Wingstop Inc. (WING) Q2 2018 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Wingstop Inc. Fiscal Second Quarter 2018 Earnings Conference Call. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note that this conference is being recorded today, Thursday, Augusts 2, 2018. On the call, we have Charlie Morrison, Chairman and Chief Executive Officer; and Michael Skipworth, Executive Vice President and Chief Financial Officer. I would now like to turn the conference over to Michael. Please go ahead, sir.

Thank you, and welcome. By now, everyone should have access to our fiscal second quarter 2018 earnings release, which has been posted to the Investor Relations tab on our website wingstop.com. Please note that 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. We appreciate your interest in Wingstop and your participation in today’s call. I’m very pleased that the continued strength in our business allowed us to deliver on our shareholders’ expectations for the second quarter. The story of the second quarter aligns with our long-term algorithm of consistent, sustainable growth. Total system-wide sales increased 13.5%. This growth was driven by 4.3% domestic same-store sales growth and 12.5% system wide unit growth. As we confirmed to you in our prior quarter, our new unit development continued to strengthen during the quarter as our domestic and international franchisees accelerated their investment in Wingstop. During the quarter, we opened 31 net new restaurants, which is a 24% increase in the number of openings compared to Q2 last year. We are encouraged by the momentum in the number of new restaurant commitment sales, as well as the healthiness of our existing pipeline. Additionally, the visibility we have into our 2018 development pipeline provides us with the confidence in our ability to deliver net unit growth in the range of 12% to 12.5% for fiscal year 2018, which is in line with consensus. Domestic same-store sales growth of 4.3% was consistent with our expectations. We expect above normal ticket growth to be reflected in our comp until we lap the pricing action taken by our franchisees late last year when record high wing prices occurred. We mentioned during the quarter that we implemented a number of transaction driving initiatives aimed at offsetting any risk of declines driven by those price increases. Quarter to date, our same-store sales in Q3 is 4.5%. As you may know, Q3 offers a tougher compare to the prior year than the second quarter, so we are encouraged by our recent trends as we head into the back half of the year, furthering our belief that the mix of traffic and check growth in 2018 is a transitory issue. During the quarter, Maurice Cooper joined Wingstop as our new Chief Marketing Officer. Maurice brings a wealth of brand building experience to our team and will immediately be working with our franchisees on the right strategy to leverage an additional 1% spin to our advertising fund. While our brand awareness continues to increase since the launch of national advertising in early 2017, we believe we have a long way to go before we maximize the impact of national media efficiencies. In fact, Wingstop’s current awareness levels are as much as 21% below our peer group and as you move further down the brand’s funnel to consideration, as much as 30% of our peer group. The continued delivery of compelling messages against increasing media rights that break through the noise with new and existing customers will bolster our ability to drive incremental demand for our brand, which will translate into sustainable long-term positive growth. Our strong top line performance translated to total revenue growth during the second quarter of 17%, and increases in adjusted EBITDA and EPS of 27% and 35% respectively, demonstrating the best in class flow through of the Wingstop model. Contributing to the adjusted EBITDA and EPS growth was the margin expansion in our company owned restaurants. We benefited from over 1,000 basis point improvement in margins at our company owned restaurants due to favorable wing prices and leverage on labor and other operating expense lines from continued positive same-store sales growth. Our franchisees’ P&Ls are benefiting from similar margin expansion, further enhancing our best in class unit level economics. Our domestic target year 1 average unit volume per Wingstop is $820,000. We believe our franchisees can achieve a year 2 unlevered cash-on-cash return of approximately 35% to 40%. These industry leading returns fuel our unit growth and are the reason why existing franchisees comprise approximately 80% of the pipeline for new unit development as they continue to reinvest by growing the Wingstop system. 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 our four key long-term growth strategies. They include executing our national advertising strategy, furthering our expansion in digital; the national rollout of delivery; and continued international development. I’ve already commented on the opportunity we have in front of us as a brand to continue to grow awareness as we accelerate our national advertising strategy. Let me briefly touch on the other three long-term growth strategies. Revenue growth through our digital channel expansion is one of our key top line drivers. Digital sales in Q2 reached 24.3% of total sales. We continue to see roughly 400 basis points of organic growth year-over-year in our digital sales mix. As of the second quarter, about 75% of the entire domestic restaurant base generates more than 20% of their sales from digital channels. In additional to providing efficiencies within the four walls of the restaurant, our digital average check is $5 