Charles Morrison – Chief Executive Officer Mike Mravle – Chief Financial Officer.

David Tarantino – Baird Jeff Farmer – Wells Fargo Andrew Charles – Cowen & Company Karen Holthouse – Goldman Sachs Matthew Difrisco – Guggenheim Securities David Carlson – KeyBanc Capital Markets Jeffrey Bernstein – Barclays.

Welcome to the Wing Stop Incorporated Fiscal First Quarter 2017 Earnings Conference Call. Please note that this conference is being recorded today, May 4, 2017. On the call, we have Charlie Morrison, Chairman, President and Chief Executive Officer; and Mike Mravle Chief Financial Officer. I would now like to turn the conference over to Mike.

Please go ahead..

Thank you, operator, and good afternoon. By now, everyone should have access to our Fiscal First Quarter 2017 Earnings Release. If not, it can be found at www.wingstop.com under the Investor Relations section. Before we begin our formal remarks, I need to remind everyone that our discussion today will include forward-looking statement.

These forward-looking statements are not guarantees of future performance and therefore we should not put undue reliance on them. These statements are also subject to numerous risks and uncertainties that could cause actual result to differ materially from what we expect.

We refer you to our recent SEC filings for a more detailed discussions of risks that could impact our future operating result in financial condition. Lastly, during today's call, we will discuss certain non-GAAP financial measures which we believe can be useful in evaluating our performance.

The presentation of this additional information should not be considered an isolation or as a substitute for results prepared in accordance with the GAAP and reconciliations to comparable GAAP measures are available in our earnings release. With that, I would like to turn the call over to Charlie..

One, we don't take short cuts with our products; and also they are made fresh-to-order, but you can shortcut the wait by ordering online. Encouraging viewers to order online or through the app will help further drive the conversion to our digital channels. Online orders command a $4 higher average check than other orders.

During the first quarter, digital sales comprised 20% of total sales, which is up from 15.8% in the fiscal quarter last year.

Almost half or 49% of our domestic restaurants had an online sales mix in excess of 20% of total sales, which is up from 20% in the year ago comparable period considering that almost half of our orders come in over the phone and approximately 75% of our orders are take-out, our digital ordering mix is poised to continue growing for a long time to come.

We opened 33 net new restaurants in the first quarter compared to 28 net new restaurants in Q1 of last year, ending the quarter with 1,031 Wingstop restaurants worldwide. Including in our openings were seven international restaurants and we recently announced an international expansion agreement for 30 in Malaysia over the next six years.

Malaysia represents our ninth international market and follows other recent announcements including Saudi Arabia, Colombia and Panama.

Unit development is one of our key strategic priorities and the productivity of our pipeline during the first quarter provides us confidence in our ability to achieve both our short-term development targets for 2017 and our long-term potential.

We believe that our domestic pipeline and our progress in international market demonstrate that we are well on our way to delivering on our vision of becoming a top 10 restaurant brand worldwide. Finally, as announced a few weeks ago we are testing delivery in the Las Vegas market.

Las Vegas is a market that has both company-owned and franchise location and we feel is an excellent market for us to test the effectiveness of third party delivery in our restaurant.

While we have seen a growing demand for delivery from our fans preserving, the quality and integrity of our product and ultimately the guest experience remains our number one priority.

In addition to assessing the impact to the guest experience, our test will also focus on understanding the impact to the value equation as well as the economic impact of the business. The test will run through July 1, at which point we will be able to determine what role delivery could play in our already highly successful business model.

With the progress we have made in the first quarter, we believe we are well-positioned to achieve our 2017 annual target and continue delivering industry-leading results well into the future.

Before I turn it over to Mike, I want to mention that we had our annual shareholder meeting yesterday and we officially welcomed our newest Board Member Kay Madati. Kay currently serves as Executive Vice President and Chief Digital Officer of BET network and was recently Head of Entertainment and Media and Global Marketing Solutions for Facebook.

I'm very excited to have Kay join our board. With that, I'll turn it over to Mike..

first, one of our company-owned restaurants was temporarily closed due to unexpected structural repairs for approximately six weeks during the quarter which has a 120 basis point impact to the comp.

