Q4 2020 Wingstop Inc Earnings Call Dallas Feb 17, 2021 (Thomson StreetEvents) — Edited Transcript of Wingstop Inc earnings conference call or presentation Wednesday, February 17, 2021 at 3:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Charles R. Morrison Wingstop Inc. – Chairman, President & CEO * Michael J. Skipworth Wingstop Inc. – Executive VP & CFO ================================================================================ Conference Call Participants ================================================================================ * Andrew Strelzik BMO Capital Markets Equity Research – Restaurants Analyst * Andrew Marc Barish Jefferies LLC, Research Division – MD and Senior Equity Research Analyst * Andrew Michael Charles Cowen and Company, LLC, Research Division – Director & Research Analyst * Brian Michael Vaccaro Raymond James & Associates, Inc., Research Division – VP * Christopher Thomas O’Cull Stifel, Nicolaus & Company, Incorporated, Research Division – MD & Senior Analyst * David E. Tarantino Robert W. Baird & Co. Incorporated, Research Division – Director of Research and Senior Research Analyst * Dennis Geiger UBS Investment Bank, Research Division – Director and Equity Research Analyst of Restaurants * Jake Rowland Bartlett Truist Securities, Inc., Research Division – Analyst * James Jon Sanderson Northcoast Research Partners, LLC – Equity Research Analyst * Jared Garber Goldman Sachs Group, Inc., Research Division – Business Analyst * Jeffrey Andrew Bernstein Barclays Bank PLC, Research Division – Director & Senior Equity Research Analyst * Jeffrey Daniel Farmer Gordon Haskett Research Advisors – MD & Senior Analyst of Restaurants * John Stephenson Glass Morgan Stanley, Research Division – MD * Jon Michael Tower Wells Fargo Securities, LLC, Research Division – Associate Analyst * Joshua C. Long Piper Sandler & Co., Research Division – Assistant VP & Research Analyst * Michael A. Tamas Oppenheimer & Co. Inc., Research Division – Associate * Nerses Setyan Wedbush Securities Inc., Research Division – Senior VP of Equity Research & Senior Equity Analyst * Peter Mokhlis Saleh BTIG, LLC, Research Division – MD & Senior Restaurant Analyst ================================================================================ Presentation ——————————————————————————– Operator  ——————————————————————————– Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Wingstop Inc. Fiscal Fourth Quarter 2020 Earnings Conference Call. Please note that this conference is being recorded today, Wednesday, February 17, 2021. On the call, we have Charlie Morrison, Chairman and Chief Executive Officer; and Michael Skipworth, Executive Vice President and Chief Financial Officer. I would now like to turn the call — conference over to Michael. Please go ahead. ——————————————————————————– Michael J. Skipworth, Wingstop Inc. – Executive VP & CFO  ——————————————————————————– Thank you, and welcome. Everyone should have access to our fiscal fourth quarter and full year 2020 earnings release. A copy is posted under the Investor Relations tab on our website at ir.wingstop.com. Our discussion today includes forward-looking statements. These statements are not guarantees of future performance and are subject to numerous risks and uncertainties that could cause our actual results to differ materially from what we currently expect. Our SEC filings describe various risks that could affect our future operating results and financial condition. We use certain non-GAAP financial measures that we believe can be useful in evaluating our performance. Presentation of such 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. (Operator Instructions) With that, I’d like to turn the call over to Charlie. ——————————————————————————– Charles R. Morrison, Wingstop Inc. – Chairman, President & CEO  ——————————————————————————– Thank you, Michael, and good morning, everyone. We appreciate you joining us for our call this morning and hope everyone is safe and well. As I reflect back on the unprecedented year of 2020, it was clearly challenging for us all. But it also underscored the resiliency of the Wingstop brand and given us confidence that our growth strategies will enable our long-term vision of becoming a top-10 global restaurant brand. I’m extremely grateful for our team members, our brand partners and supplier partners and their commitment to the success of the brand and living our mission to serve the world flavor. Our growth strategy is predicated on expanding our global footprint. And despite the challenging backdrop of the COVID-19 pandemic, we opened 153 net new restaurants in 2020, including a record 59 new openings in the fourth quarter alone. Our brand partners are eager to build more Wingstop restaurants as a result of our best-in-class unit economics. Our domestic restaurants have achieved an average unit volume of $1.5 million, up from $1.25 million just a year ago. With an average initial investment of $400,000, our brand partners can enjoy cash-on-cash returns approaching 70%. As we close the year, our domestic development agreement pipeline hit an all-time high with more than 700 restaurant commitments at the end of 2020. This compares to a prior record pipeline of agreements at the end of 2019 totaling 610 restaurant commitments. Those commitments for new openings are primarily spread across the coming 3 to 4 years. Thus, we remain confident in our ability to deliver against our 3- to 5-year development growth target of 10%-plus unit growth and believe that the current 2021 outlook will be slightly above that target and in line with current consensus estimates. 2020 also marked our 17th consecutive year of positive same-store sales growth, closing the year at 21.4%. On a 2-year basis, that equates to 32.5% same-store growth. Our strong top line growth, coupled with our restaurant expansion, led to system sales of approximately $2 billion, an exciting inflection point for Wingstop. Another milestone achieved in 2020 was our ability to exceed $1 billion in annual system-wide digital sales. Our digital business represented about 40% of total restaurant sales at the start of the year and has now grown to more than 60% of sales and has sustained above this level the last 3 quarters, pointing to the stickiness amongst our new digital guests. As a reminder, 2020 also represented our first year introducing delivery system-wide as a new channel and now represents more than 25% of total sales, which is nearly doubled after only 1 year. Guests that use us for delivery are typically new to our brand, representing a great growth opportunity for the future. In 2020, our database of digital users has now expanded to more than 20 million guests. While 2020 was a record year for top line growth for the brand, we believe there are a number of levers for us to pull to continue to drive long-term, sustainable growth and deliver on our 3- to 5-year target of mid-single-digit domestic same-store sales growth. The 20 million guests in our digital database, driven by our continued growth in our delivery channel, will fuel our CRM engagement efforts as a key lever. Our personalized 1:1 marketing will play a bigger role to quickly generate repeat orders from the increasing number of new digital guests, as well as continue to increase frequency amongst our core fans. We won’t stop there. Our national advertising strategy is working, and we continue to have a significant opportunity to close the gap to other top 10 brands in brand awareness and consideration. In 2021, we will leverage our system sales growth of nearly 30% achieved in 2020 and carry a multimillion-dollar surplus of advertising funds and utilize them to pull all these growth levers, including an aggressive strategy to lap our strong second and third quarter 2020 results with premium placed ads in places we know people will be watching, notably, live sports. We believe we are well positioned to lap our remarkable 2020 results with continued domestic same-store sales growth. I’d like to provide an update on our international operations. As with most global restaurant brands, the impact the pandemic has had on international operations is greater than what we’ve seen in the U.S., particularly since the majority of our international restaurants had a higher concentration of dining room sales. However, we are encouraged by how our brand partners have been able to weather the storm the past year, and we will continue to support them as they emerge from this difficult operating environment. Despite the challenging circumstances, we still opened 25 net new restaurants across 5 countries and had only 1 closure, an amazing result, indeed. We believe our international partners will emerge from this pandemic in a position of strength, as we continue to invest in our international business and execute against our global strategy. While 2020 was a record year for Wingstop on so many fronts, I am really moved by the resiliency and momentum in the brand as we continue to build Wingstop into a top 10 global brand. We will continue to make the necessary investments in people, technology and our restaurants to grow the brand and maximize shareholder value. We remain confident in our strategic plans that will continue to reward our shareholders, brand partners and team members. And with that, I’ll turn the call over to Michael. ——————————————————————————– Michael J. Skipworth, Wingstop Inc. – Executive VP & CFO  ——————————————————————————– Thank you, Charlie. As Charlie mentioned, 2020 demonstrated the strength and resiliency of our model and positions us well for 2021 and beyond. 