higher than our overall average check of $17. Recall that about 75% of our business is takeout and a large percentage of orders still come in over the phone, so we believe that we have ample incentive and opportunity for further digital expansion. There are several key initiatives underway as we position our brand to further drive digital sales. First, we are on schedule to launch a new front end guest spacing app and website that will provide a much better guest experience and will be optimized for a pending delivery rollout. We’ve also implemented a CRM platform, enabling us to organize existing data and build unique customer records that will position us for a more engaging interaction with our guests. And we are also working on natural voice recognition technology for orders that come in through the phone, so that they can be digitized and converted into online orders. That’s just to name a few and we’re excited about the progress we are making here and the long term. We see no reason why our digital sales cannot approach the levels that are being achieved at some national pizza chains. Turning to delivery, we’re excited to announce that we believe we have completed the preparation steps to start our national rollout of delivery. As a background, we started testing delivery in April of 2017 in Las Vegas. In late 2017 we expanded our delivery test to Chicago and Austin markets. In all test markets, we have experienced sustained mid to high single-digit sales blips. The lift in sales from delivery is highly incremental and profitable at the restaurant level. The profitability of delivery is bolstered by the checklist we have seen in these orders, which is slightly higher than the $5 checklist that we see on ordinary digital orders. We believe we have proven demand for delivery, its profitability and our ability to provide a great guest experience. We have made great progress with our partner Door Dash over the past 90 days across all fronts, including technology, integration, visibility into key metrics and data and defining processes and procedures such that we are in a position now to move forward with a national rollout of delivery. We will follow a phased approach to this rollout over time. We are working closely with Door Dash to map our domestic footprint with theirs prioritizing certain markets as we finalize the details of our national rollout plan. We expect to launch delivery in another small mark market at first, and then add one or two larger markets before the end of 2018. As we solidify our plans, we will provide all of you with updates. 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 development from existing and new franchisees. Our ability to reach 2,500 plus restaurants domestically is based upon maintaining and improving these units at 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. Therefore, a key component of our vision is expanding our international footprint, the fourth pillar of our long-term growth strategy. Given that chicken is the most highly consumed protein worldwide and that we have the ability to augment our flavor offerings to match local taste preferences, we are seeing early success in our emerging international business. We have demonstrated the portability of our brand in both Mexico and Indonesia, two very different markets, which were also our first two international markets. At the end of the second quarter, we are currently operating in nine countries outside the U.S. with our newest country being Panama, where we opened our first Wingstop location in June. We are next poised to open in what we believe to be large large international markets for Wingstop, the United Kingdom, France and Australia, all in the fall of this year. We currently have sold commitments for 13 countries consisting of a pipeline of approximately 600 international locations, but we are just getting started internationally. We believe Wingstop is truly a brand in a category of one. 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 four key strategic priorities of national advertising, digital expansion, delivery and international development. The strong growth of our business model is one that is executed in an asset light, shareholder friendly model. Since going public a little more than three years ago, we have delivered a total shareholder return of almost 200%, which we believe represents best in class performance. Since our IPO, we have demonstrated our commitment to returning capital to shareholders in the form of two special dividends and a regular dividend that we initiated at this time last year. Today we announced that we have raised our quarterly dividend from $0.07 to $0.09, a 29% increase, which further demonstrates our desire to reward our investors with return of capital. To our knowledge, Wingstop’s track record is unmatched in our industry at such an early stage of being a public company. We believe that the continued strength of our domestic economic model and the opportunity we have with our emerging international business demonstrates the promise of our vision of becoming a top 10 global restaurant brand. Before I turn the call over to Michael, I have one additional announcement. The Board of Directors and I have been working diligently to fill our open board seat and today I would like to announce that Kandy Anand has joined our board. Kandy is an experienced public company director and currently the Chief Growth Officer of Molson Coors brewing company. Kandy brings substantial boardroom experience and a welcome knowledge in global strategy and marketing at the top of global brands and is a welcome addition to the Wingstop family. With that, I’ll turn it over to Michael.

