Good day, and welcome to the Wingstop Second Quarter 2019 Earnings Conference Call. [Operator instructions] Please note this event is being recorded. I would now like to turn the conference over to Michael Skipworth, CFO of Wingstop. Please go ahead..

Thank you, and welcome. Everyone should have access to our fiscal second quarter 2019 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 risk and uncertainties that could cause our actual results to differ materially from what we expect.

Our recent SEC filings contain a detailed discussion of the risk that could affect our future operating results and financial condition. We also use 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 would like to turn the call over to Charlie..

Thank you, Michael, and thank you all for joining us this morning. July marked the 25th anniversary for Wingstop; 25 years of leading industry growth, serving the world flavor and providing our franchisees with one of the best unit economic models in the industry.

And to add excitement to this milestone, we're very proud to report another strong quarter of growth highlighted by domestic same-store sales growth of 12.8%. We ended the second quarter with over 1,300 restaurants in the Wingstop system.

These results and the success of the Wingstop brand would not happen if it were not for the hard work and investments of our franchisees, whom we affectionately refer to as our brand partners.

As we look ahead to the second half of 2019 and beyond, our long-term strategy remains unchanged, anchored by our three main growth pillars sustaining same-store sales growth via growing brand awareness and innovation, maintaining best-in-class unit economics for our franchisees and continuing to expand our global footprint.

All of this ladders up to our vision of building Wingstop into a top-10 global restaurant brand and delivering industry-leading returns to our shareholders. I'm very pleased with the strength of our pipeline of new restaurant development.

With the visibility we have today in the pipeline, we have clarity into the development numbers for the balance of 2019. We believe we will open between 136 and 142 net new restaurants in 2019. This rate of unit growth is consistent with our long-term target of 10%-plus unit growth.

Overall, I'm very pleased with the way development is shaping up for 2019. This is largely driven by the strengthening of our domestic pipeline, which is benefiting from the strong top line growth in our domestic business.

We saw the top line momentum from the start of the year continue, resulting in domestic same-store sales growth of 12.8% in the second quarter, which is a clear demonstration of the effectiveness of our strategy.

As a reminder, we asked our franchisees to invest an additional 1% in national advertising in 2019, increasing the contribution rate to our ad fund from 3% to 4%.

Our strategy leverages this investment, which equates to a roughly 50% increase from 2018, with stronger creative to drive awareness, targeting our core consumer while at the same time broadening our reach to a larger QSR audience that has not yet tried Wingstop.

This national advertising strategy, combined with both the national rollout of delivery and the continued expansion of our digital mix which was 34.5% of our sales as we exited the quarter, are driving great top line growth that we believe will sustain the balance of the year.

I would also like to update you on the progress of our international business. The international pace of growth is generally consistent with the pace we have seen over the past few years, but it is not accelerating as some might expect.

Today we have 135 international restaurants, and we believe we have successfully demonstrated the portability of the Wingstop brand to regions all over the world. The unit level economics continue to improve as our international business same-store sales growth continues growing at a rate of high single to low double digits.

We have intentionally moderated the pace of development as we explore opportunities to optimize the Wingstop model in a few key international markets.

We believe the kitchen technology and speed of service we have deployed in our London restaurant that opened in late 2018 demonstrated a breakthrough in the guest experience, especially in markets where we have more individual occasions in areas with high foot fall such as shopping malls and city centers.

Our first restaurant in France which is on track to open later this year will deploy the same speed of service model that we deployed in the UK. We believe optimizing the model in these markets is critical before we accelerate the pace of development and before we sell any additional new markets.

While all the markets are growing at a consistent pace, we believe we have a clearly defined plan that'll put us on track to see the pace of international development begin to accelerate as we prove our newly optimized model. While we are enjoying strong top line growth, we do see pressure on P&L flow-through year-over-year.

This is primarily due to the fact that in the second quarter of 2018, prices for wings were at of 4-year low as compared to today's prices which are slightly above our long-term algorithm.

And while there is pressure on the year-over-year flow-through, our brand partners are still enjoying best-in-class returns that exceed 50% at our system average unit volume, which is approaching $1.2 million.

We maintain a diligent focus on minimizing volatility to provide more predictable cash flows for our franchisees while leveraging fixed costs and generating profits through our top line growth.

To that point, I'm excited to let you know that we have a fall promotion beginning in late August that we believe will help us minimize some of this volatility. We will provide more specifics around the fall promotion as that time draws closer. As I mentioned earlier, delivery is a key driver of our top line growth.

We continue to see delivery mix that is consistent with what we saw in our test markets, high single- to low double-digit delivery mix in markets that have launched in our phased rollout. We remain on track to have delivery launched in over 80% of our domestic restaurants by the end of 2019.

In April, we completed the rollout of delivery for all of our company-owned restaurants.

That being said, the aggressive advertising efforts of third-party delivery providers, including our partner DoorDash, has resulted in the mix of delivery between Wingstop.com and the DoorDash marketplace completely flipping from what we saw in our initial test markets, putting additional pressure on the P&L, which Michael will talk about in a minute when he discusses company-owned restaurant margins.

Historically, we have paid a higher commission rate on delivery orders that are placed on their marketplace.

As we saw this shift in channel mix, we immediately worked with DoorDash to rebuild our pricing and commission structure for marketplace transactions, resulting in a more favorable commission structure which will be in place later in the third quarter that will improve flow-through on the P&L.

We remain focused on maintaining our best-in-class unit level economics, and this is central to our vision of building Wingstop into a top-10 global brand. Next I want to reiterate a few of my comments from our first quarter call as it relates to investments we are making in the business.

As I shared in the first quarter call, we feel a responsibility to our shareholders, team members and brand partners to capitalize on our success and position Wingstop for long-term sustainable growth well into the future.