2020 marked a year of record top line growth for the brand. Domestic same-store sales grew by 18.2% in the fourth quarter and 21.4% for the full year, which is a 32.5% comp growth on a 2-year basis. Record same-store sales growth combined with 153 net new restaurants resulted in approximately $2 billion in system sales for 2020, up 28.8% from $1.5 billion in 2019. The 153 net new restaurant openings, which includes 59 net new restaurants in the fourth quarter, a record quarter for us, resulted in a global footprint of 1,538 restaurants. We are excited by our brand partners’ strong interest to build and operate more Wingstop restaurants and believe we have the right foundation and drivers to execute against our long-term target of 6,000-plus global restaurants. Royalties, franchise fees and other revenue increased $4.1 million to $28 million for the fourth quarter from $23.9 million in the prior year. The increase was primarily due to domestic same-store sales growth of 18.2% as well as 152 net franchise restaurant openings since December 28, 2019, partially offset by a decrease in contributions received for our brand partner convention in the fourth quarter of 2019. We did not hold a convention in 2020. In the fourth quarter, our company-owned restaurant sales increased $1.8 million to $15.9 million from $14.1 million a year ago, mainly driven by same-store sales growth of 10.4%. Cost of sales as a percentage of company-owned restaurant sales increased by 250 basis points compared to the fourth quarter last year, primarily driven by a 27% year-over-year increase in the Urner Barry cost of bone-in wing. Our wing price mitigation strategy is in place with our largest poultry suppliers during this near-term pressure and has effectively lowered the cost of wings relative to full implied market value. The increase in cost of goods was partially offset by the leverage gained on labor and other operating expenses due to the growth in average unit volumes. While this is a short-term pressure on cost of goods, we are pleased with the improvements we saw in labor and other operating expenses, underscoring our efficient restaurant operations and our ability to secure competitive rates for delivery. At Q4 margins, we believe our brand partners benefit from best-in-class cash-on-cash returns of north of 50%. Reported selling, general and administrative expenses increased $3.1 million to $21 million from $17.8 million in the fiscal fourth quarter of the prior year due to: $1.4 million in higher professional fees, primarily related to opportunistic investments in technology and international projects to advance our global strategy; $1.3 million of expenses related to COVID-19 and continued support provided to international brand partners as certain markets reinstated restrictions as they work to contain the spread of the virus; $2.1 million in investments in people-related expenses associated with higher variable-based compensation expense, inclusive of additional stock-based compensation expense due to the company’s results in 2020. These increases were partially offset by a decrease of $1.8 million related to the brand partner convention we held in the fourth quarter of 2019. Reported SG&A was $69 million for the year, which excludes the gain on sale of $3.2 million from the refranchising of 7 company-owned restaurants. Due to its materiality, this gain was recorded in its own line in the P&L and is not included in SG&A. Adjusted for this reclass, our prior SG&A guidance would have been $66.7 million to $67.7 million. Full year SG&A as reported was $1.3 million above this adjusted guidance as we made opportunistic investments in technology and international as we continue to advance our long-term growth strategy. We believe these investments support the long-term growth of the brand in achieving our goal of 6,000-plus global restaurants. Adjusted EBITDA, a non-GAAP measure, was $16.2 million for the fourth quarter, representing a 14.7% increase versus the fourth quarter of 2019. As we had previously communicated, we completed the refinancing of our securitized financing facility in the fourth quarter and recorded loss on debt extinguishment of $13.7 million. As a reminder, the nonrecurring loss on debt extinguishment is excluded from our adjusted EBITDA, adjusted net income and adjusted EPS calculations. Despite the transaction closing late in the year, an increase in our total indebtedness by $153.8 million versus the third fiscal quarter of 2020, we saw lower interest expense in the fiscal year 2020 versus 2019, thanks to the more favorable debt terms of this facility, which carries an interest rate of 2.84% compared to the prior rate of 4.97% and will translate to approximately $2 million in annual interest expense savings. As a result of $13.8 million of expense associated with the refinancing of our debt and related payment of a special dividend in the fourth quarter, we reported a net loss of $6.4 million or a loss of $0.21 per diluted share. Adjusted net income and adjusted earnings per diluted share, both non-GAAP measures, were $5.3 million and $0.18 per diluted share, up 23% and 29%, respectively, compared to the prior year fiscal fourth quarter. Reconciliations between non-GAAP and their most comparable GAAP measures are included in our earnings release. We ended the year with $434.3 million in net debt and a leverage ratio of 6x, a level that we are comfortable with given that our asset-light, highly franchised business model and our ability to quickly delever, based on our EBITDA growth and strong cash flow generation. We are consistently evaluating the best use of capital and believe the return of capital is an important part of our commitment to our shareholders. In addition to our regular quarterly dividend, we paid a special dividend of $5 per share for a total dividend of $5.14 per share in the fourth quarter. Today, our Board of Directors announced a quarterly dividend of $0.14 per share of common stock payable to stockholders of record as of March 5, 2021. This dividend, totaling approximately $4.2 million, will be paid on March 26, 2021. Since our IPO, we have returned an approximate $0.5 billion to shareholders, and this return of capital demonstrates our confidence in our long-term outlook for our business. We will continue making the appropriate investments for the long-term growth of the brand and remain confident in our 3- to 5-year outlook. As noted in the release this morning, we are reaffirming our targets of mid-single-digit domestic same-store sales growth and 10%-plus unit growth. As for 2021, we estimate reported SG&A to be between $76 million and $78.5 million. This includes the following estimates for 2021: brand partner convention of $2 million, which has an equal and offsetting amount recorded in revenue; stock compensation expense of $9.7 million to $10.2 million; and expenses associated with national advertising of $9.2 million to $9.7 million, which also have an equal and offsetting amount recorded in revenue. Adjusting for these items, we estimate adjusted SG&A, a non-GAAP measure, to be between $55.1 million and $56.6 million in 2021 compared to $50.9 million in 2020. I’d like to close by expressing my gratitude to all of our team members, our brand partners and supplier partners for their entrepreneurial spirit and service-mindedness as we continue to navigate this challenging time. Our brand has demonstrated its strength and resiliency, and we look forward to continuing to execute against our growth strategies and deliver on our vision to become a top 10 global restaurant brand. With that, we’re happy to take your questions. Operator, please open the lines for questions. ================================================================================ Questions and Answers ——————————————————————————– Operator  ——————————————————————————– (Operator Instructions) Our first question today will come from Jeffrey Bernstein with Barclays. ——————————————————————————– Jeffrey Andrew Bernstein, Barclays Bank PLC, Research Division – Director & Senior Equity Research Analyst  ——————————————————————————– I had one question and then one follow-up. The question is with regards to the comps as we go through 2021. I know you didn’t give specific guidance to ’21 alone. But needless to say, you’re lapping a 25% to 30% comp in the middle of ’21. So I think you made reference to confidence in sustaining positive comp growth off of those compares. I’m wondering whether you think that’s reasonable as you move through the middle of the year. And obviously, if you want to offer any specific color, perhaps the (inaudible) the continued growth you mentioned, whether you could prioritize the national ads versus digital versus customer (inaudible) the 3 kind of primary areas you mentioned? And then I had one follow-up. ——————————————————————————– Charles R. Morrison, Wingstop Inc. – Chairman, President & CEO  ——————————————————————————– Jeff, and thank you for the for the question as well as for your sentiment on what we’re going through down here in Texas. It is cold. We gave the same guidance that we gave last year, as you may recall, which is a long-term outlook of 3 — or mid-single-digit same-store sales growth over the next 3 to 5 years. We still feel very comfortable with that as well as a 10%-plus unit growth target, so reaffirming those metrics. As we think about 2021, yes, a couple of things. We are — on a seasonal basis or quarterly basis, we certainly have some tougher compares in quarter 2 and quarter 3 than we do in 1 and 4. However, I think on a 2-year basis, that’s probably the best way to think about what we’re seeing in the comp and giving our confidence to being able to hit those long-term metrics that we guided to. As for the levers, yes, I mean, there are a couple of things that are important here. Number one, our average unit volume has now grown to $1.5 million across our domestic system, which is a game-changing type of AUV, which is fueling the development numbers that we are seeing as well as our brand partners’ interest in adding new restaurants to their portfolio. I would also call attention to the fact that our investment cost at $400,000 has remained relatively unchanged for almost 5 years, so the cash-on-cash returns are very, very good for our brand partners. As we look to this year, we were able to pull additional advertising dollars out of 2020 and put them into 2021. And as I mentioned on the call, we are applying those dollars in the key time frames where, if you will, climbing that mountain is a little more difficult than the rest of the year. But we do have confidence in that. And then the