Wingstop Inc. (WING) Q1 2018 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Wingstop Incorporated Fiscal First Quarter 2018 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. Please note that this conference is being recorded today, Thursday, May 3, 2018. 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 first quarter 2018 earnings release. A copy is posted under the Investor Relations tab on our website at wingstop.com. 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 actual results 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. We will also discuss certain non-GAAP financial measures that we believe can be 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. Reconciliations to comparable GAAP measures are contained in our earnings release. With that, I will turn the call over to Charlie.

Thank you, Michael, and good afternoon, everyone. We appreciate your interest in Wingstop and for joining us on today’s call. I’m very pleased with our start to 2018. We delivered a strong first quarter with healthy top line growth driven by same-store sales growth and solid unit expansion. This top line momentum, along with strong flow-through on the P&L, resulted in our highest single quarter adjusted EBITDA on record. Total system-wide sales increased 20.4% in the quarter. This growth was driven by 9.5% domestic same-store sales growth and a 12% increase in the number of restaurants since the first quarter of 2017. A strong domestic same-store sales growth is the result of transaction growth, but does contain a little more ticket growth than we would normally prefer. Some of that is driven by pricing actions our franchisees took late in 2017 as a result of record-high wing prices last year. We are working to strike the right balance of traffic and check for the balance of 2018. Although less than expected, we are pleased with the 12% unit growth given the significant decline in wing prices from 2017. We added 24 net new restaurants to the Wingstop system during Q1, including 6 international locations. We are pleased with the recent activity we have seen in new development agreement sales as we accelerate momentum from a strong pipeline of commitments from our franchisees. As we discussed on our last call, we anticipate the development for 2018 to be a little more back-end loaded this year, yielding results consistent with prior years. The 12% growth in total revenue translated to increases in adjusted EBITDA and adjusted EPS of 31% and 19%, respectively, which was the result of nice flow-through and strong margins in our company-owned restaurants. During Q1, we continue to see favorable wing prices. And, this combined with leverage on labor and operating expenses, resulted in a 1,000 basis point improvement to our company-owned restaurant margins, another example of the strength of the Wingstop model. Our franchisees experienced similar margin improvements during the quarter, furthering our confidence in the momentum of our development pipeline. While there are still a lot left to the year, the strong start in Q1 provides us with confidence that we can achieve all of our key targets for 2018. We complemented these strong results in Q1 by returning capital to our shareholders in the form of our third quarterly dividend and second special dividend since our 2015 IPO. In total, we have returned $180 million to shareholders in our first 3 years as a public company. The strength of the Wingstop business model and the passion that our franchise partners and team members have for this category of one brand continues to deliver strong results. Our ability to deliver these strong results over the long term will further differentiate Wingstop from other concepts. As we have said before, delivering best-in-class performance is predicated on 4 key long-term growth strategies: the initiation of national advertising, furthering our digital expansion, implementing delivery and continued international development. I’ll briefly comment on each of these. In Q1, we began lapping the launch of national advertising last year, which began just after the 2017 Super Bowl. We designed our national advertising program to be one that provides a multiyear benefit. We did not enter the market with a big splash, but rather designed a program that provides a steady cadence of presence on television. Our goal is to continue building brand awareness through television -- a television presence that is combined with digital and local marketing efforts. In 2018, we will benefit from having more advertising dollars to spend due to Wingstop’s system expansion. These incremental dollars will help us narrow the gap with aided and unaided brand awareness compared to other national brands and in doing so, provide a multiyear benefit to top line sales growth. As we look forward next year, we have the opportunity to increase the contribution rate our franchisees make to the national ad fund from 3% to 4% of sales. We are working with our franchise partners to evaluate the best strategy behind this additional 1% that would further drive brand awareness leading to continued positive same-store sales growth. Revenue growth from our digital channel expansion is the next critical element of our long-term strategy. In Q1, digital sales comprised 23.9% of total sales, which was up from 22.7% in Q4 of last year and represents a 390 basis point improvement from the prior year. Roughly 74% of our domestic restaurants are generating 20% or more of their sales digitally, and this has grown steadily from 49% in Q1 last year to 67% in Q4 last year. We will continue to drive digital sales organically through continued expansion of access channels to digital similar to the innovations we have already launched, like Facebook and Twitter messaging, SMS, Amazon Alexa and GM’s OnStar marketplace, just to name a few. Unlike other concepts, we are not utilizing special offers or incentives to convert guests to digital ordering. Almost half of our orders still come in over the phone which provides for further opportunity for digital conversion. Digital sales are not only more operationally efficient for the restaurant, but also have a $5 higher average check. In Q4 of 2018, we anticipate launching our new front-end, guest-facing interface for our website and app. We believe this new platform will provide a highly efficient, frictionless guest experience from the point the order is placed all the way through to receiving their order. And we are never done with innovation. This year, we have several innovative technology projects underway to further enhance the Wingstop experience that we hope to share with you down the road as we continue our development and testing. Turning to delivery. Our test now encompasses over 70 Wingstop locations in Las Vegas, Chicago and Austin. We remain pleased with the results of our delivery tests. We continue to see a sustained 10%-plus sales lift in our initial test market of Las Vegas that we launched in April of last year, and the majority of the sales continue to be incremental. In both Chicago and Austin, which were launched in the fourth quarter of 2017, we are experiencing a mid- to high single-digit sales lift with similar levels of incrementality to Las Vegas. Given our traction to date across these 3 different markets, we are very encouraged by the possibility of expanding our delivery capabilities. Our current focus is to work closely with DoorDash to optimize delivery in these markets and use our learnings as a foundation for a broader strategic national delivery rollout. Understanding how meaningful delivery could be to our business, we continue to believe the right approach is to take a market-by-market approach to a delivery rollout. In doing so, we will be able to leverage rising brand awareness from our national advertising campaign and expand our DoorDash partnership as they scale to cover our footprint. The long-term sales drivers of national advertising, digital expansion and delivery will further sustain our best-in-class unit level economics and support further domestic unit development from existing and new franchisees. Our ability to reach 2,500 plus restaurants domestically is based on maintaining and improving these unit level economics. But our ultimate vision does not stop at 2,500 plus domestic restaurants. Our vision is for Wingstop to become a top 10 global restaurant brand. In addition to domestic development, international growth, which comprises our fourth long-term growth strategy, is a key component of our vision. Chicken is the most highly consumed protein around the world, and the broad appeal and adaptability of our flavors provides us with the basis for our international development strategy. Our strategy is further supported by Wingstop’s early success in established and emerging international markets. As of the end of the quarter, we have 112 Wingstop locations in 8 international markets. This year, we plan to further extend our international reach with restaurant openings in the UK, France, Australia and Panama. While our sold development agreements consist of nearly 600 additional international Wingstop restaurants, our focus in 2018 is centered around ensuring a successful introduction of the Wingstop brand to these new markets. As such, we do not anticipate much activity in the area of new international territory sales in 2018. We continue to see strong same-store sales growth in our international business, which is improving our strong sales to investment ratios in those markets. We remain excited about the expansion opportunity we have with our international business. We believe Wingstop is truly a brand and a category of one as we lack a true competitor and have multiple long-term sales drivers and a significant amount of white space in front of us for growth. We will continue to build upon what we have already accomplished across our 4 key strategic priorities of national advertising, digital expansion, delivery and international development. This quarter demonstrates our progress against -- across all these fronts as we execute to achieve our long-term goals. With that, I’ll turn it over to Michael.