We believe this inflection point we are in as a brand represents an opportunity to make the necessary investments now to position Wingstop to reach its full potential. The investments all support our long-term strategy and drive toward our continued vision of becoming a top-10 global restaurant brand.

In rough numbers, that vision means we plan to grow to six times our size today. We believe we will achieve this kind of growth with our brand partners, who, as I mentioned earlier, are benefiting from approximately 50% unlevered cash-on-cash returns at our current average unit volume of almost $1.2 million.

As you witnessed in the first two quarters of this year, we are demonstrating the potential to drive even higher average unit volumes and showcase Wingstop as a destination for leading franchise operators.

Broadly, these investments fall into three categories - digitizing every transaction, simplifying our guest experience with technology and kitchen enhancements, and building the organization for the next level.

Consistent with other brands that leverage technology as a strategic advantage, there will be ongoing investments necessary to continue to offer a best-in-class experience to our guests, and we believe that technology is the right area for us to continue to invest as well as innovate.

As we look forward to the Wingstop of the future, we believe technologies currently in test, including kiosks, pickup lockers and back-of-the-house enhancements to improve production speed will play a key role, and we will provide more updates as we gain further learnings.

In addition to investments in technology and guest experience, we are also making strategic investments in people.

These investments include adding the appropriate headcount to support key initiatives we have in place to drive top line growth, and building our international business as well as attracting top-tier talent to our ranks as we strive towards the next growth phase.

We run a lean organization and we are going to continue to run lean well into the future. As we shared in June, we announced an investment in a new corporate headquarters. We signed an agreement to acquire a 78,000 square-foot state-of-the-art office building for $18.3 million.

As our team grows, we must ensure we have an environment that supports our next phase of growth and attracts top talent. This new office building has increased flexibility and scalability as compared to our current multi-tenant building format, and will also house a global test kitchen, innovation center and a mock Wingstop restaurant.

While just down the road from our corporate headquarters here in Dallas, we are excited to have a space that represents the growth and pride we have in the Wingstop brand. This and the investments we discussed here today are within the SG&A range that we provided last quarter and are reiterating today.

One final highlight before joining the call to Michael. As we continue to grow, returning capital to shareholders and driving overall shareholder return remains a top priority. Since going public a little more than four years ago, we have delivered a total shareholder return that exceeds 450%.

To that end and as our press release mentioned, I'm pleased to report that our Board of Directors approved a 22% increase in our quarterly dividend to $0.11 per share of common stock, a demonstration of our confidence in the business and in the strong cash flow generation of our asset-light model. With that, I'll turn it over to Michael..

Thank you. As you heard from Charlie, our level of execution against our strategy has fueled a strong start to 2019. We delivered another quarter of industry-leading growth with system-wide sales up 21.9% over the prior year quarter, totaling $372 million.

Underlying this growth was our domestic same-store sales growth of 12.8% in the quarter, which was a slight acceleration in the 2-year comp. This top line growth translated to total revenue of $48.6 million for the quarter, an increase of 31.1% compared to $37 million in the prior year quarter.

On the development front, we ended the quarter with a global footprint of 1,303 restaurants, reflecting 30 net new restaurants in the quarter as compared to 31 in Q2 last year. As Charlie mentioned, we expect net new restaurants to land in the 136 to 142 range for fiscal year 2019.

As a reminder and consistent with prior years, our new restaurant openings tend to be weighted towards the back half of the year.

The 21.9% growth in system-wide sales translated to royalties, franchise fees and other, increasing $4 million to $21.2 million, driven primarily by 112 net franchise restaurant openings since the second quarter of last year, and the 12.8% domestic same-store sales growth.

Advertising fees and the related income increased $5.1 million to $13.5 million, due primarily to the increase in the contribution rate to our national ad fund from 3% to 4% of gross sales in fiscal year 2019, as well as the 21.9% growth in system-wide sales. Our company-owned restaurant sales increased $2.4 million or 21%, to $13.9 million.

This increase is primarily due to same-store sales growth of 13.8% and the acquisition of five franchise restaurants since Q2 of 2018. Cost of sales as a percentage of company-owned restaurant sales increased by 860 basis points compared to the second quarter last year. This increase was primarily due to 32.1% wing inflation in Q2 of 2019.

And as Charlie noted, we are lapping a 4-year low for wing prices in Q2 of 2018.

Also contributing to the increase was the higher contribution rate to our national ad fund from 3% to 4%, labor and other operating expenses related to the three Kansas City restaurants acquired in late 2018 and third-party delivery commissions as we completed the rollout of delivery in April of 2019 in all of our company-owned restaurants.

Similar to last quarter, the demand for wings continue to be strong and we have not seen the seasonal downward trend in price during the summer months that we typically see. This strong demand coupled with a relatively flat or consistent overall supply has allowed wing prices to remain elevated through Q2 and into the start of Q3.

In light of the current wing environment, we are updating our outlook to roughly 30% wing inflation for 2019. Advertising expenses increased $4.8 million to $13 million in conjunction with the increase in the ad fund contribution rate.

Also to remind everyone, advertising expenses are recognized at the same time the related advertising revenue is recognized and does not necessarily correspond to the actual timing of the related advertising. Selling, general and administrative expenses were $13.4 million in the quarter, which is a $3.3 million increase versus Q2 of 2018.

We began making investments in our organization throughout late 2018 and into early 2019, as we prepare the organization for the next phase of growth.

With the backdrop of the strong top line results from our national advertising strategy, national rollout of delivery and a digital expansion, we began accelerating some investments to ensure we are well-positioned for long-term growth.

These investments are primarily in the form of new team members which resulted in approximately a $900,000 increase in headcount-related expenses over the second quarter of 2018. Also contributing to the increase was a $500,000 increase in marketing-related expenses.