other thing we noted, having now an over 60% digital business creates a lot of good information for us to leverage, to interact and engage with our guests. A lot of the growth we saw this last year came from new guests to our system. And so therefore, we’re going to be leveraging the investments we’ve made in a robust CRM platform to engage with those guests, generate those second, third and fourth Wingstop occasions and so on and then convert them into heavy users in the future. And we think having that lever with more than 20 million guests in that system gives us even more confidence in our ability to continue to deliver positive same-store sales growth over the long haul. ——————————————————————————– Jeffrey Andrew Bernstein, Barclays Bank PLC, Research Division – Director & Senior Equity Research Analyst  ——————————————————————————– Got it. And then my follow-up was just a comment you made in your prepared remarks on the unit growth for ’21. Looks like you delivered 11% growth in ’20, a very difficult year, and you talked about the pipeline growing. So I think you mentioned you’re confident in slightly above the 10% long-term target. Just wondering whether there’s any franchise pushback? Because otherwise, it would seem like, right, there’s opportunity to exceed that 10% by a fair amount, considering the real estate availability, the less competition. I’m just wondering — just want to clarify your comment around 2021 unit growth and what might limit that growth from being stronger? ——————————————————————————– Charles R. Morrison, Wingstop Inc. – Chairman, President & CEO  ——————————————————————————– Yes, and I appreciate that question, Jeff. A couple of comments on that. Number one, the name of this game is about unit growth. Too often we get hung up on same-store sales. We look at sequential comps quarter-to-quarter. We think about how that impacts the unit economic model. And as I mentioned, ours is really strong and in a great position. And that is fueling our brand partners’ demands for additional restaurants to add to their portfolios and grow their overall value. That has been — that manifested itself in the largest pipeline we’ve seen as a brand. And it also has manifested itself in an extraordinary fourth quarter development number. And as you know, early in the year, during the March and April time frame, even into June, we had almost a stoppage of development. A lot of that pipeline is pushing forward. So if you add the new demand for new restaurant development, plus what was in the pipeline, plus what’s in the pipeline going into this year, we did feel confident in stating that 10% plus is certainly our long-term algorithm. But if you look at what consensus estimates were for the year, I also commented on that as being a real decent benchmark for where we think our development potential is. ——————————————————————————– Operator  ——————————————————————————– And our next question will come from David Tarantino with Baird. ——————————————————————————– David E. Tarantino, Robert W. Baird & Co. Incorporated, Research Division – Director of Research and Senior Research Analyst  ——————————————————————————– I hope you both are doing well. My question, Charlie, I think you mentioned several same-store sales drivers for this year, but you didn’t talk about your dining rooms reopening. So I wanted to ask about your approach there on when the dining rooms might reopen and if you’ve actually reopened any dining rooms and what you’ve seen since you’ve done that? ——————————————————————————– Charles R. Morrison, Wingstop Inc. – Chairman, President & CEO  ——————————————————————————– David, the reason we didn’t put that in there is not because we don’t think it has some impact. It has more to do with trying to figure out when that would actually happen. I think at the end of the day, a lot of our dine-in customers are also now carry-out customers with our brand. They’ve converted nicely to off-premise. And I think if you think of Wingstop as compared to perhaps any other brand in the space, our digital infrastructure allowed that conversion to be done with relatively little impact to our business. If anything, it helped us grow, right? And so we are being thoughtful about our approach. We certainly will prioritize and continue to prioritize the health and safety of our team members as well as our guests. But as we see the impact of the pandemic starting to subside, we would expect to open up those dining rooms. But I would not put it at the top of the list of what we think are the material impacts to our top line. It has more to do with continuing to generate strong advertising messages that cause people to consider Wingstop. Those people we’re targeting, again, just as a reminder, tend to be those heavy QSR customers that we have not really had in our brand for a long time. And we’re adding more and more of those with the levers we’ve pulled around delivery, digital and our advertising, and we’ll continue to do that throughout the year. And then once they come in, they are new guests. We want to reengage them immediately and bring them back to that next occasion. So everything we can do to ensure a quality occasion for either delivery or carryout is paramount, and then a reengagement opportunity to bring them back, hopefully, within the next month, that’s our objective. ——————————————————————————– David E. Tarantino, Robert W. Baird & Co. Incorporated, Research Division – Director of Research and Senior Research Analyst  ——————————————————————————– Got it. And then 1 follow-up, just a clarification. The 20 million people you have in your database is an impressive number given the scale of your brand. Does that include customers ordering through the third-party app? And I guess, Charlie, can you talk a little bit about kind of how you reach the customers that are coming in through the third-party app as opposed to the Wingstop app? ——————————————————————————– Charles R. Morrison, Wingstop Inc. – Chairman, President & CEO  ——————————————————————————– Yes, it’s a great question, thank you. The answer is no. That database does not consist of people coming through the third-party app. And — which is DoorDash, just to be clear. Our partnership with DoorDash affords us the opportunity to clearly understand who those guests are in terms of how they shop, who they are. We don’t have specific information that would allow us to put them in our database, to market directly to them. But indirectly, who they are has a lot to do with how we fashion our advertising approach and how we go market to them directly, either in the digital space or through some of our national advertising. So we believe that, yes, this is a really nice database. It’s large. And it is adding new guests at a very high pace right now given what we’ve experienced through the pandemic, so again, why it’s important for us to engage quickly and efficiently with those guests to bring them back into that next occasion. ——————————————————————————– Operator  ——————————————————————————– And our next question will come from John Glass with Morgan Stanley. ——————————————————————————– John Stephenson Glass, Morgan Stanley, Research Division – MD  ——————————————————————————– I also wanted to follow up just on the ad spend and how you think about that. Is there a way, Charlie, you can quantify the incremental spend? I think you said multimillion dollars. Or maybe if you could express like TRPs or however you want to think about ad spend increase versus ’21? If you don’t want to do dollars, maybe some other metric. And does that plan include like advertising funded by DoorDash? For example, are you including or excluding? Or do you have agreements with them as they think about promoting the brand on their own app as a way to also drive incremental sales? ——————————————————————————– Charles R. Morrison, Wingstop Inc. – Chairman, President & CEO  ——————————————————————————– John, the best way to characterize it is more weeks and more TRPs, yes. We’re not providing specifics on each of those, but you can — rest assured, there are more weeks and more TRPs from that spin. I think the other way I would characterize it is quality, which I mentioned in my comments. Given the fact that there’s not a lot of new content and programming out there yet, we do believe that will come along. The one place we know people are living is in live sports. And so we have moved a lot of our inventory into places where we believe people will be consuming TV, which will be more live sports and premium sports at that. So that’s another indication of how we’re utilizing those incremental dollars effectively. As it relates to our partnerships, no, there’s no money coming into the ad fund associated with our partnership with DoorDash. We may choose to invest in another free delivery program or they may do that with us as they’ve done before. That’s up in the air at this point. But again, $1.5 million average unit volumes, $400,000 investment fuel unit development, which is really where our focus remains in terms of the health and strength of the business. ——————————————————————————– John Stephenson Glass, Morgan Stanley, Research Division – MD  ——————————————————————————– So maybe then I could just follow-up on that. Of the pipeline you’ve got now, can you just review a number of new franchisees that have entered the system this past year versus the existing legacy, percentage of new markets versus existing markets? And are you thinking post COVID now about a format shift? Or as you think about how that evolves, are you going to see new formats in ’21 that sort of focus on an all digital footprint? I know you’ve talked about that in the past, but if there’s been any evolution in that thinking? ——————————————————————————– Charles R. Morrison, Wingstop Inc. – Chairman, President & CEO  ——————————————————————————– Yes. The numbers remain consistent with prior years, and that 80% to 90% of our total pipeline over those years has been from existing franchisees, and that remains consistent with what is going on last year. We’ve added very few net new franchisees to the system. Our existing brand partners