Thank you, Charlie. Before I walk through the numbers, I would like to highlight that our first quarter results reflect the new accounting rules around revenue recognition, and the prior year results have been revised as well. Total revenue for the quarter increased 12% to $37.4 million. Royalties, franchise fees and other revenue increased $185,000. Included in this line is other revenue which decreased $2.5 million from the prior year period due to a onetime vendor payment that was received last year. The growth in royalties and franchise fees were the result of new restaurant development and same-store sales growth. From a development perspective, we grew our total unit base over 12% compared to Q1 last year, which consisted of 22 domestic openings and six international openings during the recent quarter. Domestic same-store sales growth -- grew 9.5%. As Charlie noted, both transaction growth and an increase in average ticket drove the comp. Advertising fees and related income increased $1.3 million, which is consistent with the increase in system-wide sales for the current quarter compared to the prior year period. Our company-owned restaurants delivered strong results in Q1. Sales increased $2.5 million to $11 million for the quarter. This increase was primarily driven by a 12.5% same-store sales growth in our company-owned restaurant. Transaction growth and an increase in average ticket equally contributed to the comp growth. Also contributing to the increase in company-owned restaurant sales were the two restaurants that we acquired in July of last year. In addition to strong top-line results, cost of sales decreased as a percentage of company-owned restaurant sales by 1,000 basis points. The decrease was primarily driven by a 570 basis point reduction in food, beverage and packaging costs due primarily to the 11% deflation in wing prices compared to Q1 last year. Also contributing to the margin improvement was the leverage we obtained on labor costs and other operating expenses as a result of the 12.5% comp. As we look forward, the current outlook for wing prices remains favorable, and we anticipate continued deflation in 2018. Advertising expenses were $8.6 million for Q1 compared to $9.3 million in the prior year. Under the new revenue recognition accounting guidance, advertising expenses associated with our advertising fund are recognized the time the related revenue is recognized. Please note that advertising expense on our P&L does not necessarily correlate to the actual timing of the advertising spend. In the prior year first quarter, we received a one-time payment from a vendor that was used to fund the launch of national advertising, which resulted in higher advertising expense recognized on our P&L than the current year quarter. Selling, general and administrative expenses in the quarter increased to $10.8 million from $8.2 million in the prior year. $1.5 million of the increase was related to nonrecurring transaction costs associated with the recapitalization of our balance sheet and subsequent special dividend payout. The remaining increase is primarily due to planned headcount additions. Adjusted EBITDA, a non-GAAP measure, increased 31% to $12.5 million. As Charlie earlier noted, a record quarter for Wingstop. Note the reconciliation between adjusted EBITDA and net income, the most directly comparable GAAP measure included in our earnings release. Adjusted net income increased 16.4% to $7.3 million while adjusted diluted earnings per share increased 19% to $0.25 per share. As of the end of the first quarter, we had cash and cash equivalents of approximately $3.8 million and $223 million in debt. Our net debt to trailing 12 month adjusted EBITDA stood at approximately 5.2 times, which is up from Q4 due to the recapitalization we completed during the first quarter. During Q1, we paid a special dividend of $3.17 in conjunction with the closing of a new credit facility as well as our third quarterly dividend of $0.07 per share. We remain committed to returning capital to shareholders on a regular basis through our quarterly dividend, which is targeted at approximately 40% of free cash flow. As we did during Q1, we will also leverage our balance sheet when feasible to further enhance shareholder return. The special dividend we paid in the first quarter was the second one we have paid in less than 3 years as a public company. Now turning to guidance. We are reiterating our guidance for 2018, which is consistent with our long-term targets. System-wide unit growth of 10%-plus, domestic same-store sales growth of low single digits, adjusted EBITDA growth between 13% and 15%, an effective tax rate of approximately 23%, stock-based compensation expense of approximately $3 million, adjusted diluted earnings per share of approximately $0.75 and fully diluted share count of approximately 29.6 million shares. Finally, there are 3 reminders before we take your questions. First, our EPS guidance reflects the change in revenue recognition accounting and is therefore comparable to fiscal year 2017 adjusted diluted earnings per share of $0.69, which has also been revised. The supplemental schedules for last year can be found under Financials on our Investor Relations website. Second, our EPS guidance does not include an estimate for the excess tax benefits from stock option exercises, which amounted to an $0.08 EPS benefit in 2017. And finally, we estimate the EPS impact of our January recapitalization to be approximately $0.11 per share for 2018. Thank you all for being with us this afternoon. And we will now be happy to answer any questions that you may have. Operator, please open the lines for questions.