However, this $500,000 increase is offset by advertising contributions included in revenue. Stock-based compensation increased approximately $900,000 related to the modification of certain stock awards within the quarter. The balance of the SG&A increase is driven by investments in technology as well as other strategic initiatives.

Adjusted EBITDA, a non-GAAP measure, increased 15.3% to $13.5 million for the second quarter. There is a reconciliation table between adjusted EBITDA and net income it's most directly comparable GAAP measure, included in our earnings release.

Net income in the second quarter was $4.9 million, or $0.17 per diluted share, down from $0.23 in the prior year period.

This decline was impacted primarily by higher interest expense, which we guided to on our prior earnings call, and is the result of a higher average debt balance and the applicable interest rate related to our securitized debt that we had entered into in November of last year, as well as our effective income tax rate for the quarter of 17.9% compared to a 9.8% tax rate in the second quarter of last year.

Our 98% franchised asset-light model continues to produce robust cash flow, with a cash flow conversion rate in the second quarter of 94.1%. As of the end of the second quarter, we had $297.3 million in net debt.

We ended the second quarter with our net debt to trailing 12-month adjusted EBITDA at 5.7x as we continue to delever at a rapid pace, down more than a full turn of leverage in basically two quarters.

We remain comfortable with this level of leverage and we believe over the long term we will continue to delever through a combination of adjusted EBITDA growth and strong free cash flow generation. We remain committed to returning capital to shareholders through our quarterly dividend, which is targeted at approximately 40% of free cash flow.

Our Board of Directors approved a 22% increase in our quarterly dividend, to $0.11 per share of common stock, up from $0.09 per share. This dividend totaling approximately $3.2 million will be paid on September 13, to stockholders of record as of August 30.

We are consistently evaluating the best use of excess capital, and feel this quarterly dividend is an important part of our overall commitment to our shareholders. At the midpoint of the year, we would like to provide an update on guidance for full year 2019.

Based on the strong domestic same-store sales growth in the first two quarters of 2019, we are raising our anticipated full year 2019 domestic same-store sales growth outlook to high single digits, up from mid-single-digit sales growth in our prior guidance, which we recognize is above our long-term target of low single-digit growth.

Additionally, as previously mentioned, we are updating our unit growth outlook for fiscal year 2019, to 136 to 142 net new restaurants. We are reiterating our prior SG&A guidance of $52 million to $55 million.

As we did last quarter, we included a reconciliation in our earnings release from SG&A as reported to an adjusted SG&A number that excludes transaction fees, noncash stock-based compensation and is further adjusted for convention- and marketing-related items which have equal and offsetting contributions in revenue and do not impact the profitability metrics.

To reiterate, let me briefly comment on each of those components that are included in SG&A. We expect our franchisee convention cost to be approximately $2 million. Please note that our convention occurs in the fourth quarter of each year.

Expenses related to national advertising of between $7.3 million and $7.7 million, and stock-based compensation of between $5.9 million and $6.4 million. Adjusting for these components, we expect adjusted SG&A for 2019, to be between $36.8 million and $38.9 million, consistent with our prior guidance.

Separate from SG&A, we are reiterating the following for 2019. Interest expense of $17.8 million. We continued to estimate an effective tax rate of 25% for the balance of the year, and fully diluted adjusted EPS of between $0.72 and $0.74 per share, which reflects 29.8 million shares outstanding.

Please note, the additional interest expense associated with the securitization we completed in Q4 of 2018, impacted EPS in 2019 by approximately $0.19 per share. Lastly, before opening the call for questions, we wanted to follow up on our new corporate headquarters acquisition announced in June.

The acquisition of the headquarters will largely be funded by cash on hand, with the remaining source from a revolving line of credit. At this time, we are not anticipating a significant P&L impact for the new headquarters in 2019.

We are still undergoing due diligence and gaining a better understanding of the cost and efforts to build out the new space as well as the overall timing of our move.

In closing, we remain focused on growing Wingstop for the long term, maximizing both our brand partners' returns as well as our shareholders, and we have provided metrics to measure our growth and success as our business continues to scale and mature.

We remain confident in our previously shared long-term targets and will continue to manage the business with a long-term outlook that is anchored on 10%-plus unit growth and low single-digit same-store sales growth. Thank you all for joining us today. We would now be happy to answer any questions that you may have.

Operator, please open the lines for questions..

[Operator instructions] Our first question comes from David Tarantino of Baird. Please go ahead..

Just first, Michael, a clarification on the guidance. I know the comp guidance is going up, but the EPS and earnings guidance isn't changing.

So can you just confirm that the key offset to the revenue increase is the company operated cost of sales line? Or is there anything else going on under the surface?.

Yes, David, that's exactly right. One of the key drivers impacting the outlook is definitely the cost of sales inflation we're forecasting for the balance of the year.

And I would say the other component that's kind of playing into that, us not changing the EPS range, is also in our range for SG&A that we're estimating for the year, we're trending, as we look at it right now, kind of towards the higher end of that range. So it's those two pieces that kind of arrive at us landing within that same EPS range..

Great. Thank you. And Charlie or Michael, the comp guidance for the year does leave open a wide range of interpretations for the second half of the year. And just wondering how you're feeling about the business heading into the second half of the year.

And if you're willing to comment, after such strong momentum in Q2, are you seeing trends slow down? Because that's what, I guess the guidance for the full year would imply..

Yes, I think the guidance is anchored on the momentum we had in Q2, seeing that continue but also noting higher compares to the prior year, driven by the bundle promotion that we did in 2018, as well as the introduction of delivery, which started during the fourth quarter of last year, both of which just leading to a tougher compare..

Our next question comes from Jeffrey Bernstein of Barclays. Please go ahead..

Two questions. The first one just about unit growth. And Michael, I know you mentioned comfortable with the 10% long-term algorithm and I know you gave some color around 11% unit growth this year. So it doesn't seem to be any slowdown.