are growing in size and scale. And they’re able to take the strong cash returns they’re generating and reinvest that back into the business. And so we expect that to continue. As it relates to format — or let me address, first, markets, sorry, very strong in our fortress markets, very consistent with what we’ve talked about in the past. We have about 25 key markets in the U.S. that we are working very diligently to establish a strong presence and fortress them. And that’s working very well. So that usually makes up more than 75% of our total development. And then lastly, as it relates to new formats, we are up to 13 ghost kitchens across the planet for Wingstop. We’re expanding them in the U.S. in key markets, very early stages, but we like what they provide for us. Right now, it comes down to the same comment I made in prior quarters. We really want to understand the unit economic model. We want to understand whether it’s a partner or build strategy. And we’re taking our careful and thoughtful consideration into each of those decisions as we move forward, but expect us to continue to expand that footprint as well. ——————————————————————————– Operator  ——————————————————————————– And our next question will come from Andrew Charles with Cowen. ——————————————————————————– Andrew Michael Charles, Cowen and Company, LLC, Research Division – Director & Research Analyst  ——————————————————————————– I hope you guys are staying safe in Dallas. I have one clarification and one question. So the clarification is that similar to a year ago, you provided the 3- to 5-year outlook for mid-single-digit comps and 10%-plus store growth. Can you just remind us if this is an average over the 3- to 5-year time frame or an annual range you guys hold yourselves accountable to? And specifically, I totally get, obviously, the thought that, obviously, same-store sales are likely to grow next year. But can you talk about your level of confidence in delivering mid-single-digit comps in 2021? ——————————————————————————– Charles R. Morrison, Wingstop Inc. – Chairman, President & CEO  ——————————————————————————– Andrew, and thank you for the well wishes. All is well. Lacking power and water, but we’ll be fine. It’s a good question because if it were an average, I would say, all we got to do is deliver flat for the next few years, and we’ll hit the number, and I don’t think that’s what anybody is expecting at Wingstop. And it’s not what we’re expecting for ourselves. We do believe the brand has the potential over the 3- to 5-year time frame of delivering mid-single-digit comps. And hence, why we reinforced that message this year, much as we did last year. So yes, I mean, does it have the potential? Absolutely. We have to be diligent and thoughtful in pulling the levers. But again, I want go back to the fact that this brand was so well positioned with our investments that we made in digital and delivery to prepare ourselves for this. We’ve only effectively been delivering food to our guests nationwide for a full year now. We believe there’s growth opportunity there. We believe there’s growth opportunity by way of our advertising and expanding that. I mean we — not only did we pull money in from last year, but we grew our sales by 30%, which fuels a lot of dollars in the ad fund to really up our game dramatically. So there are plenty of levers there to be pulled to help continue the growth. And noting, of course, we’re rolling over a big number, but we’ve done that many times in our 17-year history of positive same-store sales growth. ——————————————————————————– Andrew Michael Charles, Cowen and Company, LLC, Research Division – Director & Research Analyst  ——————————————————————————– And then, Michael, question for you. How does the bone-in wing pricing mechanism impact 4Q results? Wing inflation was about 17.7% and gross margins were down about 270 basis points. Can you say what the gross margin would have been without the pricing mechanism? And then looking ahead, what are your vendors saying about the outlook for bone-in wing prices as we look across 2021? ——————————————————————————– Michael J. Skipworth, Wingstop Inc. – Executive VP & CFO  ——————————————————————————– Yes. Andrew, that’s — it’s a fair question. I appreciate it. I think we did point out in our prepared remarks that the underlying Urner Barry was up 27%. And if you think about our bone-in wing mix of our COGS representing about 60% of mix, you can kind of work that math to get to a much lesser impact. And I think one thing that’s really important to point out is the discipline we’ve had as a brand around taking strategic pricing twice a year. And if you look back to 2017 where we saw similar inflationary numbers in bone-in wings, then you can compare in our corporate store P&L as a proxy the Q4 back then in 2017 compared to Q4 in 2020. And there’s — we’re running a much lower food cost. So that’s a combination of discipline around menu pricing as well as the pricing mechanism we have with our suppliers. But obviously, that’s one piece of it. But we’ve also been focused on making sure we’re taking care of our team members in the restaurant as well and making investments there. And so that’s been a big priority for us for 2020, and it remains that way for us as we go into 2021. But as far as the outlook, there’s clearly a fair amount of uncertainty around reopenings and how overall supply will — for the entire bird will play out. We’ve got a lot of mismatch, if you will, and the demand for the bird. Demand is really soft for the back half. And we’ve got some soft demand, low prices for breast meat right now, and that’s obviously impacting the overall supply and production levels that poultry suppliers in addition to their challenges they have as they manage the impact of COVID on their plant production levels. But I think we’re anticipating an inflationary year, obviously, compared to 2020 as it relates to wings. But nothing — we don’t think — we’re well positioned to navigate through as a brand. Obviously, Charlie called out the AUVs that we’re running right now for the system of $1.5 million, which provides a nice amount of leverage on the P&L. And even as you think about the inflationary prices we’re seeing in wings right now, the profit dollars that our brand partners are enjoying are up year-over-year, which is really kind of — you don’t take percents on the P&L to the bank, you take dollars, and so that’s what we’re focused on when we look at the economics and the overall return. ——————————————————————————– Operator  ——————————————————————————– Your next question will come from Andy Barish with Jefferies. ——————————————————————————– Andrew Marc Barish, Jefferies LLC, Research Division – MD and Senior Equity Research Analyst  ——————————————————————————– Guys, yes, glad you’re trying to keep warm down there and safe. I’m surprised no one’s asked about the virtual concepts yet. Can you just kind of frame up how you’re thinking about all the — it’s just wings and now cosmic wings added in 1,300 Applebee’s and so on and so forth? ——————————————————————————– Charles R. Morrison, Wingstop Inc. – Chairman, President & CEO  ——————————————————————————– Andy, thank you for that question. I was surprised as well. The — let me give you an answer to that. I think Michael just talked about the demand for chicken wings. And it’s interesting that we’ve arrived at the point that we believe that selling chicken wings is the answer to same-store sales growth, which, we would argue, if you’re Wingstop, we understand that. But we believe that having a robust digital infrastructure already in place, a proper delivery partner have more to do with the strength of this business and the strength of the brand than anything else. We love selling chicken wings. But all we think that’s doing is impacting the commodity costs, which, as we’ve seen over the many years we’ve been doing this, rise and fall with what I would call competitive intrusion. And so we want to first say thank you to our suppliers, as Michael mentioned. They have been with us, knowing that we will be a wing buyer in this market for the long haul and have supported us. And I think that’s really important to recognize that the relationships we have with our supplier partners really demonstrate the strength of Wingstop and the fact that we have not had any issues with supply even given the demands for the product in the market. I think our same-store sales performance and our confidence in our performance in 2021 are demonstrating the fact that this really isn’t impacting the Wingstop business, other than just putting pressure on supply. But again, as Michael very clearly articulated, cash profits for our brand partners remain strong. We’ve got the right mechanisms in place to navigate yet another difficult wing environment. But overall, margin performance even is strong or stronger than it was in 2017 when we experienced this. So I think we’re in great shape. Not a concern. ——————————————————————————– Andrew Marc Barish, Jefferies LLC, Research Division – MD and Senior Equity Research Analyst  ——————————————————————————– And just one quick follow-up, if you could, on the 50-plus domestic openings. How much of that do you think is some of the delays from earlier in the year, particularly, as you mentioned, development obviously stopping in kind of March, April, May? And does this sort of catch you up from some of those earlier openings in ’20 that may have occurred? ——————————————————————————– Charles R. Morrison, Wingstop Inc. – Chairman, President & CEO  ——————————————————————————– Yes. We entered 2020 expecting to have a very strong development year. And of course, we did with the 153 net new openings as exceptional performance given the challenge of the pandemic. That fourth quarter number really is not indicative of the push in the pipeline as much as it is the demand for new restaurant openings our brand partners had and perhaps even an acceleration in performance. Usually, our pipeline has about a 9-month window in front of it. And so if anything, any push would be a first quarter type of phenomenon. But I think I call