Thank you, Charlie. Before I walk through the numbers, I would like to remind everyone that our financial results reflect the new accounting rules around revenue recognition that became effective the beginning of this year. Our prior year results have been revised to reflect this change so that you can compare apples to apples. Total revenue for the quarter increased 17.3% to $37 million. Royalties, franchise fees and other increased $1.9 million, driven by our 4.3% same store sales growth and new restaurant development. We grew our total restaurant base by 12.5% compared to the second quarter last year. This quarter we added 21 domestic and 10 international restaurants. We closed the quarter with 1,188 restaurants of which 122 are outside of the U.S. Our company owned restaurants continue to deliver strong financial results. Sales grew 29.8% or $2.6 million for the quarter. $2.3 million of the increase is associated with five opportunistic acquisitions we have made in the Dallas market since the prior year comparable period. The remaining increase is driven by same store sales growth of 3.5%. Our company owned same store sales growth was driven by an increase in average check. Cost of sales decreased as the percentage of company owned restaurants sells by over 1,000 basis points. The decrease was driven by a 750 basis point reduction in food, beverage and packaging costs due primarily to the 23% deflation in wing prices compared to Q2 last year. Also contributing to the margin improvement was the leverage we obtained in labor cost and other operating expenses as a result of the 3.5% comp. As we look forward, the current outlook for wings remains favorable. Advertising expenses were $8.2 million for Q2 compared to $7.6 million in the prior year. Recall that under the new accounting guidance, advertising expenses are recognized at the same time the related revenue is recognized, which does not necessarily correlate to the actual timing of the advertising spend. Selling, general and administrative expenses in the quarter increased to $10.1 million from $8.2 million in the prior year. The $1.9 million variance is primarily driven by an increase in stock based compensation expense and also payroll and benefit expense related to headcount investment. Depreciation and amortization increased to $1.1 million in Q2 2018 from $0.8 million in Q2 2017. The increase is primarily driven by the additional amortization expense related to the reacquired franchise right resulting from the acquisition of franchise restaurants. Adjusted EBITDA, a non-GAAP measure, increased 27.1% to $11.7 million. Note the reconciliation table between adjusted EBITDA and net income, the most directly comparable GAAP measure included in our earnings release. Net income increased 39.4% to $6.8 million while diluted earnings per share increased 35.3% to $0.23 per share. As of the end of the second quarter, we had cash and cash equivalents of approximately $3.1 million and $220 million in debt. Our net debt to trailing 12-month adjusted EBITDA stood at approximately 4.9 times, which was down almost a full turn from the recap we completed in January of this year. 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 Charlie mentioned, our Board of Directors has authorized an increase in our quarterly dividend from $0.07 to $0.09 per share. This increased dividend will be paid on September 18 to shareholders of record as of September 4. Now turning to guidance, we are confirming our long-term algorithm of low single-digit domestic same-store sales growth and 10% plus system-wide unit growth. For fiscal year 2018, we are reiterating previous guidance, which is consistent with our long-term targets with the exception of updating certain items impacting fully diluted adjusted earnings per share. We expect depreciation and amortization of approximately $4.5 million, reflecting the amortization expense of reacquired franchise rights associated with restaurant acquisitions. An ongoing effective tax rate of approximately 25%, previously 23%. Please note that this go-forward tax rate excludes the impact of excess tax benefits from stock option exercises. Stock based compensation expense of approximately $3.7 million, previously $3 million. Fully diluted adjusted earnings per share of approximately $0.80, which reflects 29.6 million diluted shares outstanding. And as a reminder for everyone on the call today, our EPS estimate is comparable to fully diluted adjusted earnings per share of $0.69 for fiscal year 2017, which has been restated to reflect the new revenue recognition standards. Fiscal year 2017 also included an $0.08 benefit to adjusted earnings per share associated with excess tax benefits for stock option exercise. Our 2018 guidance includes a benefit of $0.05 to adjusted earnings per share due to excess tax benefits realized in the first two quarters of 2018. Thank you all for being with us this afternoon and we would now be happy to answer any questions that you may have. Operator, please open the lines for questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question is from David Tarantino with Baird. Please go ahead.