This restaurant reopened the second week of April; second, we have six company-owned restaurants that are being impacted by cannibalization to be of further penetrated the markets where we operate company stores. We estimate that the impact of this cannibalization to be 340 basis points on the Q1 company-owned restaurant and same-store sales comp.

Our company owned restaurant AUVs are $1.7 million versus the domestic system average of $1.1 million and we identified opportunities to further penetrate these markets while delivering great returns to both our shareholders and our franchisee. We should begin to lap the impact of the cannibalization ratably through the third and fourth quarters.

Our company-owned restaurant comp is in a small store base and is not indicative of the overall comp in the markets where we have company-owned restaurants, or more broadly the state of Texas. Trends in Texas for the first quarter remained similar to 2016, slightly below the system average.

Cost of sales increased as a percentage of company-owned restaurant sales by 640 basis points to 77.2%.

The increase was driven primarily by an 11% in commodity rates for bone and chicken wings as compared to the prior year period, an increase in wage rates in labor to the investments and roster sizes and staffing we made in the third quarter of fiscal year 2016 and deleveraging associated with a declining company store same-store sale.

In Q2, we expect year-over-year inflation on bone and chicken wings to be similar to Q1. Selling, general and administrative expenses increased 34.1% $10.3 million, up from $7.7 million in the prior year first quarter.

This increase is attributable to the contribution we made to our advertising fund associated with a one-time payment recorded in royalty revenue and franchise fees in conjunction with the vendor agreement executed during the quarter.

As I previously stated, this contribution is intended to provide support for the company's national advertising campaign. Adjusted EBITDA on non-GAAP measure increased 11.7% to $10 million. Please review the reconciliation table provided in our earnings release between adjusted EBITDA and net income, its most directly comparable GAAP measure.

Interest expense rose to $1.3 million, compared to $0.8 million in the prior your first quarter, reflecting the refinancing of our credit agreement that was completed at the beginning of the third quarter last year. Our effective tax rate was 14.7% for the quarter, which compares to a 37.3% rate in the first quarter last year.

This lower tax rate is driven by a change in GAAP presentation requirements related to equity-based compensation. We now record the tax benefit associated with equity-based compensation in tax expense where previously, this was recorded in equity.

As a reminder this GAAP presentation change has no impact to cash flows or the amount of taxes we ultimately end up paying. This new standard will create volatility in tax rates and earnings over time. Net income increased 52.2% to $6.5 million, while EPS increased 46.75% to $0.22.

The tax benefit associated with a new GAAP presentation related stock option exercises improved DPS by $0.06. As of April 1, net cash and cash equivalents of approximately $3.4 million and $144.9 million in debt which reflects $5 million in debt payments against the revolving debt facility made during the first quarter.

Note that our net debt to trailing 12-month adjusted EBITDA was approximately 3.9x, down from 5x at the beginning of the third quarter of 2016. Turning to our 2017 guidance.

We are reaffirming our prior guidance with the exception of updates associated with the one-time vendor rebate, the corresponding contribution to our advertising fund and the tax benefit associated with the first quarter stock option exercises.

Our outlook for the fiscal year ending on December 30, 2017 is system-wide unit growth of 13% to 15%, domestic same store sales of low single digits, SG&A expenses between $36.5 million and $37.5 million dollars reflecting the impact of our new vendor agreement, adjusted EBITDA growth of 13% to 15%, net income of $20.2 million to $20.5 million, fully diluted EPS growth of 19% to 21% and finally, fully diluted share count should be approximately $29.3 million shares.

There are two items I would like to highlight for modeling purposes.

Due to the unpredictable nature of the timing around stock option exercises, the net income guidance provided for 2017 reflects an effective tax rate for the balance of the year at our normalized rate of 37% to 38%; second, our franchisee convention occurred in the second quarter of 2016 and will take place in the fourth quarter of 2017.

As a reminder, there is a net zero impact to profit dollars from this event, but we will have expenses associated with the convention of approximately $0.9 million dollars in SG&A in the fourth quarter with offsetting revenue from support we received to fund the convention. Thanks again for joining us this afternoon.

We appreciate your interest in Wingstop. I would be happy to answer any questions you may have. Operator, please open the lines for question..

Thank you, sir. At this time we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from John Glass with Morgan Stanley. Please state your question..