more attention to the 700 restaurants that are in the pipeline for potential development being roughly 100 more than it was a year ago and those stagger out over 3 to 4 years. It’s a better indication of just what we think is the strength in the pipeline going into 2021. ——————————————————————————– Operator  ——————————————————————————– And our next question will come from Chris O’Cull with Stifel. ——————————————————————————– Christopher Thomas O’Cull, Stifel, Nicolaus & Company, Incorporated, Research Division – MD & Senior Analyst  ——————————————————————————– I believe the company’s initial G&A guidance for ’20 was for it to grow roughly 10%. But it increased by over twice that rate even excluding the COVID-related expenses. And for ’21, it looks like you’re growing roughly 15%, excluding those same costs. I’m just wondering, Charlie, how are you determining whether you’re spending at the appropriate levels? And Michael, what level of COVID-related expenses are you assuming in ’21? ——————————————————————————– Charles R. Morrison, Wingstop Inc. – Chairman, President & CEO  ——————————————————————————– Thank you. Any time you experience the kind of growth that Wingstop has experienced, and I would note, obviously, this year, growing your revenue — your system-wide sales by 30%, presents an opportunity for the company to evaluate investments we can make to further that performance into future years. And as you know, this brand has already grown to about $2 billion in system-wide revenue now. We think that there is a necessity to make sure that we have the right infrastructure, systems and people in place to catapult us well beyond this level. We think the $2 billion is a bit of an inflection point. And I’ve commented on that many times in the past with both investors as well as the analyst community. Even though we grew our G&A costs during the year, I would point to the fact that we did a few things we thought were the right thing to do for our business. Number one, we protected our international brand partners and their businesses. They’ve had a tough year. And with the strength we saw in the domestic business, it was our decision and choice to make sure that we do everything we can to insulate them from the impact of the pandemic and prepare them for a strong emergence. And I’ve noted that we only closed one net restaurant in our international business, and I think that’s indicative of the money we’ve put into G&A to support them. Number two, we also want to make sure we’re protecting our technology investments. And it goes without saying that the investments we’ve made over the past 5 years have been fantastic for the brand. They were made with the partnership of a lot of — a number of players who have supported us through that time frame. But now that our business is more than 60% digital, it’s time again to make sure that we’re protecting that investment and contemplating what that looks like for the future. So we did make some investments in the fourth quarter to evaluate and study what that future looks like. We’re not prepared yet to talk about what the impact of that would be. But suffice it to say that we’re going to do everything we can to protect that 62% digital business and grow it well into the future. And so I think it’s important to recognize that we saw this as an opportunity to step on the gas with this brand. We certainly could have flowed a lot of those dollars to the bottom line, but we’re not going to apologize for a 26% adjusted EBITDA growth for the year either. That’s fantastic performance that I think any long shareholder would be very pleased with our performance on. As we look to 2021, we’re going to continue to invest. We want to make sure we have the right people in place to support the business and what we believe is strong growth coming out of this difficult time that we’ve all experienced. We do actually have a convention in 2021 planned, which is not in 2020. So that does impact the SG&A number. And then we’ll continue to expand on technology and our international expansion. A lot of that comes in the form of leveraging third parties that can help us prepare the platform for the future. And so we expect those investments to continue as well as making sure that our international partners in 2021 are still as well insulated as they can be from the effects of the pandemic. I would only say that we see the virus slowing down in the U.S. We see the vaccine performance. But if you look out across the world, it is not the same story. And so we’re cautious of that and making sure that we do everything we can to help them. ——————————————————————————– Christopher Thomas O’Cull, Stifel, Nicolaus & Company, Incorporated, Research Division – MD & Senior Analyst  ——————————————————————————– That’s helpful. And then just a follow-up. We’ve heard a lot of brands that seek out Class A sites, say that the haven’t really seen a break in rents or any kind of improvements in location opportunities. Given that your model differs somewhat, I’m curious if you’re seeing a greater level of opportunity in Class B sites than you’ve typically seen? ——————————————————————————– Charles R. Morrison, Wingstop Inc. – Chairman, President & CEO  ——————————————————————————– Well, I think we’ve always seen a great opportunity in the Class B sites, which are Class A for us. So I thank our our landlords across the country for providing us such opportunities to grow. But I do think that the market is going to continue to free up. I don’t know that we’re seeing substantially different rent rates overall, but we certainly have not seen them increase as we would have otherwise seen if we didn’t have the pandemic in front of us or behind us. So I think it’s pretty much stay the course. No real change there, other than we’ve always had ample access to real estate. ——————————————————————————– Operator  ——————————————————————————– And our next question will come from Jared Garber with Goldman Sachs. ——————————————————————————– Jared Garber, Goldman Sachs Group, Inc., Research Division – Business Analyst  ——————————————————————————– Many of mine have been asked and answered, thanks for all the color today. But wanted to just round up on the third-party delivery versus your white label app digital ecosystem. Can you give any kind of breakdown on how that has trended throughout the — maybe the fourth quarter, the breakdown of those 2 different channels? And what you’re seeing in terms of consumer behavior, maybe similarities or differences on those channels? ——————————————————————————– Charles R. Morrison, Wingstop Inc. – Chairman, President & CEO  ——————————————————————————– Yes. There’s really not much I would call attention to as to the mix between wingstop.com-sourced occasions and those from our third-party delivery partner, DoorDash. They run about — with the exception of Q2 last year, which was a bit of an anomaly, they’ve been running about a 60-40 split to the — to DoorDash’s marketplace over Wingstop. But again, I’d just remind ourselves, we’re agnostic as to the platform they come from, other than the information that we get about our guests, which I addressed in an earlier comment. ——————————————————————————– Jared Garber, Goldman Sachs Group, Inc., Research Division – Business Analyst  ——————————————————————————– And just a follow-up there. I’m curious if you’re seeing — on those free delivery promotion that you offered in the fourth quarter, are you seeing new customers sign up or engage with the brand on the back of those? Or if you can tell based on the consumer data? Or is it more of the core consumer? ——————————————————————————– Charles R. Morrison, Wingstop Inc. – Chairman, President & CEO  ——————————————————————————– Yes. I think regardless of the promotion, we believe that delivery represents, for the most part, a new incremental customer to Wingstop who has not tried us before. And hence, my comment about really growing the size of our database that’s indicative of the performance of delivery. ——————————————————————————– Operator  ——————————————————————————– And our next question will come from Jeff Farmer with Gordon Haskett. ——————————————————————————– Jeffrey Daniel Farmer, Gordon Haskett Research Advisors – MD & Senior Analyst of Restaurants  ——————————————————————————– Hopefully, you can hear me now. You did talk about the importance of one-on-one marketing as a sales driver in 2021. But I’m curious where you are right now with this strategy? Meaning, did you actively reach out to database customers in 2020? And if you did, how did you go about engaging with those guests? ——————————————————————————– Charles R. Morrison, Wingstop Inc. – Chairman, President & CEO  ——————————————————————————– Yes. The answer is yes, we have been reaching out to those guests. But I think the key message here is that, that database has built rather rapidly given the performance of the brand and the acceleration in our digital business in the last year. We’ve always leveraged our CRM platform to engage with them one-to-one, tying into preferences that they have. We’ve been working to append information about these guests to the database to help us understand them even better as to their preferences so that we can, in the future and going into this next year, spend more time really engaging them around events that they prefer with products that they love in a timely manner. And I think that that’s really fundamental at the core of what a good CRM platform should do. ——————————————————————————– Jeffrey Daniel Farmer, Gordon Haskett Research Advisors – MD & Senior Analyst of Restaurants  ——————————————————————————– That’s helpful. And just as a delivery follow-up, I think your delivery mix, as you mentioned, was roughly in that 25% range. It sounds like you have confidence in your ability to potentially take that mix higher in 2021. Assuming that’s the case, what does give you confidence that you can continue to move that 25% delivery mix higher? ——————————————————————————– Charles R. Morrison, Wingstop Inc. – Chairman, President & CEO  ——————————————————————————– Yes. Well, first and foremost, it’s only our first year of