But just wondering if the wing inflation were to sustain, and obviously it's been painful for your company stores and painful for your franchisees, and presumably if labor remains elevated, I'm just wondering whether there's any concern that the franchisees might be inclined to pull back on openings in 2020.

Or whether, on the flipside, you think that the 50%-plus return among the industry leaders is enough or too strong, and, therefore, you really wouldn't expect any risk to that unit growth if these cost pressures were to persist..

Thank you, Jeff, for the question. No, I think, as Charlie noted earlier on the call, we're actually seeing some really nice momentum building within the domestic pipeline and the development there.

And when we think about the wing inflation that we're seeing this year, it's really important to note that it really has more to do with the extremely deflationary prices that we saw on wings in 2018.

And if we look at kind of where we're running food costs this year, it still falls within kind of that long-term algorithm that we have that drives those unit level economics that Charlie referenced that exceed that 50% threshold..

I would add to that, Jeff, that if you look at our performance year-to-date, the domestic business has demonstrated a strengthening coming out of that high wing environment from 2017, and hasn't lost any of that.

We don't expect that moment to change; hence, why we guided to a specific target for the balance of the year to demonstrate our confidence in the pipeline. And as you know, we have great visibility into the pipeline, especially within a 6- to 9-month time frame. So no expectation that we'd see any slowing because of the wing prices today..

Got you. And then just on the comp, obviously very strong and above expectation, I think you mentioned it and investors seem to be focused on what we think are the three areas, which would be the digital, the delivery and the national advertising.

I was just wondering whether you could maybe break down, at least directionally, how you think each one in terms of each initiative contributes to the outsized strength that you've seen of late.

And if you could just clarify your comment around the third-party delivery flipping in terms of the usage and the impact on the economics from a delivery standpoint, that would be great as well..

Absolutely. I can't provide specifics on the component parts. I'll anchor my commentary on the fact that the majority of our growth is coming from transaction growth, not from check. And so we're very happy with that, although our digital efforts do drive about a $5 higher average ticket, delivery being 100% digital continues to enhance the ticket.

The majority of this is all coming from transaction growth; we're very happy with that.

If you look back on our strategy, our approach in raising the national ad fund contribution from 3% to 4%, which added about 50% more advertising dollars to our coffers, was pointed clearly at attracting new guests to Wingstop, and we believe that that has taken hold. It is a significant driver of our overall performance.

As delivery comes along, and we mentioned that we're just right in the 50s to 60% rolled out in delivery, at this point we are seeing very consistent top line results with regard to delivery and its incrementality.

The uniqueness of what we're seeing in the mix is that a lot of those transactions are actually coming from the DoorDash marketplace, more so than wingstop.com.

That, we believe, and we've talked to DoorDash about this, has more to do with their aggressive advertising efforts with us and around Wingstop, than it does anything different than what we had tested originally.

To comment on the margin side of that, we have noted before that we do pay a overall lower commission for wingstop.com orders because we absorb a lot more of the specific cost of the transaction.

We had a very productive engagement with DoorDash to try and eliminate that gap in margin, or commission if you will, by way of a price change that we anticipate taking on our marketplace orders only. The wingstop.com orders will still have the same pricing structure as our core restaurants.

But we felt that was important in addition to a modification of the commission structure based on our performance to date. So we believe going into the latter third and into the fourth quarter, certainly into 2020, this particular impact to the P&L will moderate..

Our next question comes from John Glass of Morgan Stanley..

Charlie, first on international, I understand you're taking a break to understand throughput in the kitchen, kitchen equipment. But I think given where the stock's gone the investors have to start really believing international's going to ramp up.

So what's the timeframe you think of in terms of getting the kitchen package or whatever else you need to modify before you can see an accelerated international unit growth? And why doesn't it makes sense to kind of engage, and maybe you have engaged, those partners now, understanding that it's still going to take them a number of months or quarters before they're able to really open up stores anyway?.

Yes. I mean there's no doubt we're engaging everyone on that new idea as it relates to the kitchen efficiency. One thing we've seen is that in our experience in the U.K., we've had some other experience around the world, different markets operate different ways.

So when we talk about speed of service, this has more to do with a location like we opened in the United Kingdom right there in London in Cambridge Circus, where you have incredibly high foot fall.

And that happens in shopping malls, in areas where the local climate, for example, dictates that a lot of business is done in these malls where you have high foot fall and, therefore, lots of individual transactions. We've identified ways to accelerate the pace of that order.

So instead of waiting maybe somewhere between 12 and 15 minutes for your order, now we've gotten that dialed down to somewhere between five and seven minutes. That's a meaningful change, improves our speed of service metrics as it relates to our scores.

And if you look across the world, John, in Mexico, for example, as you may know, we operate more of a casual dining, sports bar-oriented model. This is not a necessary investment for those markets and other markets around the world where we have a higher level of touch of service in the dining room.

This really affects more of that standard fast/casual, walk-up, place your order and wait for the product to be delivered. So I don't think it means that we're going to stop any development. Development will still continue.

But certainly what we believe is that we can moderate the pace of development and, more importantly, make sure that as we start to open new markets, that we open it with this new model in mind. So no concern on our end. We're still very confident on our international business.

As I mentioned on the call, we're in the middle of our seventh consecutive year of positive same-store sales growth for international, mid- to high- to even double-digit same-store sales growth in these markets. So the model continues to strengthen.

We believe, in our very deliberate approach to international, we're going to be very careful to make sure we've got the model right, and sometimes that may impact the pace in one particular quarter or another of our development..

Thank you. Can you also just update us a little on your new store productivity? You've had a couple of years now of national advertising. Obviously this year it's increased again, comps have gone up materially. I know you talked about 50% cash-on-cash returns.