Hi, good afternoon. My first question’s on the guidance and I know you anchored a bit on your long-term targets, but the prior guidance was for low-single digit same-store sales for the year and given what you’ve seen in the first seven months, it seems like you’re going to be comfortably above that. So I guess how do you encourage us to think about the comp for the year for the second half or however you want to talk about it?

Hello, David. I think we certainly wanted to provide some insight on the comp in Q3 based against – because of the compares to prior year and what we saw in Q2 we didn’t want to give you an idea that there was deceleration. In fact that we feel like we’ve flattened the trend coming out of Q1 to Q2. And so we still have a compare that’s tough in Q4 and the balance of Q3, so we feel comfortable still anchoring at low single digit as our long-term outlook, but I do believe that we’ve provided both in our commentary prior to this quarter, as well as the information that we provided in the quarter to date information, a pretty good road map for what we think can be the outcome for comps for the year.

Got it. And one clarification, Charlie, on the comp that you mentioned so far in Q3, which is encouraging, is that cycling up against a comp that’s similar to what you’re going to cycle for the full quarter? In other words, I think last year you did a 4.1% comp for the quarter domestically, so are you already cycling up against a number like that?

Yes, I think if you look at the cadence across the quarter in the prior year, the comp was fairly consistent month-to-month during that quarter.

Great, that’s helpful. And then my other question’s on delivery. So sounds like you’re ready to roll it out an that’s good news. I guess the – you mentioned a couple of markets by year end. Could you give us a sense of how many units that might cover or what percentage of the system will have it by year end? And then how do you plan to stage out the rest of the system as you think about 2019?

We don’t have a clear outlook to 2019 other than a very consistent message that it’ll be a sequenced rollout throughout most of the year. I do believe that by the end of 2018 we could see as much as 15% to 20% of the U.S. system offering delivery. So beyond the market that we noted, the subsequent markets would be able to take us up to that level fairly quickly.

Great. Thank you very much.

The next question is from Jeffrey Bernstein with Barclays. Please go ahead.

Great. Thank you very much. Two questions. One, as you think about the pricing that you had through the first half of the year and your prior expression of maybe some concern that you could see some traffic degradation in the short term, with that as a backdrop, I’m just wondering if you saw what you thought you were going to see in terms of maybe you can give some sequential trends that you saw through the quarter. And I’m just wondering whether there were any specific levers, offerings or promotions that you drove during the second quarter to help support that traffic. And then I had a follow-up.

Okay, thank you for the question. I don’t really have a comment on the sequential trends in the quarter other than if you reverse what happened last year, the inverse would apply to this quarter in that the compares got tougher as the quarter went on. And I think that was known and expected through the quarter. I do believe though and I think it’s important to note that we did, as we mentioned multiple times both in our call last quarter, as well as during some of our discussions out on the road with shareholders, that we have put in place some traffic driving initiatives aimed at value messaging and bundled messages. We also reinforced our $0.60 bonus wing night. And we also reintroduced a fan favorite Spicy Korean Q into the mix. And all of those events we expected to have a nice impact on our traffic trends and I think we saw that that leveling of the traffic performance against that higher average ticket from the pricing activity played out nicely in the quarter. And in the subsequent quarter as well as we described in the early part of Q3.

Got it. My other question was just on the advertising spend and it sounds like based on your comments today that it’s now pretty certain that you’re going to be taking that 100 basis point bump as we start 2019. So I just wanted to confirm that and then see if there were any early takeaways from the new CMO, whether it’s a change to the approach or how you’re going to go about measuring that return to make sure you’re getting a proper return on investment. Thanks.

Yes. I’m not going to call it a certainty, but I think what we mentioned is that he is working with our franchisees on the strategy to implement the 1%. It’s certainly a likely outcome for the brand because we believe that under Maurice’s leadership we’re going to be able to make great use of that 1%. One of the things we’re going to do in preparation for that in the current quarter, starting in late August and carrying that through into the fourth quarter is an expanded message about that bundled offer and a promotional offer that will go live on air on our TV advertising and some new created that Maurice is driving. And then separate from that, we’re going to actually compress some of our messaging into higher weights of TRPs early – or later in the third quarter, early fourth quarter as a means to stimulate some additional awareness. And I mentioned in the commentary previously that Maurice has done a fantastic job of really identifying where the opportunity lies for that brand. Some of the messages that we noted are specific to the gap that Wingstop has as compared to some of its larger peers in the large franchise restaurant chain space that carry much higher awareness levels and higher rates of consideration once aware that we believe we can close that gap through better strategies around how we deploy media, but also through creative execution that really hits home with people who might not be aware of the Wingstop brand, but certainly will give them compelling reasons to try.