really operating under a full delivery platform. So I think there’s confidence we can grow that platform much larger than what it is today. We’ve always felt that way. If anything, we might be 1 year or 2 ahead of where we thought the goal would be for the brand. But I think — I don’t have a number, Jeff, to give you as to what I think it ultimately could mix at. But I do think you’re starting to see Wingstop emerge as more like some of the large pizza players in terms of our mix of digital and our mix of delivery sales overall. And so if you use that as a benchmark for potential, and we’ve got quite a ways to go. ——————————————————————————– Operator  ——————————————————————————– And our next question will come from Jon Tower with Wells Fargo. ——————————————————————————– Jon Michael Tower, Wells Fargo Securities, LLC, Research Division – Associate Analyst  ——————————————————————————– I got a few for you. Would you be willing to quantify how much spend you’ve been so far using to support the international franchisees, whether in 2020 or planned for 2021? ——————————————————————————– Charles R. Morrison, Wingstop Inc. – Chairman, President & CEO  ——————————————————————————– Yes. So in 2020 alone, roughly $2 million to $2.5 million of our EBITDA impact was associated with that spend. ——————————————————————————– Jon Michael Tower, Wells Fargo Securities, LLC, Research Division – Associate Analyst  ——————————————————————————– Great. And 2021, have you been able to parse that out yet? ——————————————————————————– Charles R. Morrison, Wingstop Inc. – Chairman, President & CEO  ——————————————————————————– We haven’t provided it. It’s — anything anticipated is already incorporated into our SG&A guidance. ——————————————————————————– Jon Michael Tower, Wells Fargo Securities, LLC, Research Division – Associate Analyst  ——————————————————————————– Okay. And then just one quick clarification on the convention. Is that going to hit in the fourth quarter again? Or is it going to be at a different time of year? And then on top of that, it sounds like, at least historically, the company has shied away from the idea of loyalty program. But you’ve got digital mix north of 60%, 20 million members in the database, and we’ve got launches across quick service landscape as well as some of the fast casual landscape, some of which recently have been very successful. So have your thoughts evolved around the loyalty program? Are you still sticking with staying away from it? ——————————————————————————– Charles R. Morrison, Wingstop Inc. – Chairman, President & CEO  ——————————————————————————– We’re sticking with it. What I would give you as a response to that is, number one, our same-store sales were up over 21% last year without it. Number two, and more importantly, we do have this large database of guests, and the key is engaging with them productively. There’s no pressure to have to provide a discounted base loyalty type platform in order to do that. And number three, we believe we are in a category all by ourselves, in a category of one. We don’t have a direct competitor that we feel we have to engage in a price war as most QSR players would do. So I think all of those protect us from having to feel a loyalty-type platform would be necessary. And then let me answer your convention question. It is scheduled. And I really, really hope we get to pull it off in the first couple of weeks of October this year, so that will be fourth quarter. ——————————————————————————– Operator  ——————————————————————————– And our next question will come from Dennis Geiger with UBS. ——————————————————————————– Dennis Geiger, UBS Investment Bank, Research Division – Director and Equity Research Analyst of Restaurants  ——————————————————————————– Glad you’re all safe. Just wanted to circle back on the international development opportunity. Charlie, I know you talked about how the international partners will emerge well positioned from the pandemic. But just wondering if you could provide an update on kind of where some of those partners are now in thinking about the trajectory of development going forward? And specifically, maybe if you could also just touch on China, if there’s any kind of new development and how you’re thinking about that opportunity from the last update? ——————————————————————————– Charles R. Morrison, Wingstop Inc. – Chairman, President & CEO  ——————————————————————————– Yes. Thanks for the question. Much appreciated. Look, it’s tough. A lot of our international markets rely on dining rooms, notably Mexico, which is our largest partner in the world. And so not having full capacity or use of the dining room has been a big drag on their business, much as we’ve seen for, for instance, other casual dining players here in the U.S. It’s very similar circumstance. The challenge they deal with is the pandemic itself, the management of the vaccine and the controls that are in place. And it’s just difficult for us to see sort of a light at the end of the tunnel there. That said, we did open 25 net new restaurants overseas last year during this time frame. And so I think there’s still a desire for our brand partners to continue to invest and build restaurants, and hence, why we’ve made the conscious decisions to support their businesses during this time frame to keep that development pipeline alive. I’ll call attention to the U.K. We opened a number of restaurants this year, a mix of both street side as well as dark kitchens, and they’re all performing very well. And we have adapted our business to more of a delivery and takeout model, heavy digital like we’re seeing in the U.S., and that’s working. Other markets like our partners in the Emirates, Indonesia, Singapore have all done quite well this year and have added new restaurants to their portfolio. So we’re very happy with where we stand there. I think the future is bright as we start to emerge from this pandemic. And then you asked about China. Yes, one of the I comments made earlier was that we did additional studies on international expansion. One of those was specific to China, and we completed that in the fourth quarter. Still a ways out in terms of our ability to really enter that market in a meaningful way. As I’ve noted before, we expected it to be a 1.5- to 2-year process before we got there. However, we believe the potential for a market like that represents as many of 1,000 restaurants or more for Wingstop. So it’s well worth our time and investments right now to prepare ourselves for that opportunity and not wait down the road. ——————————————————————————– Dennis Geiger, UBS Investment Bank, Research Division – Director and Equity Research Analyst of Restaurants  ——————————————————————————– It’s great color. And just one unrelated follow-up, if I could. Just as far as size, if anything, to share there, how that’s gone, anything on expectations, et cetera? ——————————————————————————– Charles R. Morrison, Wingstop Inc. – Chairman, President & CEO  ——————————————————————————– Yes. I mean we came out of test learning a lot more about the size. And Michael mentioned, other parts of the bird are important in order to help mitigate wing prices. We had a good test. We’re going to take that now, that learning, expand upon it this year. There’s not a specific commitment to roll that out yet in our pipeline. But we do have enough learning to be able to support what we believe is going to be a product for the future for the brand. Dark meat in general becomes a great opportunity as well. So more to come. But right now, we’re going to focus on making sure we connect with these new guests, bring them in the building. We don’t think that necessarily a new product is going to be the answer. And as Michael mentioned, we have put in some really solid mitigating practices in place to help support a lower food cost for our brand partners. ——————————————————————————– Operator  ——————————————————————————– And our next question will come from Michael Tamas with Oppenheimer & Company. ——————————————————————————– Michael A. Tamas, Oppenheimer & Co. Inc., Research Division – Associate  ——————————————————————————– Just wanted to follow up on the fortressing strategy in the U.S. in those 25 key markets. Do you think there’s an opportunity longer term to maybe add more markets for what you’re seeing beyond those 25? You talked about your really strong unit economics. And so just wondering if there’s any hurdles that would get you over — that can get you over that and get you to more to 25 markets? ——————————————————————————– Charles R. Morrison, Wingstop Inc. – Chairman, President & CEO  ——————————————————————————– Well, I mean we certainly do develop in markets outside of those fortress markets, but we think it’s important to prioritize them because they create a lot of benefits for the brand. Number one is just having that concentration in those 25 markets and being able to leverage that for advertising efficiencies on a local basis, as well as supply chain efficiencies and so on. That said, we’re all across the United States and in many, many markets. So opportunistically, where we have a stronghold already, that might not be in those 25 markets, we will continue to develop those and let our brand partners do that. But this is our focus point. I’d also say that those 25 markets and the potential in those markets alone would catapult us all the way to our 3,000 restaurant potential in the U.S. So — and it’s a 3,000 plus. I say that because we think there’s more opportunity. But that strategy really is our game plan for how we get to 3,000. ——————————————————————————– Operator  ——————————————————————————– And our next question will come from Nick Setyan with Wedbush Securities. ——————————————————————————– Nerses Setyan, Wedbush Securities Inc., Research Division – Senior VP of Equity Research & Senior Equity Analyst  ——————————————————————————– You guys obviously talked about your expectation of the wing cost headwind being a transient near-term phenomenon. But at the same time, obviously, there is a little bit of a different dynamic in terms of the competitive encroachments. What if it doesn’t end up being a