But where are new store openings trending over the last 12 months versus the prior 12 months? How much stronger are they? I would assume they must be a fair bit stronger, given those conditions..

Yes, that's an accurate statement. They are a fair bit stronger than they have been, and continuing to progress based on the effectiveness of our national advertising strategy. I'll also call attention to our domestic fortressing strategy, which, just as a reminder does not mean cannibalization.

It means that we are going to take 25 markets and very deliberately invest in those markets with our franchisees, to grow them aggressively as our priority markets. And that's taking hold rather nicely. Roughly 80% of our development pipeline exists in those markets. So we're very happy with the performance of our fortressing strategy.

And as we get stronger and add awareness to the brand, which we've obviously demonstrated through our efforts on national advertising, we expect that to continue to strengthen over time..

But are new stores now opening closure to the chain average as a result of all this? I mean is there a number? Or directionally, can you talk about where new store productivity is?.

No. I think you know we've talked about our overall algorithm being an $820,000 first year for new stores, followed by about a 10% increase in that year-on-year. That $820,000 has increased. We're not yet to the point of our national average.

Some of that is just driven by the fact that awareness in some of these emerging markets is still relatively low. Just to remind everyone, our brand experienced average aided awareness was about 74% before we initiated our current campaign. We've seen those awareness metrics improve to the upper 70s during this campaign launch.

So we're very pleased with that. But in some markets, those numbers can still be down in the 40s and 50 percents. So we've got a pretty steep hill to climb. But as we climb that hill and add new restaurants to those markets, we are seeing the performance in those markets improve as well. So eventually, we'd love to get to that national average.

We're certainly ahead of that in mature markets, but some of these newer markets still have to gain that same traction, and they are..

Our next question comes from Katherine Fogertey of Goldman Sachs. Please go ahead..

So you referenced customers going more to the DoorDash site than to your company website to do delivery. And I was wondering if you could give a little bit of color here around the split of core versus non-core markets, how you saw that evolving this quarter. Thank you..

Yes. I don't think there's a differentiation between core and non-core as it relates to that mix. I think it had everything to do with strong performance and delivery first and foremost, with a sales mix that's at or above what we've seen in our test markets. So we're very happy with that. It really had to do with just this shift in advertising focus.

You may recall, but I'll reinforce that when we roll out delivery, we are not putting our own advertising efforts behind it. We do a little introductory work, but it absolutely is not part of our national advertising plan this year. That will happen in 2020 and beyond.

So right now what you're seeing is aggressive efforts and, for good reason, by DoorDash to market their business and Wingstop is a beneficiary of that. And so because the commission rates were different, that just created that flip and also the impact to the P&L that was unexpected. Again just to reiterate, we've gotten beyond that.

We now expect that in the latter part of Q3 and into Q4, you'll see that moderate..

Our next question comes from Jeff Farmer of Gordon Haskett. Please go ahead..

So I think your new ad campaign was kicked off in late February with, I believe it was 10 to 12 weeks of pretty heavy advertising support. Your same-store sales clearly inflected while that support was in play.

But the question is, were you able to sustain those same-store sales trends when the support dropped at some point in mid-May?.

Great question. Very happy to say that during the quarter, the pace of same-store sales growth was consistent month-in and month-out. I think some of that was a great carryover of some very strong advertising during that window.

In addition to that, we kicked off our 25th anniversary celebration by way of what we announced as our 25 days of flavor that culminated with National Chicken Wing Day. And so we had some good balance with two new flavors coming onboard, that it was the first time we've launched two flavors at the same time.

We had some local advertising media that supported that in our largest markets, when we weren't in national. And then we supplemented as well a lot of our advertising with other efforts around digital, some out of home and other things to sustain it. So all-in-all very pleased with the consistent cadence through the quarter..

Thank you for that. And just two quick follow ups on earlier questions. First is going to be on the technology investments you've been making in front of house, back of house for the company-owned restaurants. I'm just curious what the franchisee appetite is to pursue similar investments.

Are they onboard with continuing to sort of take the brand and the restaurant to the next level?.

Yes. I think it's early to tell that, Jeff. We have modified three restaurants here in the DFW area with these investments that we're contemplating here, all of which we're learning a lot about which component parts are the most effective and also a little bit about how to sequence some of these investments.

And just to remind everyone, these investments cover the gamut of kiosks for order entry and payment, pickup lockers. It also includes some back-of-house technology that improves cooking speeds, which is really consistent with what we've seen in our international footprint. So we're trying to look at that as a U.S. opportunity as well.

And then some kitchen technology that improves our effectiveness in terms of order management, if you will a KDS-type platform. All of those are incorporated into this test. And what we want to see is which of these parts is unique and differentiated, makes sense for us to invest in earlier rather than later.

But along the way, we're bringing our franchise advisory council with us to help us evaluate this. And at the end of the day, it'll all be about making sure that we generate a great return on investment so that we maintain the best-in-class unit economics we have..

All right. That's very helpful. And last question just on the tax rate. So I think both in '18 and '19, you're going to end up with a tax rate that ends up well below your initial guidance level.

So in terms of looking forward to 2020, any reason to believe that you should sort of be sticking with your guns to that longer term 24% to 25% tax rate? Or is it a potential for that to come down a bit?.

This is Michael. I think without having a good line of sight into the predictability around stock option exercises, which is really what's creating the differences from our long-term expectation, we're going to continue to anchor on that 25% to 27% range as far as the tax rate..

Our next question comes from Andrew Charles of Cowen and Company..

Can you quantify the mix of delivery sales from DoorDash versus the Wingstop-owned channels? I think you previously said it was about 2/3 Wingstop and 1/3 DoorDash.