Great, thank you.

The next question is from John Glass with Stanley. Please go ahead.

Hi, thanks. Good afternoon. First, Charlie, Mike, can you just confirm, I think last quarter you said that the check was, or pricing was about half of the total comps. That’d be like 4.5 of the 9. Is that right and therefore this quarter basically traffic was flat and that was all check? Or did that dynamic in traffic change a little bit this quarter?

No, I think you have it right and we did not expect – I’ll just add to that, that we did not expect that check component to move much at all through the course of the remainder of the year. So I think that’s a reasonable assessment.

I think maybe it surprised you, but pleasantly last quarter, but maybe the repercussions of a higher check, you started to worry about. How do you prevent that from happening in the future? Are you communicating more regularly with the franchisees about the benefits of remaining calm in terms of pricing? Wing prices stimulated that, but you can imagine an ongoing basis, labor may sort of creep up and they may say we need to take more pricing. So have you been working with them to make sure they understand the benefits of restraining pricing to get the benefits of traffic?

Great question and thank you for it. One of the things we have done recently as we continue to fortify our team here at Wingstop and expand our capabilities, we mentioned Maurice Cooper has joined us as our CMO, but we also brought on a gentleman named Lance Richards to the company and he is previously a menu pricing and menu strategist at MacDonald’s. And we know that they have excellent discipline as it relates to looking at menu strategies. And so we’re starting to really work on putting in place the right type of analytics through third party support, as well as our own research to make sure that we’re making very thoughtful, well informed pricing decisions well into the future. And we’d love to get back to the cadence of 1 to 2 points as we talked about before of price in the comp on an annual basis as part of our low single digit outlook. We believe that that’s going to make it an even more robust conversation with our franchisees as we drive the recommendations for how we look at that. As it relates to any other future outlooks, again I think the experience we had last year in 2017 with the wing prices spiking so high is the unique phenomenon and therefore drove what we believe and have believed all along was a transitory issue for the brand.

Okay. Thank you so much.

The next question is from Will Slabaugh with Stephens. Please go ahead.

Thanks, guys. I have a question about pricing and I know this is maybe a little difficult to get an exact answer on now. But as we get closer to the end of the year, whenever your franchisees did take that larger amount of pricing than normal to get over the wing cost, is there anything you can say in terms of your expectation for what pricing may look like as we get into next year? What that level may be?

Yes. Hard to say at this point. I would not expect much, if any, pricing activity. I think it’d be to our benefit, assuming that commodity costs and other factors that affect the P&L remain consistent with our expectations that we would simply allow this price increase to carry on for a period of time, focus our energies solely on driving transaction growth through increased awareness and consideration.

Great. Good to hear. And another question on international if I could, this continues to be a faster growing piece of the story. So I was wondering if there is anything you could add in terms of how pleased you are with both the same-store sales results of various markets where maybe you’ve been there for a relatively longer period of time. And then separately how you would characterize a return on capital franchisees have been seeing in some of the more recently opened markets versus against some of these more mature markets.

Yes. Certainly it has become, and we expected it to become a more meaningful mix as it relates to our growth targets for the business and achieving our desired outcome ultimately of being a top 10 restaurant brand. The international business, as we’ve mentioned before, has produced great results for our franchisees. It’s still young and still in some cases in its infancy as a business and is following fairly similar cadence that the Wingstop brand experienced in the U.S. where people are gravitating towards this idea of wings as a center of the plate item, not just an appetizer. And with our unique flavors and our flavor experience, really recognizing that this can become an everyday meal replacement occasion option for them. The stronger markets, like Mexico and Indonesia have continued to perform very well, strengthening their unit economic model with continued positive same-store sales growth as we’ve mentioned before. And some of the newer emerging markets are showing signs of coming out of the gates very nicely, although they still have to get through that first year or two where they’re getting to know the brand and the brand is starting to adapt itself to the local market, whether it be through flavors or adaptations of the service experience, either one, are things that we do in that first year or so. And I think it’s important as well to note that this is a year where we are investing heavily in our international business to build up the new markets. So as we noted on the call, we expect new restaurants to open in the UK and in Southern France later this year, as well as Australia coming along with those as well. And we recently opened Panama. So this is that investment year. The following year will be a development year, looking for new deals and then we’ll go through that same sequence again. So it’s a long-term outlook, but one that we’re feeling very excited about.

