, great. Second question, I think, just regarding the advertising strategy. Do you see that kind of continuing into 2018 as it was this year or any changes you would contemplate to that, whether it’s to frequency or waiting or the messaging there?

Yes, I mean, we’re constantly working the messaging. And I’ve mentioned – as I mentioned in the call a little bit ago, we have a new campaign out that centers around the concept of you can’t stop Wingstop. And we really believe that, that’s a bold way of demonstrating to people the quality of our food, the crave-ability of the product. It’s hard to let go of the opportunity to drop into a Wingstop and continue to enjoy those wonderful wings. What we have seen with the advertising that we’ve done so far this year is about a 5 percentage point improvement in aided brand awareness through the third quarter from where we were when we started back in February, and that’s a very meaningful increase. So we know that the media is doing its work. As we look forward into 2018 and even 2019, we will continue to see the – an increase in our advertising fund, just through the growth that we experienced in our system-wide sales. That will fuel additional investments in advertising to continue to increase the quality of the messaging and also the quality of the placement of that messaging in the right places where people can see it and then expanding it beyond our targeted consumer segments that we want but into a more broad audience. And then as we look even further out, when we negotiated our advertising approach, we have the opportunity to continue to increase the amount of money that we spend, should our franchisees feel good about that, into 2019 and beyond. So we still have levers to pull to continue to increase our awareness, but we’re very pleased coming out of Q3 with that 5 percentage point increase and awareness that we’ve seen so far.

Great, thanks very much.

Our next question is from Will Slabaugh with Stephens Incorporated. Please proceed with your question.

Yes, thanks for taking my question guys. This is actually Hugh on for Will. My first one just being, if we look a little bit further out maybe in a year or so and we see that wing prices are beginning to normalize, and you mentioned earlier they already are coming down somewhat, can we still expect the split menu to be a permanent fixture? And then on that same note, how much flexibility does that menu give you to adjust the prices in case we do see some more normalization in wing prices?

Yes, good question. So the answer is, yes, the split menu will be there for the future. We don’t expect to change that. It’s being incorporated into everything we do going forward, including new restaurants. The – what it does for us, as I think you’ve described quite well, it gives us a lot of flexibility. We don’t have – we can still create great value through our boneless wings, which are a lower food cost item, and adjust carefully the prices of our bone-in wings to the market. It doesn’t mean we’d necessarily bring them down, but we don’t have to feel so much pressure to take the entire menu up when we have pricing on wings like this. The good news on the wing market is that we’ve seen it come down almost $0.30 since the early part of the quarter. So it’s been a very quick drop. And I think that’s indicative of menu changes that are happening, people pulling them off the menus, perhaps, and also the ability for folks to put away their frozen stock for seasonal peak. So I think this trend is very encouraging at least right now to all of us.

Got it. That’s helpful. And then just one more. The business is obviously showing strong momentum. What do you all see – what will it take for this momentum to continue through 2018, just given the competitive environment continues?

Well, I think the thing we have going for us, which is probably the biggest driver, is not only our national advertising but the meaningful increase in awareness that we’re seeing in markets that are outside of our core markets. We’ve noted in the past that we have had some markets that have had efficiency because they are in advertising co-ops and they were already on TV and had decent media budgets. But when we go to these new markets, these emerging markets for Wingstop, and layer on a TV weight as strong as we’ve been able to put against it, that is having a nice impact on the growth of the business. The second piece I would add to that is we continue to see increases in our digital sales mix for the brand. Those digital transactions carry about a $5 higher average check, and that check average increase is creeping up over time. Historically, we’ve called it out as a $4 check increase. So it’s – we’re starting to see continued improvement there. We don’t have to discount to get those new transactions on board. And then if you look at delivery in the future, as we’ve talked about with the testing, I mean, any brand that has three strong levers like that to be able to pull to grow their business, it would suggest that we have definite opportunity for long-term sustainable growth.

Sure. Thanks for taking my questions.

Pleasure.

Our next question is from Jeff Farmer with Wells Fargo. Please proceed with your question.

Thank you. On the delivery test, what do you guys need to see in terms of your franchisees either executing on these delivery orders or, I guess, you’d be monitoring how your delivery partners are also executing on those orders. But what do you need to see before you pursue a wider rollout?

Well, we did see what we liked in Vegas with our partnership and the test with DoorDash, and that’s why we chose them as our sole partner for the Chicago test that we announced today. They do a fantastic job at delivering a quality occasion and on a timely basis. So the simple message that we’ve trained in to the organization as we’ve prepared for this launch is done right on time. Those are the – that’s the rally cry that makes sure that we get the food to the driver; they get the food from the restaurant to the customer in the time frame that they expect. And anyone who’s in pizza delivery knows that, that’s the name of the game and crucial. We had great success with them, less so with other partners at the time. And so our choice of DoorDash is one that we’ve really looked hard at because of their experience and their approach and their model in the business. So going forward, that’s what we’re going to look for in Chicago. Once that test proves that they can deliver consistent with what we’ve experienced so far, then it does put us in a position to roll it out nationally.

All right, and just a couple of additional quick questions on delivery. So I think you’ve touched on this in the past, but as it relates to the POS system, which I know is fairly new across the system, is that plug-and-play with, I guess, in this case, DoorDash? Will it work sort of out of the gate with them?

Yes. The beauty of the model that we have is that you can utilize the existing Wingstop app or web technology to place your order for delivery. It goes seamlessly into our point-of-sale system at the restaurant and also seamlessly to – through the DoorDash interface. In that manner then, all of the data gets pushed through. There’s no secondary devices on the counter in the restaurant, and it’s a fully integrated solution. So another good reason why we like the choice there.

Okay. And you basically just touched on it, so I heard you loud and clear on the ability to order delivery on the app, but I missed are you able to actually pay for your order on the app as well?

Absolutely. Yes. It’s through the Wingstop – it’s both DoorDash’s marketplace but also, primarily, we expect it to come through the Wingstop app, which you can pay on today and also in the future with your delivery choice.

Okay, thank you.

Our next question comes from Karen Holthouse with Goldman Sachs. Please proceed with your question.

Hi, good afternoon. This is actually Greg Lum on for Karen today. A couple of quick questions. The first is just a modeling question. I think you guys mentioned the expense for the convention is going to be a wash on the revenue line. I was just wondering exactly what line that’s going to hit. Is that on the company or the franchise? And does that have an impact on the comps?

It’ll be in the franchise and royalty fees line, and it does not have an impact on the comp.

Okay. And then a quick follow-up on delivery. Appreciate all the color that you guys provided. I was wondering, in the two specific markets that you guys have it launched so far, have you done any specific advertising focus on delivery or has it been mostly organic so far?

No – yes, a good question. It has been supported with some advertising, no TV. Radio and digital marketing have been the two drivers of the awareness generation in those markets.

Thank you.

This concludes today’s conference. You may disconnect your lines at this time, and we thank you for your participation.