And I'm wondering if the economic structure between the two commission rates, does it make sense to do actions similar to restaurant peers, to provide in-app coupons or other incentives, if you will, to intercept the guests and go through that Wingstop-owned channel? Or is that something that you guys continue to want to avoid?.

First and foremost, I think we mentioned and you confirmed what the mix was during test, which was about a 65/35. And we also commented that we flipped that. So that should give you a pretty clear indication of what those numbers were.

As it relates to incentives to drive people to the channel, we don't believe that's necessary based on what we've been able to architect with DoorDash. We certainly didn't want to have to do anything like that.

We, instead, rather than an incentive, we also followed suit with what other brands have done and modified the pricing for the marketplace channel and differentiated it from our channel. So said another way, it's a better value to go through wingstop.com.

We don't believe we need to incorporate a coupon or any other sort of incentive at this point, and would rather rely on our national advertising strength going into 2020 as a means to drive that mix the other direction..

That's helpful. And then just curious if the updated wing inflation guidance, what that implies for anticipated pricing relative to the 1% to 2% long-term target. I know wing prices, when you look on a multiyear basis are more normalize than the year-over-year inflation would suggest.

But what are franchisees saying? I mean is there demand out there to take more pricing amongst franchisees?.

Yes. I think we mentioned on previous calls that we've partnered RMS, who is an industry leader in helping brands establish effective strategies for taking price very carefully. And our franchisees are doing a fantastic job of adopting that and working through that.

So yes, there is always going to be, as we've noted before, one to two points of price in the comp. That is reflective of the ongoing pricing that we'll put into position associated with wing inflation or, as you said very properly, this ongoing fixed wing price that we're seeing right now.

Which I think is important to note that the price of wings is not going up; it's just that we're overlapping extraordinary deflation in the prior year. So this pricing, while it's slightly higher than what our long-term algorithm would prefer, it's not at the levels that we saw in 2017 and other years in the past..

Our next question comes from Nicole Miller of Piper Jaffray..

Turning to the corporate headquarter move, I was kind of curious about, I guess hypothetical question, what might stay the same and what might change? In hearing you talk about the test kitchen and the mock restaurant, I'm wondering if you might do something differently, for example, with the depth of menu tasting or having more flexibility in the pipeline.

I would just be curious to understand your perspective in that regard. Thanks..

Thanks for the question. Yes, there will be a number of changes, we believe, by making this decision and buying this building. One, we certainly have much more flexibility to have a proper test kitchen and a proper mockup of our restaurant, which is very common for restaurant companies to have; not the case with Wingstop.

And so today, as I mentioned earlier, when we evaluate new innovative ideas by way of technology or product, we tend to use existing company-owned restaurants as our test bed for those, and incorporated into some of our economics are the impacts of those tests.

And so it would give us a better clean kind of alpha, maybe early beta test environment that we can use notably for that which is impacting the kitchen, the technology and the flow of the restaurant. We can use those as well for research and with consumers about the changes we're making. So there are a lot of pieces to that that really make sense.

And then the last piece is, much more effective in our training efforts. Again, we tend to lean on our existing operating restaurants to do a lot of that.

So as we're growing up as a brand and scaling towards a top-10 global brand, we feel like these investments are going to yield great impact for the culture as well as the effectiveness of some of our innovation..

Thank you for that. And just a second and last question.

What can you share about your current guest satisfaction scores? How much is that a precursor to same-store sales as a correlation? And then the underlying components of that, what's moving in terms of speed value, flavor accuracy, etcetera?.

Sure. We measure all of those every day and monitor it very closely and do believe there is a strong correlation to our overall guest satisfaction and our same-store sales growth, as that would be the case with any brand.

Right now I can tell you that we've seen meaningful improvements in our overall satisfaction from our guests over the last two years, based on a concerted effort of ours to really focus our attention towards digital transactions, which are becoming a larger mix.

As I noted, we exited the quarter with 34.5% of our sales coming through the digital channel. That is a much more discerning guest. The concepts of having your product done right and on time is critical in terms of satisfying that guest.

And I'm happy to say that we've seen continued incremental progress in terms of our guest satisfaction scores while we attach technology solutions and as well as effective training around those areas of our business.

Typically when we're executing on that which the guest primarily appreciates, which is done right and on time, our scores for price and value fall right in line. And generally Wingstop exceeds industry averages that in many cases can be in the top 2 or 3 of restaurant chains in our category as we compare in terms of overall guest satisfaction..

Our next question comes from Jon Tower of Wells Fargo. Please go ahead..

Just a few from me. First on the kitchen equipment tests that you're doing and some of the other tests you're doing in the company-owned stores.

I'm curious to know if these do succeed, would there be a willingness to invest alongside the franchisees to perhaps expedite some of the tests that may hit above the normal rate of returns that you get on some of your equipment that you put out there, or technology? And then on that same point, given how it's used in the international market, particularly urban market in London, if it were to push out particularly the kitchen equipment in the United States, does it change your thinking about where stores could be located over time?.

Excellent questions. Thank you. Let me address the first one related to our investment appetite for that. I think the short answer is yes, we would be willing to invest alongside our brand partners in technology that we believe generates a great return for both of us.

I think the determination of that decision falls squarely on the strength of the benefit and, in some cases, for example, the kind of information we can glean from an investment like that, that could be beneficial to how we manage the business going forward. So to be determined, but, yes, that's certainly crossed our minds.

As it relates to the equipment changes that improve speed of service and transaction times, notably, we have not yet gained enough insight to suggest that we would change the complexion of the restaurant from our standard 1,700 square-foot, limited seat, heavy carryout, delivery-oriented restaurant.

However, certainly it can improve throughput, which can make existing restaurants that much more productive and have capacity for additional growth. But in that case, we haven't really even hit the top end yet on all our restaurants. So there's room to grow there anyway.