Great, thank you.

The next question is from Peter Saleh with BTIG. Please go ahead.

Great, thanks for taking the question. I think you had mentioned that you’re seeing some moderation or continued moderation in the prices of wings. Can you give us a sense of what the magnitude is on the wing price decline and if that is helping alleviate some of the pressure on the labor line?

Hey, Peter, it’s Michael. Yes, what we’ve seen this year I would argue is what we’ve kind of seen in years prior to 2017 where wings kind of follow a seasonal curve where they drop to a little bit more favorable pricing throughout the summer months, and then as we get into the fall football season, you start to see prices creep up as demand and consumption of wings increase. Today we still remain at a – the Urner Barry remains at a favorable spot of $1.36 a pound, but we do expect to see that price go up as we move through the balance of this year.

Great. And then just real quick on G&A side, do you guys anticipate any significant, I guess, increases on the G&A side from the investments that you’re making to, I guess, open more markets internationally?

No, I think, Peter, kind of what you see in our G&A number right now is a pretty good number. We put a lot of the investments in advance of opening some of these new markets. So I think they’re in the G&A numbers that you see today.

Okay, great. Thank you very much.

The next question is from Chris O’Cull with Stifel. Please go ahead. Chris O’Cull: Thanks. Good afternoon. Charlie, can you describe what operational or training support the company may need to provide as you rollout the delivery service to markets? And maybe what other constraints you have as you roll those out?

Sure, one of the big things we worked on that we talked about was making sure that operationally we were ready for the rollout. And that not only required the training and preparation of our restaurants and our restaurant teams with our franchisees, but it also had a lot to do with making sure that the integration between our business and the support that’s provided by Door Dash happens in a very seamless manner. And the best way I can sum that up is that we have created what we would call our playbook for how we will enter a market. How we train our existing and communicate with our existing franchisees on how to handle a delivery occasion and what to expect out of that occasion. We also do that with our partner in Door Dash to make sure that they clearly understand what market, what parts that they market will rollout first and then how subsequent areas will continue to follow that pattern going forward. A lot of it is centered around making sure that we are very accurate on our timeliness and quality as it relates to making sure that the food that is ordered is the food that goes in the bag and that the bag is ready and prepared for our guest or in this case the Door Dash driver on time so that the handoff, that window during the handoff, is optimized and minimized in terms of any delays whatsoever. What we believe is over the quarter in the additional testing and work that the teams have done collectively that we’ve been able to optimize that narrow window between finishing the food and handing it to the driver such that we can get it to the guest in a time that makes sense to them. And that’s the optimization. So there’s a lot of work and effort involved, that’s why we’re going to go to one more market to test this, but we’re going in with confidence such that in the future, and in the near future, in the fourth quarter, we’d be able to take it to some larger markets very soon. Chris O’Cull: Michael, should we expect any kind of incremental costs to the company as this rolls out?

I don’t think anything meaningful to call out. Obviously we’ve had a team built that’s been very focused on getting us ready for the national rollout that we mentioned in our earlier remarks. And so I think most of that cost would be included in kind of the G&A number that you see for the second quarter. Chris O’Cull: Okay. And then one other question. I believe the bundled offer that you featured this summer, I think it’s $16, $17 price point, I think it was supported with maybe national social media advertising. It sounds like you plan to have it on national TV this fall, so I’m curious if you’ve tested it on any local – with any local TV advertising to kind of measure consumers’ reaction and how they perceive the value at that price point?

We actually did not test it on any TV as part of the decision to do this, but I will say that we actually are going to take that deal, which was $16.99 and actually advertise it nationally for $15.99, which we believe is an even more attractive and compelling price point that does not have a negative impact to unit economics. We did a lot of consumer screening of this particular bundle in preparation for this. We have good insight from our guests as to the relative take rate of this deal going into it, but we did not test it specifically on TV. Chris O’Cull: Okay, great. Thanks, guys.