Hi, this is Courtney on for John.

Can you guys, please just quantify the sales list that you got from national advertising on the 40% stores that didn't have advertising previously? And in what benefit you thought overall comes from that?.

Yes.

We don't have any specifics as it relates to the benefit to come, but I can tell you that the developing markets certainly - what we call are developing markets outside of our core coop markets - have seen a stronger rebound certainly than our existing core markets with associated with the national advertising or since the national advertising hit.

I will call attention to the fact that we've seen just in the short period of time, that we were on-air with our national advertising that our developing markets saw a marked increase in brand awareness, which we expected in addition to very strong ad awareness and very positive results on those ads.

And then what we call consideration are folks that would be interested in actually trying Wingstop and trying our product jumped considerably as well. So we're very excited about the strong performance that we had out of those developing markets. In addition to improvements across all of those metrics in our core market as well..

Okay. Got you. And then I think you mentioned that you're spending up 2.3% at the Easter.

Is your company store still performs the same GAAP that they did to the system?.

Yes. To clarify the statement, in the second quarter to date, net of the impact of Easter because Easter for us created a negative result because most of our restaurants are closed or not operating much on those days. We did experience across the U.S. side the brand a 2.3% increase in same-store sales.

The company stores have also followed suit with that, since the beginning of the second quarter as well, returning into a positive comp during that same time frame..

Okay. And then just lastly on your delivery test. Obviously you had previously been pretty reluctant to try delivery.

Just curious why now? Is it just because of the competitive environment or did some franchisees come to you asking for it? I just wanted to understand why you made that decision and then also, I think one of the concerns you cited was food quality and have you changed your efficacy at all [ph]..

Excellent question. I think as we mentioned in our comments during the call that we have seen an increase level of demand from our customers regarding delivery and we knew that at some point, there would be an opportunity for us to deliver.

The question was where and when? Certainly as you noted, product quality was very very important to us to ensure especially that our French fries which are hand-cut and fried daily that you order in every restaurant, were taken care of during that process. So, we have made some modifications to the product.

I won't disclose the details of that other than to tell you that we still do hand-cut all of our fries at our restaurants every single day. But we feel that we have addressed the quality issue and part of this test will be to assure ourselves that the guest satisfaction is where it was even prior to delivery.

To answer your question franchisees, yes, our franchisees have in many cases requested delivery and for the same reasons we've been hesitant, but we're very excited about the early indications of this test.

We know that our brand is well-positioned for delivery and I think guests are responding quite well to our approach, but it's very early in the process..

Okay..

Thank you. Our next question comes from David Tarantino with Baird. Please state your question..

Hi, good afternoon. Just my first question on the unit development side and I was wondering if you could give an update on how the new unit in some of your newer markets are performing. And I guess as a secondary question, are you starting to see the newer units? The ones that aren't in the comp base benefit from the national ad..

I'll let Mike jump on this as well. Good afternoon, David. We have seen very consistent performance out of our new restaurants. I think in some of the emerging markets, the performance improvement we've seen in existing restaurants does translate a little bit into some of these new stores.

I think it's a little early to be able to say that the new units are performing dramatically better. There aren't a lot of data points, but I think the overall tide is lifting in those markets as we would have expected with the national advertising.

Mike, do you have anything to add?.

Yes. Okay. We're aligned on that..

Fair enough. Yes, okay. Great. I'm not sure you've given us yet. I was wondering how many units are embedded in your guidance in international markets in terms of your net opening guidance for this year, and I have a follow up with that..

We didn't break that out, David, in the guidance. We opened around 20 or so last year on a net basis and so I think our initial guidance is a number that's not the similar from prior year, but we haven't specified that..

Got it. And then the follow up for that is, of course you signed a bunch of agreements over the last year.

I was just wondering if you could talk about how you think that number might ramp up as you look at the next three to five years and should we expect also to hear about more deals on the comp?.

Malaysia, Saudi Arabia, as well as Panama and Colombia together under one deal are a good representation of a slow but steady approach that we like. We may see one or two more markets maybe this year but then each year subsequently we wouldn't want to get much beyond that level of development..

Great. That's helpful. Thank you..

Welcome..

Thanks. Your next question comes from Jeff Farmer with Wells Fargo. Please state your question..