We think the key here is making sure we can address a faster cook time, which actually puts the food in the guests' hands quicker, and that improves overall satisfaction. So, and certainly that satisfaction as I mentioned before, is driven by being done right and on time.

So the more we focus on that effort, we'll improve the business, but not sure if it's going to manifest itself in an asset change just yet..

Okay. And then just switching gears to advertising. Obviously this year there was a step-up in the national advertising contribution from franchisees.

Is there anything else in the foreseeable future where that could also, in terms of the contract sort of that could step up again? Or perhaps your ability to even add mix, take up the absolute percentage contribution and/or shift the mix more towards national than it already is?.

The franchise agreement does call for the opportunity for Wingstop to increase the contribution by a half a point next year, and then another half a point the following year. We have not determined whether or not we would execute that. We're quite pleased with the performance we've gotten from this investment.

And if we balance that with the challenges we see in the P&L, just with higher wing prices, the investments we're asking our franchisees to make on the delivery side of the business that yields good fruit for them, I think those will all factor into what is the best decision for the brand next year.

What I will say is, if you look at our system-wide sales growth in the quarter above 20%, those are dollars that can go right back into an increase in the ad fund next year. So we do expect to have meaningfully more dollars to work with, regardless of whether we'd make a change..

And then just on that, do you have the option, does that 50 basis point step-up in 2020 and again in 2021, can that carry forward in the future years, or does it expire at the end of 2020, if you don't exercise it?.

Yes, it does not have an expiration. It just gives us the right at that point in time..

Okay. And then just lastly on G&A. Obviously this year was an elevated year with respect to growth of that line for you. Just curious if you can give us any sort of thoughts about how we should think about it relative to overall revenue growth or system-wide sales growth over time..

I think, you know we looked at that metric. But as a relatively young company emerging and growing and building ourselves to be up at the level of the top-10 global restaurant brands, creating a benchmark against brands at that level would be premature for us.

But we do recognize that while we see a step function increase this year, we would expect to see leverage on that in the next one year or two. And then at some point down the road, we can certainly take another look and decide if we want to make another investment.

I think the investments we're contemplating this year really set us up for a good long period of time, primarily because we made this big investment in advertising through national media and we've really improved the strength and size of our team, added in a deeper focus on the guest experience in doing that.

And then in addition to that, as we're making the adjustments internationally, at that same time, we're also investing there as well, so that we have plenty of capacity to be able to roll out new markets in the future.

Said another way, I think it would be improper for us to not make those investments, especially in international, and then have to stretch our team too far and yield unproductive development and growth in the future. So I do think there's going to be good leverage on this long term..

Our next question comes from Matt DiFrisco of Guggenheim Securities..

Just had a couple of clarifications and then a question.

With respect to the comp differential between the company and the franchise, did you disclose that?.

Yes, we did, Matt. It was 13.8% at the company stores compared to the domestic system of 12.8%..

Okay. And then I think you were answering another question about price.

Did you imply that the price within that 13.8% and the 12% was only around 2%? Or was that 2% plus some adjustment for the 30% year-on-year commodity inflation?.

Well, I'll just clarify. Always in our comp, we expect to have 1 to 2 points of price. We do have check improvement that is driven by our digital mix. But the vast majority of our comp growth is in transactions at this point..

But are franchisees taking price to offset the wing price, the wing cost inflation?.

Yes. As I mentioned before, in our partnership with RMS, we are now in a cadence of always putting in a little bit of price over time, and that would reflect into this 1 to 2 points of price that I've mentioned earlier..

Okay.

And then the reach right now of delivery, I think was that 55% it's in now, and you're going to get to 80% by the end of 2019?.

We're in the low 60s today, and we're on track to hit that 80%-plus mark by the end of the year..

So would it be correct math then to assume that delivery is almost about half of your comp, in that I think you cited almost double-digit or high single-digit to double-digit delivery as a percent of sales, so the incrementality being relatively high.

If it's in 60% of your stores, would 6% of your comp be coming from delivery?.

At some point, that would be the case. But keep in mind, Matt, that we have been ramping this up over time, so you don't have the full effect of that 60% for the entirety of the quarter or the year. So as it ramps, yes, that would be a reasonable assumption to make. But I don't think that's how it's reflected in the comp now..

And then my last question. I guess historically you've always been somewhat sensitive about your consumer demographic with taking too much price.

With respect to DoorDash spending so much on marketing to drive people to their marketplace and your brand on their marketplace, are you concerned that taking up the price on the menu might disrupt that demand that you've seen already? Or have you had tests that suggest that the menu price increase is not going to impact that marketplace demand?.

Yes, we made that decision confident that the pricing on that channel is fairly inelastic. So we don't expect that to be an issue..

Our next question comes from Andrew Strelzik of BMO Capital Markets. Please go ahead..

Two things from me.

First, are you able to quantify how much the margin impact was from the shift to the delivery channels or otherwise how much would be nonpermanent under the new agreement? And then second, previously you've discussed some dynamics that were mitigating the underlying commodity inflation in terms of how much -- the wing cost inflation in terms of how much you were realizing.

Have any of those dynamics changed? Or are those incorporated into that wing cost outlook? Thanks..

Yes. Andrew, as it relates to the impact of delivery of corporate store margins, we haven't specifically called that number out. But that was definitely a driver, because we launched in middle, end of April the balance of our corporate stores, which included DFW, so a total of 19 stores.

But as Charlie noted, we think we have put in plan some actionable items with DoorDash that are going to significantly improve those economics..

And on the wing cost side in terms of the dynamics that had been mitigating the cost that you were realizing -- the inflation you were realizing..

Yes. I guess to put it simply as it relates to wing prices, not a lot has changed from last time we spoke with you guys on Q1. So we are still receiving a little bit of that benefit from our PFG partnership and the pricing. And so the actual inflation that we see on the Urner Barry is a little bit more than what is actually hitting our P&Ls.