Thank you. [Operator Instructions] Our first question comes from David Tarantino with Baird.

Hi, good afternoon and congratulations on an excellent start to the year. My question is about the guidance for this year. And I just wanted to maybe start there and ask what led to the decision to keep it in light of such a strong start to the year? And I guess, related to that, are you trying to signal anything about the rest of the year in that guidance?

Good afternoon, David. I think the consistency of guidance goes more towards the affirmation of our long-term guidance rather than anything specific for the year. I will say that after next quarter, we had talked about after Q2, we would probably provide a little bit more clarity into the back half of the year as we gain a little bit more into the year. But there’s no signal that I would reference otherwise.

Great, that’s helpful. And then, Charlie, you mentioned the comp, which was very impressive. You mentioned that it included more ticket contribution than what we’ve been seeing. I was wondering if you could quantify the level of lift in the ticket versus maybe what it was before the franchisees took those price increases. And then your comment there about sort of achieving more balance. I was just wondering how you plan to do that as you look at the next few quarters.

So the comment about a little more ticket than we would prefer is really based on what we’ve said many times about what we prefer our traffic and check components to be in a low single-digit type of growth scenario. So 1 to 2 points of ticket is what we would prefer to always have. We did see some -- certainly, some pricing in the fourth quarter and early first -- really, mostly fourth quarter, but a little bit of the early first quarter as we finished up the rollout of our split menu. And in some cases, we reduced the price of our boneless wings and then conversely increased bone-in wing prices. We did see a mix shift associated with that, that have benefited the P&L upwards of 200 basis points on food cost, which was great, but at the same time, put a little bit more lift in the ticket than we would have otherwise preferred. So that preferred amount is really at the baseline of 1 to 2 points. On the back half of the year, the balance question really goes to a focus on continued transaction growth for the brand, leveraging national advertising as well as some value orientation around new products or product ideas that we have, packaging of products, et cetera, just to make sure that we balance any ticket lift with some value orientation behind that in our promotional activities.

Got it. And Charlie, just so I understand. So the move up in comps from fourth quarter to this quarter, can you help us think about how much of that was the check changing or the ticket changing versus traffic trends changing?