Thank you.

Can you guys provide some additional color on that biggest test? Is this exclusively with some of the third party delivery companies or are you looking at in-house delivery models as well?.

Hi, Jeff. It is exclusively with third party delivery companies. We have a handful of different parties that we're working with, including one of which is Oleo [ph] who handles all of our online ordering as well..

Sort of further down the road, is there any consideration of potentially bringing this in-house?.

It is not. It's not something we're working on right now. As you know our restaurants are nice and efficient. They're not built to handle all of the details, the logistics of delivery and having dedicated employees in there. So it's not our first approach here.

Certainly it's something we could contemplate we've talked about, but as of right now, we feel pretty good about the approach that we've seen with third parties that we're working with..

Okay. And then on a different topic. In March, you did note that some of your customers have become increasingly cautious with [indiscernible] especially in those months following the election.

So clearly, the same-store sales have gotten better, but in terms of your sense of that headwind for that certain segment of your customer demographic, has that eased up as we've moved past election?.

Yes. I think it's hard to say. There's not a real clear major meant to it. Certainly as we noted before, when we saw our comps really taper off quickly, it happened right around that time of the election and then further was exacerbated by the tax refund delay.

We certainly have seen a rebound since that and if you couple that really with the momentum in our first and now our second wave of national advertising in the messaging strategy that we've employed, we're starting to see the momentum kick back in.

I always felt as if that loss of momentum from the late fourth quarter into the early first quarter would be a temporary issue as it has shown itself to be during past election cycles. The tax refunds were a challenge. But right now, we really do like the momentum that we're seeing in the performance of the brand across all of our markets..

I appreciate that. Just one last one if I could sneak it in, which is I don't think the system has taken menu pricing in quite a while.

Any idea to how the franchise group is addressing what could be mid-single digit wage rate inflation? Any commentary, any discussions with the franchise group?.

Yes. We certainly keep an open dialogue with our franchisees about wage inflation, whether it be demand for employees or that associated with any sort of legislation in addition to commodity prices.

In our test that we're doing in Las Vegas, we've also started working on some ideas on how we can position ourselves for improved value driving perhaps more boneless product through our mix as well as looking at ways to optimize the labor equation to support the business. So we're testing some ideas with them.

More to come on that down the road, but we feel pretty good about ways that we can address that without having to resort necessarily to many pricing as a means to offset this..

Thank you..

Our next question comes from Andrew Charles with Cowen & Company. Please state your question..

Great, thank you. This is the first quarter where you didn't seem like you guys got a sequential increase with the mix of digital sales. It's 20% in 4Q and 20% again in 1Q. I'm just curious, with the digital campaign launch in January and then national TV advertising in February where you tagged online ordering.

Were you surprised by kind of the similar sequential trends to this 4Q?.

Actually, no. If you if you were to map our line chart each and every year year-over-year and look at our online sales - because of the Super Bowl, we actually see a reduction in online orders as the percent of sales because we actually turn that mechanism off on a very, very busy full capacity day.

So usually the first quarter against the fourth quarter tends to be pretty flat which is what we saw.

We then start to gain momentum as we exit the first quarter and into the second quarter we're starting to see some momentum build associated with our advertising that we just started, which is specifically focused on online ordering and skipping the weight, if you will, by coming to Wingstop. So we're encouraged.

If you look at year-over-year, the rate of change year-over-year has been very consistent quarter-in and quarter-out..

Very good. And then we saw that you recently launched boneless wing promotions on Mondays and Tuesdays. Maybe these were used in the past as well, but brought back just given the wing bone and wing cost pressures.

Could you talk about the success of just driving incremental traffic during curiously slow days for you guys, as well as the mix shift to boneless wings away from bone-in?.

Yes. That promotion has actually been a part of the brand. It's not on our menu per se, but it is merchandised in all the restaurants and has been for many years in a row. That will continue to be the case probably for a period of time to come. The only thing I would say on boneless wings versus bone-in, I think consumers value both products equally.

They're all sauced and tossed in our 11 unique flavors. And there is a disparity in the price of bone-in wings to boneless. Usually we work with our franchisees and anytime we see that kind of price disparity, we try to encourage the sale of boneless wing..

Thanks for the help..