The next question is from Karen Holthouse with Goldman Sachs. Please go ahead. Ms. Holthouse, your line is open.

One quick housekeeping question. The quarter-to-date commentary, do you think you saw any benefit from World Cup earlier in the quarter or has the trend been pretty consistent week-to-week or pre and post World Cup?

Hey Karen, this is Michael. I think just based on the time differences in the games being so early, we looked at it and we didn’t see anything material or meaningful that we would call out as far as the benefit from the World Cup and the comp.

And I think we can rely on that from past years where we’ve had the same time zone challenges that it didn’t provide a meaningful benefit previously as well.

And then another on the G&A question, just to clarify the answer. Are you saying sort of the right way to think about it is the dollars of spending this quarter is sort of a fair way to – a fair base for how to think about spending in the third quarter and the fourth quarter?

Yes, I think, Karen, from a G&A perspective that’s right. The one thing I would look at as kind of the cadence throughout the year of kind of how we historically have recorded stock comp expense with Q4 being a little bit heavier than the first three quarters of the year.

Great, thank you.

The next question is from Jon Tower with Wells Fargo. Please go ahead.

Great, thanks. Just looking at the unit growth side of the equation and domestically in the first half of the year the gross number of openings was actually down year-over-year. And you noted, Charlie, in the prepared remarks how strong store level economics are for the franchisees. And so my question is can you talk about your confidence in that gross opening schedule picking up either second half this year or into 2019? And then I have another question after that, please.

Yes, I think we did comment on the fact that we felt very good about the development of our pipeline of opportunity that has come along both in signing new deals, as well as those are franchise deals. But in addition to that I comment that our real estate pipeline has been growing nicely with this strong unit economics we’re seeing driven by the wing price reductions. I think the outlook is, and we’ve said this from the get go, we’d have a back loaded development expectation. We feel confident that we have great visibility into our pipeline and that Q4 would be a very strong quarter for us.

Okay, thank you. And just switching to the balance sheet, I know today some of the debt that you have is variable rate. Interest rates are rising. Any thought to potentially locking in rates over a longer period?

Jon, that’s a great question and that’s definitely something that we’re keeping an eye on. One thing I would point out is at the pace that we de-lever, we move down a rate grid that our interest rates should stay relatively flat if there’s any sort of increases in the Fed rate for the balance of the year. We’re definitely looking at it and making sure we’re thinking about the right long-term solution as it relates to fixing the interest rate.

Yes, thank you.

The next question is from Andrew Charles with Cowen. Please go ahead.

Great, thank you. Looking at the Las Vegas locations that pilot delivery, as these stores enter year two, how are these stores performing relative to the system same store sales during the quarter? And Charlie, how would you categorize this relative to your expectation?

Yes. I think we’ve seen – I think we commented on this before, but I’ll recognize that we have seen that these restaurants have been able to sustain their volumes after the anniversary of rolling out delivery. However, I would call attention to the fact that we really only advertised delivery during the first couple three months of the test process. And since then, we’ve noted, and I think you’ve seen in some of our results in our investor presentation as well, that we were able to sustain that growth throughout the year. But with no additional advertising spend, we would not have expected it to do anything but be fairly flat or consistent year-on-year. I don’t think that’s an indicator necessarily of what the long-term looks like because as we get to a full rollout, delivery becomes a part of the business. And our messaging strategy can continue to reinforce the importance of delivery as an occasion for Wingstop.

Okay, great. And then Mike, based on what your vendors are saying on the wing cost outlook, is the 32%, 33.5% gross margin you’ve seen so far this year a reasonable expectation going forward? Or are there efforts in place we should be mindful of, just shift mix to bonus, for instance to build your side items for instance that could lead to even stronger gross margins for you and your franchisees?

No, I think consistent with an earlier comment, Andrew, I think we seasonally will expect the Urner Barry to go up as we trend through the back half of the year. And as you think about that on a year-over-year basis, we really – that’s kind of when we started to see prices drop from last year. So the 23% deflation we experienced in Q2, I wouldn’t expect that to continue throughout the rest of the year necessarily.

Okay, great. Thank you.

[Operator Instructions] This concludes the question-and-answer session and today’s conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.