Well, I think a good way to look at that has more to do with the sequential nature of the comp. We saw a great momentum coming out of the fourth quarter. We did pick up some benefit to ticket, as we’ve said, because of that menu change from one quarter to the next. But if you look at the momentum that came into the quarter, I would still say we were quite comfortable with what the comp delivered in Q1. Quite happy, quite frankly, another thing just to throw in, in describing the strength of the first quarter was a very strong March. If you recall, we’ve rolled over our national advertising rollout during that quarter, and we were rolling over a negative comparison from the first quarter of last year. There were a lot of factors in there, but a strong March that not only we saw, but others in the industry saw helped lift that comp higher than even a consensus expectation or what we would -- expected to see.

Our next question comes from John Glass with Morgan Stanley. Please proceed with your questions.

Charlie, can you talk a little bit about an updated view on development? You said maybe it was a little lighter than you thought. I think coming into the year, you sort of said this was a year that was going to be more, I don’t know, closer to long-term averages. Do you have -- what is your better insight now that you got a quarter in terms of development? You said it was going to be similar to last couple of years. I wasn’t sure if that meant like percent or if that was an absolute comment, an absolute number comment on the number of units domestically versus the last 2 years.

John, yes, certainly, the number was the absolute number included a couple of closures and it is well on a net basis domestically that where one of which, for example, was the result of a transfer that will reopen in a different trade area later this year. So it’s really -- it had to be closed, but it really is going to be a net zero. As we look at the pipeline, we expected the first quarter, the first half of the year to be lighter than the back half. And I think we noted that both at the end of Q4 as well as in our discussion today that we expect this to be more of a back loaded year. But still from a strength perspective, the comment I made was that we would expect our development to be consistent primarily with where consensus is right now. And a lot of that is going to be seen in the back half of the year. So with our fourth quarter guidance, we wanted to make sure that we encouraged everyone around that softer start to a stronger finish. Some of that’s based on the tough year we went through from a food cost basis last year that has now flipped dramatically. If you remember -- recall in the commentary, our company-owned restaurants saw a 1,000 basis point improvement in their P&L. Our franchisees are enjoying similar types of P&L improvement. And so that cash generation gives us confidence in the back half that we’ll be able to deliver what we expected from the onset of the year.

And just to that point, I mean, between your comps and the food cost improvement, the margin improvement, that must -- I mean, I presume that’s being reflected in the conversations you’re having currently with the franchisees. You mentioned something about you’re encouraged by developments. Is there any number around development, signups or new franchisees that would give you further evidence that development accelerates in the back half based on the first quarter on what you mentioned on those two metrics?

Yes. I think there are a couple of metrics I would look at. The pace of our real estate pipeline is improving each and every week in terms of the number of deals coming in, and those deals translating into approved sites that franchisees built. The other good metric that we’re seeing is an improvement in the pace of deal signing for new development agreements. In the quarter, we were able to continue to add new deals to the system and expect, as we go through the year, to increase the number of deals we add to the system faster than perhaps the number of restaurants we’re opening. So we’re very encouraged by the pace of development, where that’s going. And I think if you look at the P&L, as you mentioned, this is a business that we know from time to time every few years, we see the cyclicality in the wing prices. When it goes high, it’s tough. But when it goes low, it’s a great opportunity for us. And we expect these wing prices to moderate and perhaps sustain for quite a period of time only because the market, all the market factors appear very favorable for that. So I just reinforce that we’ve got good momentum, but that momentum needs to translate into deals are going to the pipeline and then turning those into open restaurants, which is why we continue to talk about the strength of the back half of the year.

Just one final question for me. On the pacing of delivery roll out, you talked about a market-to-market approach as you work with DoorDash and you look forward to maybe national advertising. So how many more markets at this point do you think you’ll introduce delivery to in 2018?

I don’t have a set number yet. We are looking at other markets. The thing I would caution everyone around delivery is that while we feel very strongly that we have achieved great results on the top line, I think, as you know and many know, the real key to success here is ensuring that the experience for the consumer is done in a very high quality and seamless fashion. So our team and DoorDash are working very diligently to make sure that that integration of the transaction is very efficient and ensures that we provide food on a timely basis, in an accurate way, fresh, hot and ready to go. And I’d say the other thing is, is that we’re encouraged by the investment that DoorDash received and their ability to prepare and scale. Those 2 factors really go into the pacing at which we would roll out. So I think later in the year, probably another market. But I don’t want to set expectations that we would be aggressively pushing national during this year, probably a 2019 outlook. But that can change if we can start to really optimize things quickly.

Our next question comes from Jeff Farmer with Wells Fargo.

You guys did touch on it briefly. So that’s 30% company-owned restaurant level margin in the quarter. I’m just curious, how should we be thinking about that margin over the balance of the year? I realize there are some unique circumstances at the first quarter. But again, as we move deeper in the year, how should we be thinking about that margin?