And then the only comment I would add to that that's maybe slightly different is we commented on bird sizes back in the first quarter. And the bird weights have gone up a little bit, and so we're not getting quite the benefit we were as it relates to yield on piece count..

Our next question comes from Will Slabaugh of Stephens. Please go ahead..

Just following up on the comments around international accelerating a little bit slower than maybe we anticipated. And I realize you have some different prototypes across different markets.

So I was wondering if you could talk a little bit more about the payback periods and how those are looking across various parts of the world, and if there's anything or anywhere that you're getting any significant pushback on the ROI or maybe there could be more wood to chop in other areas..

Yes. There's always opportunity to improve the ROI. And I think the commentary I made earlier, I'll reinforce that in different areas of the world, we operate a model for Wingstop. And in areas where we have a higher tough service, we tend to see a stronger return.

The improvements we're seeing in our London prototype as it relates to speed of service as echoed by the guests, give us comfort that a modification of our fast casual prototype to increase the speed of service will have a big impact on the overall return on investment.

That said, we've noted previously, and this metric continues to sustain, that our sales investment ratios for international restaurants tend to exceed a 2:1 ratio in almost all markets, in some cases higher. And we believe that that's a great indicator of the strength of the model.

However, we believe we can do better and, hence, why we're making sure that as we accelerate growth, we do so with a model that has a much higher ROI and more predictability for success..

Our next question comes from Andy Barish of Jefferies..

In the strong results you're showing, do you have enough data yet to kind of get a sense of the expanding reach of consumer that you're kind of bringing into the brand at this point? Be interested to see if that work has been completed or in process.

And then secondly, just on the development pipeline, either currently or looking out, what percentage is being opened by existing franchisees at this point?.

The first question, absolutely we are seeing the effectiveness of our strategy as it plays out in terms of consumers we are attaching ourself to.

Prior to launching this new advertising campaign with the additional 1%, we did a very comprehensive segmentation of our customer base and identified clearly that there is a huge traunch of consumers in QSR that would profess to like to eat chicken wings, but did not have awareness of Wingstop and, therefore, had not tried.

In our research that we've done, and it is preliminary, but early indications suggest that the lion's share of the growth that we are getting is from these new segments. And so we're very pleased that this is happening.

One of the reasons we felt confident we would achieve that is that a lot of our national advertising efforts over the years prior were pointed straight at our core heavy users of Wingstop, the people we knew.

This time, we had enough resources to expand that tent, still focused on the core, but expanding our message to a broad new audience, and those are the ones that are feeling a lot of the growth.

As it relates to the pipeline for development, very consistent with what we've seen before, that our development pipeline is comprised primarily of existing franchisees. More than 80% of that pipeline is existing franchisees.

I'll also provide a comment on the number of franchisees in our system is actually shrinking, not growing, which is part of our ongoing strategy to consolidate and continue to grow with an existing base of franchisees..

Our next question comes from Jake Bartlett of SunTrust..

Charlie, when I think of one of your kind of core differentiators, it's the quality of the food. And part of that had been kind of the made-to-order aspect.

And so as you test this internationally, is that something that could change domestically as well, so we could see that change if it's successful in those stores internationally, move to the U.S.? And I kind of think of that in the context of your initial kind of resistance for delivery and kind of quality of service and all that.

Is there a possibility that this could really be an unlock in the U.S.

as well?.

Certainly it has the potential to unlock in the U.S. Let me pay careful attention to the quality question. By no means would we do this and offer this if we felt as if it was going to degrade or erode the quality of our brand and the product that we serve. I will make sure to call attention to the fact that we still will cook to order.

We do not hold the product under a heat lamp, for example, and then provide it to the guest. So there's no change there. Really it's just in the pace and procedures for how we cook the wings that provides us with this accelerated cook time. So same as always, fresh, cooked-to-order wings.

And if we can identify and I guess replicate the efficiencies we're seeing overseas in the U.S. model, we certainly would consider that to be something we could roll out and see it as a benefit..

Got it. Now just so I understand, is it a change in technology that something's evolved? I mean, I imagine this would be something you would have loved to be able to do in the U.S., for a long time now.

What's changed?.

Yes, it's -- I don't want to give away all the secrets. But it really has more to do with how we prepare the wings upfront. So the cooking process involves a slower process to get them prepared, and then a final flash, if you will. It's just a simplistic procedure in frying wings that we've put in place.

But doesn't really change the overall product itself; it's still a fresh wing, cooked to order, much the same. It's really in the finishing procedures that we're evaluating..

Got it. And then just one last question on restaurant level margins.

Can you break out how much the three stores that you bought in Kansas City, how much those are pressuring margins and, in particular labor? I'm just trying to understand how that experience might be very different than what the franchisees are experiencing now, given the level of comps..

Yes. Let me give some perspective on this. I think over the past couple of quarters, we've identified these restaurants as having a necessity for investment in order to turn them back into what we believe is the common standard for the brand.

That required us to invest in people, training, deferred maintenance, a number of things that were necessary for us to operate them at the standard we expect. I'm very happy to say, these restaurants are operating quite well at this point. In fact, very strong top line comps.

Margins are in line with our expectations for restaurants at that average unit volume. And as we've noted before, the real differentiator there is, they are on the lower side of the AUV compared to our additional 26 restaurants that are in our system.

So, and then we do anticipate signing a definitive development agreement for that market, in which case those restaurants would be transferred to new ownership under that. The key here is, make sure we get the right owner for the market. And so, as always, we're going to be diligent and careful to make sure we pick the right player.

So I don't think the impact to these restaurants is significant or material, and I think those days of investment are behind us now..

This concludes our question-and-answer session and concludes the conference call. Thank you for attending today's presentation. You may now disconnect..