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

Thank you for taking the question. Looking at the quarter-to-date number you gave, I know last year there was a bit of a headwind in April because you were wrapping up May Weather pack [ph], something I'm not into boxing.

Slight from the prior year, just how does that work on a two-year staff rate? How much was just because there was an easy compare in '16 and I'm sorry to be a little nitpicky there..

No, I don't think anything has to do with a two-year stack that's going on right now Karen. That was actually an event that was back in 2015 and so the one year comp has nothing to do with anything that happened back in 2015..

Okay.

And then quick clarification, the change in French Fries, is that for all orders or just delivery orders that you're slightly changing the preparation?.

Yes, that was a procedure change on all front..

Okay.

And has there been any reaction to that in terms of change in customer comments or anything?.

No, no. It's -- what it does is actually, the only change we've made was to ensure that it remain crispy and held longer and harder, all of which we tested thoroughly and feel like there is very little change to taste flavor or anything else that would be noticeable by the guest.

So far all the consumer response we've seen in the past has been very positive..

And one final one for you; I know with the launch of national advertising there is a benefit to consumer awareness but it will also hopefully a benefit to potential franchisee awareness.

Are you seeing any early signs of greater interest on that end as well?.

A little, it's early.

I think we already had a lot of interest in our brand already Karen and I would demonstrate that through the fact that we continue to open a lot of restaurants, continued strong openings, franchisees that we have in our system are still really the key to our long-term success in terms of opening more restaurants and they continue to do so.

So it's not as if we need a large pipeline of net new franchisees for us to be able to continue our growth. But certainly as the national advertising helps raise brand awareness, those restaurants tend to open stronger, faster, especially in newer or emerging markets..

Okay, great. Thank you..

Our next question comes from Matthew Difrisco with Guggenheim Securities. Please state your question..

Thanks so much.

I just have two questions actually, can you describe a little bit of the competitive environment; I'd presume that you're not seeing as much discounting given the rise in the commodity cost or are you -- how would you describe the year-over-year competitive environment promotional activity from your peers?.

It kind of depends, I don't know that we have what I would call a true peer and that we don't really find a burger war or a pizza war or anything like that that others have sandwiches included.

So we see maybe some discounting by casual dining chains that might sell Wings but I don't think any of that is having an impact necessarily on our business, in fact I think we've been able to demonstrate that we can separate ourselves from the rest and we've done that through our national advertising and maintaining a good value equation without having to deep discount anyway..

Excellent. And then just a follow-up a little bit on the marketing side of it. I guess so you've got this rebate now and you're starting to spend more on the national side; how should we think of the cadence of marketing dollars throughout the quarter and throughout the quarter and throughout the year.

Are you out of run rate now and what you've sort of fueled the 2.3 quarter [indiscernible]? That comp is reflective of a going forward pace to marketing or I guess what the dollars now coming in from the rebate and plus gaining some momentum behind advertising, are you going to see a larger spend as the quarter and year progresses, so in theory more support towards the comp from marketing?.

Well, the spend as planned is to be fairly evenly spread across, at least 22 weeks of the year. We might expand the number of weeks against our initial target but the TRP is and/or the dollars if you will -- quarter-to-quarter will be very, very smooth and consistent.

We did that deliberately because we did not want to come out with a big heavy push and then back it off and we see this is a long-term play and so we've approached in that way..

Yes, Matt and one other thing to clarify that the incremental dollars that came -- that we contributed was already contemplated in our original budgets, so that's not incremental to our original plan for the year, it's just got reported here in the first quarter..

And is there anything abnormal digging into that two/three quarter a date is as far as year-over-year comparisons on TRPs and amount of support?.

No..

Okay, excellent. Thank you..

Thank you. Our next question comes from [indiscernible]. Please state your question..

Thanks.

I wanted to ask another one about National Media and just your assessment of that impact for sure initial expectations before the launch and do you feel like that momentum is building as we go along and now you said you would get the second launch happening now or if that bump in sales causes somewhat stable as we moved along?.

Well, I think we've noted a couple of things. That one, it reversed a negative trend that we had experienced in the early part of the first quarter, and that we have started to build momentum into the back half of the quarter and I think that was demonstrated by the improvement in our comp from the last time we spoke.