Jeff, that margin, first and foremost, as we know, is outstanding and probably best-in-class and indicative of the strength of this model that we have and the benefit our franchisees are seeing from these lower wing prices. As I mentioned before, the outlook on wing prices would suggest that you’ll have some increase in the wing price throughout the year that follows the natural cadence or pattern to it. Meaning, in the third -- in late third, early fourth quarter, we’d see a tick up. That’s what all of the experts would suggest. Barring any competitive type of entry into the market, the -- all the factors associated with wing prices should be -- should suggest that the pricing will stay on the fairly lower side, which is great. So now as we look at the other elements of the P&L, many of our markets have already adapted to the higher wage inflation. We’ve created some efficiencies even in the back of the house through some of the new menu strategies that we’ve talked about by replacing our sides in certain markets, and that will all launch later this summer. So I think at the end of the day, I feel very good about this P&L being sustainable. If you factor in the wing prices for the back half of the year.

Okay. And then following up on David’s earlier question on guidance, you saw roughly 30% adjusted EBITDA growth. In the quarter, you’re guiding to, I think, 13% to 15% for the full year. Understanding, I don’t know if you want to call it conservatism, but is there -- can you remind us if there’s something specific that’s driving that expected deceleration in EBITDA growth over the balance of the year?

Yes. I mean, I think if you look at the top line side of it, although we’re very confident in what our ability is to hit that guidance, the thing I would say is as we go through the year, it’s a harder rollover from the prior year with the strength of the comp that we saw in the back half of the year. So that’s one factor at play. And then as we talk about development, we want to see that pipeline continue to strengthen, which aids the confidence in our ability to hit those consensus numbers that are out there already. But all that said, I think really, the key to guidance is what I reflected on before, which is the consistent reiteration of long-term guidance. I think Wingstop has demonstrated that we’ve been able to meet or exceed that in every quarter since we’ve been a public company. We are going to be the beneficiaries of some very strong quarters like we’re seeing here. But as we work through the year, we’ll provide more clarity, and that’s been our consistent pattern, and we’ll probably stick to that.

Okay. And just final question. At ICR, you did provide some color on brand awareness. I don’t know if there were metrics, but you just pointed to some nice improvement in brand awareness. Any update you can provide us here, what it was, 4 to 5 months later in terms of brand awareness trends for the concept?

Yes. We continue to see awareness build each and every quarter. Our big objective for this year is layering on the increased sales momentum we’ve had. Last year’s performance of the new restaurants that come onboard continue to fuel the advertising dollars for the brand to continue to grow. Our current cadence is still the ability to be on every 2 or 3 weeks and off every 2 or 3 weeks in that similar cadence with a TRP level that, quite frankly, is not in any way, shape or form causing saturation, we’re a long ways from it. So as we continue to grow the brand and build it, we expect that momentum to continue to carry. And I think it’s reflected itself nicely in the comp performance we’ve had over the past 4 quarters.

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

Charlie, you mentioned the momentum picking up in the industry, and I think you’ve mentioned yourself that even Wingstop saw a very strong March. I’m just wondering if you had any thoughts around the drivers from the consumer standpoint, for the broader industry and whether the momentum at least that Wingstop saw in March continued into April?

I won’t talk about the current quarter, but I will reflect on what we thought the drivers were. In March, we rolled over our first or initial launch of national advertising. But we do believe that there was some strengthening in the market associated with the new tax plan and its ability to put money in peoples’ pockets, especially our core consumers. So I think tax reform is a driver here. And then I think the continued brand awareness growth that we’ve had lapping the performance or what we started last year, I think that momentum in brand awareness helped carry us as well. Low unemployment, you put all these things into play, and all of those bode well for a brand like ours whose consumer is generally lower middle income and skews quite urban in terms of where we operate our restaurants. So all of those are good factors for Wingstop specifically.

And then specific to delivery. So sounds like both -- all 3 of your markets at sustainable levels you talked to us about last time. Just wondering what you think drives the difference between a Chicago doing mid- to high-single-digit and a Vegas doing 10%-plus, so maybe what the drivers are? And which of those things you think is likely more the norm, which I’m guessing would dictate how you think about what market you would test next?

Yes. It’s interesting. Vegas is such a concentrated and media efficient market that our marketing dollars spent probably were more effective there in helping drive awareness and, therefore, new occasions through delivery. That can explain some of that lift. Chicago, obviously, a little harder to break through the clutter in a big market like that. And then Austin, warm weather market, a small market but still kind of a tough market from an advertising perspective compared to Vegas. So that’s really the only factor I would say really skews what that performance is. And I think in all 3 cases, I mean, we put some incremental media behind delivery, but we certainly didn’t turn on our national media, which is much heavier. And so that’s one of the factors we look at as we plan the rollout of delivery will be what the media strategy is because with essentially a little added radio support and some digital marketing, we were able to generate this result. We want to make sure that we put our best foot forward as we look forward into the future and the rollout.

Got you. And just lastly, on the thoughts around one-to-one marketing. Just wondering as your digital orders continue to increase as a percentage of the total, how are you using the data? Maybe what’s been your approach to the one-to-one marketing? And any feedback you might have?

Yes, we’re in the -- we’re right in the middle of the build out phase of our CRM application, which will mine all this rich data that we have, this transactional data translate that into unique customer records and data that we can use to monitor the guests. The platforms being built, we expect that to come live in Q -- probably Q3 this year. And when we do, then our ability to use that information will be going hand in hand as well with some other technological developments, most notably all of our front-end applications, either through Web or mobile Web or the app to be able to directly communicate with our guests. So we’re excited about what the third and fourth quarter offers for us as we are making these technology investments that we noted early in the year.

Our next question comes from Andrew Charles with Cowen and Company. Please proceed with your question.

I want to make sure I heard correctly that the app update is expected to be completed in 4Q. I think previously it was messaged to be 3Q. So I’m just curious if that’s the case. And if so, if that means the resumption, the delivery rollout is expected one quarter later than it was previously anticipated?

Well, I think back to the commentary on delivery in general. I think what will drive delivery rollout is not necessarily the technology. We could roll it out in the platform we have today. What we’re most concerned about is making sure that the occasion itself end to end is optimized. Meaning, we get the food out when it’s expected and hand it to the driver who gets it to the guest when they expect it. And that it’s in a hot, fresh and ready to go format with all the right products in the bag. To me, that’s way more important than whether the technology would be driving it. So I just want to reinforce that point.

Sure, okay. And then just an update on the CMO search. Where are you guys with that? Are you still doing first round interviews or down to a shortlist? And curious what skill set you’re looking for in a desirable candidate.

Well, we are still in the process of that search. It’s going quite well. We’ve had an unbelievable amount of interest in the role, which is great and a great testament to the strength of the Wingstop brand and what the potential is as well. We’re being very selective and careful in the process. I think the person that comes onboard is going to first fit beautifully in this culture that we have defined within this organization, but also brings great brand building experience, some expertise as well in media strategies that can help us continue to put our best foot forward in how we build awareness and also build conversion. Meaning, once the customer is or somebody’s aware of Wingstop, how do we convert them into a user and then retain them. Those skill sets are critical for this search. So again, great interest. We’ve had a ton of candidates and a flood of interest. So it’s actually one of those searches that I’m very, very excited about when we bring that candidate forward.

Our next question comes from Matthew DiFrisco with Guggenheim Securities.

In respect to the same-store sales, just not to beat a dead horse here. But you’ve been asked in the past, given your Texas exposure, did you see any regional differences? Could some of the acceleration in 1Q be indicative of economic regional strength related to oil in any way?

I don’t think so. You could interpret that the company store performance at 12.5% same-store sales growth was indicative of regional performance. But I think those restaurants were just cranking and they had the benefit of the delivery test in Las Vegas. So now, there’s no regional element to the strength or lack thereof of the comp.

That’s great. And then, I guess, one of your peers also, who’s a predominantly off premise sales pizza player, had very good comps also. Did you see any -- was the off premise sales, I guess, roughly 75% historically of your mix, did that outpace even the 9% to 12% that you’ve seen in both the franchise and the company stores?

No, it’s pretty consistent between on and off premise. I think we saw it fairly consistent across the board, this performance overall.

Okay. And then last question. Have you given any thought yet or is there something that potentially could come down the line as far as a different store design if as you look towards delivery and you look towards digital, are there things and tweaks that you would do perhaps to the store design or even a store location that might change than where you’ve sort of grown the first 1,000 stores?

Yes, an excellent question, and I appreciate it. We just finished an industrial engineering study within our 4 walls of our restaurant in a number of locations to identify areas of opportunity. And so Stacy Peterson, our Chief Experience Officer, and her team have been working on looking at ways to further optimize the operation of the business, to marry up 2 digital transactions. And so yes, there is potential for some minor changes. I don’t think they’ll be big ones. But definitely there’s opportunity to optimize flow and also incorporate the use of technologies in the back of the house to ensure that we’re providing the guest with information along the path of their experience from when they order to after they’ve enjoyed their wonderful wings, how did we do. So all of that’s kind of going into some of this technology investment that we talked about earlier.

Our next question comes from Karen Holthouse with Goldman Sachs.

Going back to the price versus traffic dynamic. I want to make sure I’m clear on sort of the company versus the franchisee side. Was the comment about half of the comp being driven by price versus traffic specific to company? Or was that the whole system?