And then certainly going into Q2, in the first four to six weeks I guess in the quarter excluding the Easter impact we've seen that momentum continue.

Again, I reinforce, we didn't design this to have a big pop at the beginning and then settle down; we had designed it such that we could create good solid momentum this year, well into the back half of this year and into the future years, we didn't want anything to -- we'd have to necessarily roll over if you will..

Understood.

And I wondered if you could quantify the calendar shift that we saw in the quarter and then the court-to-date period; you mentioned that two/three I think was net of Easter in the quarter-to-date period; I'm curious if you would be able to quantify what we saw in that quarter and then what that Easter impact was?.

Yes, Easter is about a 70 basis point headwind for the second quarter, for the whole quarter and it was a benefit to Q1 on the reverse..

Okay, thank you..

Our next question comes from David Carlson with KeyBanc Capital Markets. Please state your question..

Thank you very much. Mikey, you mentioned your expectation for 2Q Wing inflation persists today at a similar level as what you've experienced in the first quarter. As you kind of think a little bit further out, what are your thoughts on second half Wing inflation just given the suddenly high prices we've seen off late? And I do have a follow-up..

Yes, sure.

It's a pretty volatile commodity as you guys know, it typically would have started its field declined by now and it obviously hasn't done that, it's actually gone up a bit, although it's been stable more recently; and it's hard to say what's going to happen in the second half of the year so I wouldn't particularly speculate on that right now..

Okay, fair. And also I appreciate the commentary you guys provided on the performance in the State of Texas.

You know, given the large percentage of stores in California, can you maybe give us a little bit of glimpse as to state how that geography is performing relative to the system?.

Yes, we don't want to get into breaking down the comp by geography, we know Texas has been important, particularly given our company store commentary and so I think similar to the momentum we've seen across the system with the positive momentum recently, we're happy with performance in California..

Thank you very much..

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

Great, thank you.

Just a couple of follow-ups; one on the delivery; I'm just wondering how would you actually define success? I'm wondering if that's certain hurdles you set on whether it's sales or guest satisfaction? And if you're achieving those, I'm just wondering how long I mean they said you will look at these results over the next couple of months; but how long do you think it would take if you decide to roll it out nationally or would you do it more in phases over multiple years?.

Jeffrey, it's a great question and we're really just getting going so it's little early to tell you what we think a rollout strategy would look like.

We're obviously being very careful and cautious to ensure that we can actually get the product to the guest and within a reasonable period of time that they would expect and that also would maintain the quality of the food.

The only other thing I would add to that is we have set some internal benchmarks in terms of what we think success is; without quoting specific numbers the one thing I would say is, we certainly wanted to be incremental to the business, not just cannibalizing existing revenue that we have as carryout.

We also have to make sure that the value equation for the consumer is right, in some cases these delivery fees can be very high to the guests but for the most part we want to make sure that the guest is willing to pay that fee and not have it rewrote the value equation for them.

So there is a lot to learn in the early stage, like I said, we're very excited about some of the results we've seen. But again it's been a very short period, only a few weeks and so we want to make sure that we're very thoughtful about this.

So what we did mention was that in the summer time this year we would probably be at a position where we felt like this was ready for an advanced roll out whether that be in a few markets or more broadly across the United States but time will tell..

Got it. And then just -- I think you made mention talking about balance sheet and leverage; I think you [indiscernible].

I'm just wondering as a rule of thumb, delever what rate based EBITDA growth and are you considering options? I know in the past you've picked a one-time dividend but -- you know, when might we see something like that and what options would you consider or is a one-time dividend something you guys have said would be your priority?.

Jeffery, its Mike. Great question. Historically, every five to six quarters we've been in this position because of the deleveraging to recapitalize the company; and as you've pointed out, we have paid special dividends. So on that cadence, that would put us Q4 to Q1 as you look forward.

So we're starting to work on that, now I contemplate that, now that we've dropped below four times. And as we go through that process, we'll also be reviewing other options for possibly more regular return to shareholders but we don't have anything specific to discuss at this time..

Got you. Thank you very much..

Thank you..

Thank you. There are no further request for questions at this time. This concludes today's Wingstop first quarter 2017 earnings call. All parties may disconnect. Have a good day..