I think it’s the system-wide objective to, as we said, have a little more balance, and I’ll just reiterate that our goal ultimately is to always have 1 to 2 points of price in the comp. At this case, we’re higher than that and we don’t want to maintain that. But we can understand it and appreciate it based on the year we had last year. So really, I mean, it’s not like, hey, we want 50-50 between the 2. What we want to make sure is that the optimized balance always has more traffic than it does too much check.

And then, I guess, with the sort of focus on we would like less of that, are you planning -- is this enough of a concern you’re going to be sort of explicitly discounting that away or are already re-engineering some of the price points as I see a split menu pricing? And if that’s the case, I guess, are you seeing something in traffic that’s concerning? Just trying to understand sort of that mentality if we want that number to be lower, how much of that is just tied to the long-term strategy versus you’re seeing something that you’re worried about in reaction to that price increase?

That’s a good question. I think as we get to the back half of the year, I think our commentary just aligns with that rollover of the third and fourth quarter’s strong performance with a great comp trend and momentum we’ve got in the business right now, but with more check than we would expect. If you have more check, then you would anticipate that at some point you’re going to roll that over. So really what we’re trying to give you some insight to is that rollover could occur down the road. Our way to get ahead of that and mitigate that really comes down to value being introduced to the consumer in the form of promotional opportunities, not necessarily a price reset. I think the pricing we have will be the pricing we have. But more of a value orientation towards our promotional strategies that gives people great value products, can drive transactions as well and help offset some of the check lift.

And if you are doing some of that promotional activity, how new would that be? I’ve always sort of thought about this is a brand that doesn’t price promote, it’s more about the flavors and sauces and come try this. And is that something you’ve tested or have a lot of familiarity with? Just what’s the risk, that you do some price promotion and then you -- once you sort of are down that rabbit hole, you can never climb back out of that rabbit hole.

Yes, we’ve been that for quite some time because we do offer a value price point and promotional strategies. Usually, we deliver those through our digital marketing. A good example would be when bone-in wing prices were high, we tried to push mix change by promoting a $19.99 boneless wing pack, where you might get 25 boneless wings, fries and a drink for a 19.99 price point. It’s not a menu product that we have. So we try to go off menu, build a very value-oriented product for the guest that usually feeds 2 to 3 people and then promote that out. And that’s been a very effective way for us to do price point advertising, but not discount. And so I think the differentiation here is great value through pricing, not discounting.

Our next question comes from Chris O’Cull with Stifel. Please proceed with your questions. Chris O’Cull: Thanks, good afternoon. Charlie, one of the benefits of national advertising that you’ve discussed in the past is for new stores in underpenetrated markets to benefit from greater brand awareness. Are you seeing any evidence of that happening yet?

Yes. Glad you asked that question. We are starting to see -- if I go back and look at the vintages of restaurants and look at the 2016 class, that class had performance that has been consistent with what we’ve set expectations for, which is a first year AUV of about 820,000. That grows to about 890,000 the second year, and we’ve seen that class have that momentum. 2017, although it’s early because we only have about half of those restaurants in start -- very few of them starting to comp for their first year. Similar, maybe a little better performance. The first quarter 2018 restaurants that we see and some of the fourth quarter 2017 restaurants are starting to demonstrate that momentum, meaning, they’re coming out of the gate stronger and holding that revenue very nicely. So we are encouraged by what we expected the media to do. Chris O’Cull: That’s great. And then how have sales trended during periods when the company is not running commercials?

We really only go off air for any meaningful point in time during the July and early August timeframe. It’s about six weeks. And so during that time, although we’re off air on cable TV, we actually heavy up our digital messaging. And our guest is reacts really well to digital marketing, and that’s digital video as well as static content. So we haven’t seen any sort of meaningful or notable change during that timeframe.

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

This is Kevin Robinson on for Jake Bartlett. How should we think about delivery roll out in 2019? Is the base case that it’s front-end loaded or should it be expected to gradually roll out or maybe back-end loaded?

No matter when we start the launch of delivery, it will always be a phased roll out. And I think that roll out time frame probably at a minimum encompasses three quarters, if not more. So part of that -- the requirement for that is there’s a lot of training and education to do with our franchisees and also optimizing the media strategy around launching deliveries. So in any case, even if it starts in 2018 in earnest, it would take us quite a longer period of time. It would not be front-loaded.

Okay. And in terms of marketing, we were under the impression that the incremental 1% of marketing in 2019 was going to be used to support delivery rollout. Is there a change to that?

There’s no change to the idea of that. There’s two things just to clarify. One is we haven’t made a conscious decision yet to increase the ad fund by that extra 1%. Obviously, when you do it, you want to make sure that you’re clear on what you want to do with it and also that it provides a great return on investment for our franchisees. The other thing is the opportunity to utilize that and leverage that for delivery absolutely is one of those pieces we’re putting into place. I’d like to have our new CMO be onboard before we made that final decision, which should happen during this quarter.

And are you finding your digital mix grows faster in markets where you are testing delivery?

It absolutely has a highly incremental impact on deliver -- or on digital mix. In fact, it’s almost 100% of the digital dollars are -- all delivery transactions are digital, period. The incrementality of delivery that we’ve seen has been about 80%, plus or minus, in these markets. So yes, very incremental to the digital mix.

And my final question. Are new unit volumes going up, along with the higher awareness due to the national TV advertising?

Yes. I just mentioned that to Chris when he asked that question. The answer is we are seeing the Q4 2017 as well as the Q1 2018 restaurants opening at a stronger pace than the previous vintages.

Well thank you for answering all of my questions. Thanks so much.

Our next question comes from Will Slabaugh with Stephens.

Wanted to follow up on a comment you made about pricing and the conversations going on with the franchisees now that, as you mentioned earlier, a large percentage of them took pricing due to wings last year. I just wanted to clarify that you feel like we’re in a bit of a holding pattern for much of this year or are there markets with particularly those at higher minimum wages or just high wage inflation in general expected to readdress pricing again later on this year.

Yes, I don’t think wage inflation would be a reason for addressing price again mostly because when wage inflation was put in place, many franchisees 1 year or 2 ago put in some price associated with that anticipated wage inflation. Now that the split menu is complete, that pricing really reflected more about the wing inflation where we saw the higher prices put on the menu than anything else. And I would not expect that there’d be much, if any, price activity for the balance of the year.

Great. And then also an update on mobile and the app. And I apologize if you gave any of this earlier. But to the extent you’re willing to share sales mix of mobile orders or year-over-year growth that we saw in the quarter of mobile ordering that would be helpful. And any other specifics you might be willing to give in terms of what the new app rollout in 4Q may be able to do to better drive frequency that we’re not currently able to offer to the guest today?

Yes, okay. So piece by piece here. The online sales for Q1 of ‘18 were 23.9%. That was up from 20.0 last year same quarter and about 100 basis points or a little more than 100 basis points better than the prior quarter. So the trajectory we’ve seen is still holding with about a sequential 100 basis point lift every quarter. As it relates to the modifications we’re making, a couple things come to mind. One, the ability to -- we -- first, we’re going to greatly simplify the process for the guests, to make it easier for them to navigate and get their order in, in hopefully, fewer steps. The other 2 big areas of opportunity for us include the opportunity to upsell in a more effective way. So add a dessert, add a side, add a drink and/or maybe promote new flavors from an add-on occasion. We’re fairly restricted in our technology we have today for that, so that’s an upside opportunity. And then the last piece I would add is the integration of delivery. Most of our delivery orders actually come in through wingstop.com, not through the marketplaces of DoorDash, for example. And so we want to make sure that we’ve optimized that app to be a delivery focused up when those occasions begin.

Our next question comes from Peter Saleh with BTIG.

I want to come back to the conversation on delivery. I think you’d said you’re working on improving the customer experience and you’re seeing a lot more of the delivery orders coming through the Wingstop app versus the traditional third-party operators. So is there any appetite among the franchisees to maybe take delivery in-house versus outsourcing it to improve this experience?

No, there’s very little, if any, desire to do that. And quite frankly, I don’t know that we would want them to do that. At a very high volume of delivery, that might be an opportunity. But it comes with an extraordinary amount of complexity. We’re very pleased and happy with our relationship with DoorDash. And I think both parties understand and recognize the importance -- to both parties being us and DoorDash, the importance of really connecting and putting together a seamless end-to-end experience for our guests and both of us making sure that what we promised to the guest is what we deliver. That doesn’t always happen in delivery. And I know a lot of chains are enamored with the upside potential, and I think we’ve proven that, that’s the case. But what I think a lot of people are experiencing and should tell you is that it’s not always the most seamless and efficient transaction. So our focus here, especially for brand that is 75% carry out, is to make sure that we deliver consistent with what their expectation has been for Wingstop all the way around.

Great. And I believe you said that the delivery has been about 80% or so incremental, suggests it’s a fairly different occasion. Can you talk a little bit about what you’re seeing in the customer data or the type of customer that would do delivery versus your traditional customer that dines in or takes out? How do we think about those 2 customers? How are they different?

Well, I think, ultimately, it’s a fairly consistent consumer, but it’s awfully early for us to clearly identify who that true delivery customer is. That’s part of what we want to make sure we clearly know as we start to target marketing towards a roll out scenario down the road. So I’ll get back with you on that once we get a little more insight in some of the research we’re doing.

Thank you, ladies and gentlemen. At this time, this concludes the question-and-answer presentation. You may disconnect your lines at this time, and thank you for your participation.