near-term transient sort of phenomenon, what’s plan B? ——————————————————————————– Charles R. Morrison, Wingstop Inc. – Chairman, President & CEO  ——————————————————————————– Well, I think, Nick, to look for a plan B I would assume that it’s a catastrophic challenge for the brand, which just isn’t the case. Our food cost is running at levels that are below where they were in 2017 even at much higher wing prices. And so the way we’ve solved that is hard work with our suppliers and continuing to work with them on ways we can use other parts of the bird to help mitigate some of the mix. Our boneless wing mix, which is typically a breast meat, white meat product is at the highest mix ever. So we do use product bundling as a way to mitigate the impact as well. But I think if we go back to Michael’s comment, a $1.5 million AUV, even with the unit economic challenges of high wing prices, still deliver exceptional cash-on-cash returns. So we don’t think that we need to get into a position of material changes in doing that. I think we’re fine right now. And we do believe it will remain transient. It’s proven that self in the past. Other competitors are pricing at very low levels to generate volume. We know that’s not sustainable. We still believe we have pricing power within our top line. And so we’re going to continue forging ahead on our strategy. ——————————————————————————– Nerses Setyan, Wedbush Securities Inc., Research Division – Senior VP of Equity Research & Senior Equity Analyst  ——————————————————————————– And I mean you guys did talk about Investor Day in terms of the longer-term expectation of maybe being able to get the fuller bird. I mean what is the time line for that? Is that still a strategy in the background that you’re working towards? ——————————————————————————– Charles R. Morrison, Wingstop Inc. – Chairman, President & CEO  ——————————————————————————– Absolutely. Any time we can utilize more of the bird, it gives us that opportunity to buy the whole bird. The market dynamics fluctuate as we’ve seen this year. There’s almost no demand for what we call the back half of the bird, but that would be the leg and the thigh and the back portion of the bird, and that’s a struggle right now for us and anybody in this business. And breast meat demand is down, too. So this is a pandemic thing more so than anything. And I think as we start to retreat back to some normalcy and we pray that we do, brands like Chili’s will put their fryers to use to take care of the dining room. We won’t be seeing chicken wings flowing through, that’s our guess. Other of these brands that are emerging, we understand, and I’ve said many times, we support what they’re doing to try and keep their restaurants capacity up. It’s a smart move. But do we believe it’s sustainable? Probably not. And so we’re going to continue to work on ways we can use dark meat in our products. The thighs are a great example of that in the test that we did. And we have a lot of good learning there that allows us to pull that lever when we need it. And we can look at other products that we are always constantly evaluating to see what makes the most sense. But right now, the way we’re sitting, I think we’re in good shape on the P&L. We could always be — obviously be in better shape. But keep in mind that our labor and our 4-wall rent costs are substantially lower than most brands. And so a lot of times, we get to talking about food costs and forget about those. That’s really what fuels our P&L. ——————————————————————————– Operator  ——————————————————————————– And our next question will come from Andrew Strelzik with BMO. ——————————————————————————– Andrew Strelzik, BMO Capital Markets Equity Research – Restaurants Analyst  ——————————————————————————– I actually wanted to ask about labor, and I was hoping you could share your perspective on the current labor environment. And with the conversation around minimum wage potentially going up, how you would think about with your franchisees managing through that environment, should it come to pass? And I was also hoping just a follow-up on the conversation around the $2 billion kind of threshold that you guys have hit from a system sales perspective. You mentioned the implications for unit growth and some advertising stuff. Are there any other kind of structural benefits or opportunities that surpassing that threshold, do you think, kind of opens up for the brand? ——————————————————————————– Charles R. Morrison, Wingstop Inc. – Chairman, President & CEO  ——————————————————————————– Well, let me say this first. It’s not really a good time in our economy given what’s going on, especially in the restaurant industry, to be talking about minimum wage legislation when what we’re really talking about is trying to get especially smaller independent operators back on their feet and growing their business. It’s a heavy demand that we’re placing on them. And I really wish we weren’t talking about it right now. We do — if I think about Wingstop and the perspective there, we already operate in a lot of states that have enacted minimum wage legislation, that’s been developing over the past, gosh, 4, 5 years at least. So there are many markets where we’re already up at that level. On a chain-wide basis, our restaurants, on average, pay our employees somewhere between $11 and $12 an hour on average. That’s been consistent year in and year out. So even in a market like Texas where the minimum wage may be sub-$8, it’s still not the wage we pay. And I think we lose sight of that. So the wages would have to graduate up to those levels before it would really impact the business. I mentioned as well, we do have pricing power in our P&L. And that’s how we’ve addressed minimum wage legislation over the past few years in markets where we’ve seen it grow. It’s challenging. But I think right now is not a good time to be even contemplating the minimum wage increase. What we should be doing is everything we can to stimulate the economy, get people back on their feet, give small businesses the relief they need. And let me address the $2 billion. I’m sorry about that. Yes. So there is a little bit of science to the $2 billion threshold, but — in some demonstration in the past of companies that have hit that milestone. And what we believe and Michael and I spent a lot of time thinking about this is when you hit that threshold, the scale opportunities become pretty significant in terms of just — a small amount of growth creates a lot of opportunity in the business. And so what we want to do is make sure that we’re building this business so that we can sort of hit that consistent momentum run rate that a lot of companies have seen in this industry when they’ve cleared that $2 billion mark. And that means you got to make sure, a, you have the right infrastructure in place to support it. That means systems — financial systems, store level systems, above the 4-wall systems for digital performance. You also need to have the right people in place, and so investing in our talent base, growing the talent base to make sure that we’re scaling with it. Those are critical to the success of companies as they sort of hit this inflection point. And we’re right at it right now. We’re being proactive in our approach to make sure that we’re getting ahead of it and at the Board level talking a lot about this. Because I think it’s very important that we not lose sight of the fact that we have got a long way to go. And although we can rest on the fact we’ve had great success in what we’ve invested in so far, those investments are what got us to where we are now. We need to continue to look at those for the future. ——————————————————————————– Operator  ——————————————————————————– And our next question will come from Brian Vaccaro with Raymond James. ——————————————————————————– Brian Michael Vaccaro, Raymond James & Associates, Inc., Research Division – VP  ——————————————————————————– I had a question and a clarification. Charlie, historically, you’ve highlighted the gap in awareness and consideration compared to other brands as a substantial long-term opportunity. And you’ve also talked about even today the growth in delivery during COVID that’s included a lot of new customers. I was wondering, can you further frame or quantify how much you’ve narrowed that gap in 2020? ——————————————————————————– Charles R. Morrison, Wingstop Inc. – Chairman, President & CEO  ——————————————————————————– I sure can. Not by a lot, believe it or not. We’ve had great performance, but narrowing the gap on consideration, a small amount can yield a substantial impact to revenue. And I think it’s worth noting. And we noted this before, but our brand in the U.S. is a little over 1,300 restaurants. Some of the competitors that we compare against can have 5,000 to 10,000 or more restaurants in the U.S. So it’s a substantial gap in just the penetration of the brand. We also are a brand that sort of lives virtually in a weird way, but our locations are not on the street corner with giant golden arches on them. Instead, they’re hidden back in strip centers and what we’ve determined today is B real estate. So it’s a little harder for us to really generate that consideration the same way others do. That being said, I think we’ve done an exceptional job. It’s showcasing itself in the top line growth. And as we continue to invest and point our advertising muscle towards those people that really don’t know much about Wingstop or may be aware but haven’t considered an occasion, which are those heavy QSR users, there’s a huge, huge base of customers out there for us to go after and share some occasions with some of those other competitors. So we have a long way to go. I would say the gap is in the mid-teens in terms of percentage points from where we need to be, where we desire to be long term. But again, like everything else, that’s a long-term outlook for us, and we’ll just keep chipping it away on it. And again, I can’t reinforce enough that it’s showcased by the performance we’ve seen in the business. ——————————————————————————– Brian Michael Vaccaro, Raymond James & Associates, Inc., Research Division – VP  ——————————————————————————– Yes. Okay. That’s helpful. And then also, could you — the clarification, could you clarify the comments on your ’21 unit growth, your 2021 unit growth? Just so we’re on the same page, there’s different aggregators of consensus estimates that are out there. Our sources would suggest that consensus was modeling around 170 net new units in 2021. Just wanted to confirm that’s consistent with the consensus that you’re referring to. ——————————————————————————– Charles R. Morrison, Wingstop Inc. – Chairman, President & CEO  ——————————————————————————– I would say you’re not materially off that number. But we go by the aggregate of all of the folks that follow us. And so that’s the number we were pointing towards. ——————————————————————————– Operator  ——————————————————————————– Our next question will come from Jake Bartlett with Truist Securities. ——————————————————————————– Jake Rowland Bartlett, Truist Securities, Inc., Research Division – Analyst  ——————————————————————————– Charlie, I’m still a little uncertain as to kind of — as to what your guidance is for same-store sales in ’21. It seems that you’ve endorsed this positive mid-single-digit number. But if you could explicitly do so or not, I just want to make sure I’m understanding the intention. ——————————————————————————– Charles R. Morrison, Wingstop Inc. – Chairman, President & CEO  ——————————————————————————– Yes. We don’t have an explicit guide for 2021. We simply reinforced our 3- to 5-year outlook for mid-single-digit same-store sales growth. ——————————————————————————– Jake Rowland Bartlett, Truist Securities, Inc., Research Division – Analyst  ——————————————————————————– Okay. And maybe another way to get there as well, in the past, you’ve talked about kind of some color on current trends. I think last year, you talked about how the Super Bowl was very strong, and we had a strong start to the year. Could you give us any color on what you’re seeing year-to-date? Maybe it would help us kind of gauge the ongoing momentum in the business. ——————————————————————————– Charles R. Morrison, Wingstop Inc. – Chairman, President & CEO  ——————————————————————————– Yes. Jake, no, but I would just reinforce that what we had mentioned last quarter is, I think we need to avoid the sequential quarter-to-quarter discussions and quarter-to-date discussions and focus on the long-term algorithm for this brand. What I will say is, with confidence, our average unit volume for 2020 was $1.5 million on an investment of $400,000, that hasn’t moved over a number of years, yielding exceptional cash-on-cash returns, [appealing] development. ——————————————————————————– Jake Rowland Bartlett, Truist Securities, Inc., Research Division – Analyst  ——————————————————————————– Got it. And then I’m going to just take one last one and I’ll pass it on, which is earlier in the script or earlier in the Q&A session, you talked about thinking about same-store sales on a 2-year basis. Obviously, that 2-year basis has been moving around a lot. But is that how we should think about in terms of the 2-year ’20 — that you experienced in ’20 and kind of move that forward? Maybe just give us some clarity on what you meant about kind of thinking about on a 2-year basis. ——————————————————————————– Charles R. Morrison, Wingstop Inc. – Chairman, President & CEO  ——————————————————————————– Yes. Look, I appreciate the triangulation, Jake, towards the answer. But look, we have a 2-year trend. It’s been pretty consistent in terms of its pattern. I wouldn’t rely on that for your estimates. But I did mention that it’s more — it demonstrates stability, if anything, in the comp. But what we aren’t going to do is provide any specific indication. We’re long-term focused. ——————————————————————————– Operator  ——————————————————————————– And our next question will come from Joshua Long with Piper Sandler. ——————————————————————————– Joshua C. Long, Piper Sandler & Co., Research Division – Assistant VP & Research Analyst  ——————————————————————————– Great. A couple of different follow-ups. We’ve talked about the investments in the brand and the people and how important that is to the Wingstop story. And so I was just curious if you might be able to talk about how you coordinate the kind of the brand power, those investments and how you build the culture aspect of it across your domestic and then international pieces of the brand as well, knowing that, that’s going to be an important piece of the overall long-term growth story. ——————————————————————————– Charles R. Morrison, Wingstop Inc. – Chairman, President & CEO  ——————————————————————————– Yes. Well, I appreciate that question. Certainly, the culture of this company and the culture of our brand, I believe, it’s the foundation of our success. It’s our people. And we’ve invested a lot over the past years to really build and strengthen the culture of this organization. And I have noted over the past year that aside from investments in technology we’ve made over the past few years, it’s our people who have made the difference in Wingstop as compared to anybody else in performance. And I can’t thank them enough for what they’ve done. And I think that culture that is inherent not only in our corporate entity, not only with our brand partners, but in the restaurants. It’s what makes this brand so special. And we will do everything to protect that. And that is part of our outlook for the long term in achieving our vision is that we maintain our entrepreneurial roots, we maintain the authenticity that this brand is all about. We continue to be service minded. And we continue to have fun. There’s nothing wrong with having fun in doing what we do. Food is fun. Wings are a fun food. People love that about our brand. When we get too serious, it’s probably at a point where we’re going to have struggles. So rest assured, we’re going to keep pushing to make sure that, that becomes and remains foundational for our business. ——————————————————————————– Operator  ——————————————————————————– And our next question will come from James Sanderson with Northcoast Research. ——————————————————————————– James Jon Sanderson, Northcoast Research Partners, LLC – Equity Research Analyst  ——————————————————————————– I just wanted to follow up to the discussion on international development. Wondering based on your recent studies, if you’ve reconsidered potentially any type of master franchisee relationship with international development groups to really take advantage of some of the reductions in restaurants we see in Europe and potentially in China, and if that would come at some sort of different royalty rate compared to what we see today? ——————————————————————————– Charles R. Morrison, Wingstop Inc. – Chairman, President & CEO  ——————————————————————————– Can you — I’m going to ask you to clarify that question, if you would, James. I’m not following where you’re going. I want to make sure… ——————————————————————————– James Jon Sanderson, Northcoast Research Partners, LLC – Equity Research Analyst  ——————————————————————————– No, understood. I’m referring to an example that Domino’s currently has with a number of larger international groups where they have master franchisee relationships. And I believe that the royalty rate is at a discount of what the — others domestically pay, but they do have an opportunity to accelerate unit growth in those markets. I think dash brands in China is an example of that. And I’m wondering if Wingstop is considering a similar type of relationship to accelerate unit growth in international markets you haven’t really entered into yet. ——————————————————————————– Charles R. Morrison, Wingstop Inc. – Chairman, President & CEO  ——————————————————————————– Okay. Thank you. We would refer to that as a subfranchising opportunity, meaning the master would have rights to also become a franchisor in those countries. We do have some experience with that. I would not suggest that, that is a growth path opportunity for Wingstop. Conversely, we believe that having a solid, well-capitalized real estate savvy partner in any market is going to be the best choice for us. Each market is different. But I think you’ll probably see more indication of Wingstop making investments in markets where we believe there’s great opportunity to scale and grow rather than going to subfranchise route. And part of the reason for that is it creates a lot more complexity. While it does create a discount, if you will, for the master franchisee, they have to have an operating infrastructure that can support those subfranchisees. That’s difficult for them to execute consistently. And it puts the brand to us in a position of having to support those. So I’m not sure that all of the previous experience on that is necessarily indicative of long-term success. It may create some short-term upside, but that’s about it. So we’re going to stay the course on our approach to large master developers in our markets for today. ——————————————————————————– James Jon Sanderson, Northcoast Research Partners, LLC – Equity Research Analyst  ——————————————————————————– All right. A quick follow-up. I was wondering if you had any feedback on some of the strategies that we had seen in the past that might be able to reduce the cost of labor in stores. The example I’m thinking of are locker systems that expedite the pickup of delivery orders, things like that, that we might see in 2021 that might be used to improve labor productivity. ——————————————————————————– Charles R. Morrison, Wingstop Inc. – Chairman, President & CEO  ——————————————————————————– Yes. I mean we — obviously, by shutting down our dining rooms for almost a year now, we have put all those things on the back burner as it relates to what happens inside the 4 walls. I would only call attention to Wingstop being a very unique brand and that the roster size for our restaurants is rather small compared to most. And the number of people you can physically put in the kitchen starts to get fixed very quickly, especially at these higher average unit volumes that we’re seeing. So we — aside from pandemic-related expenses in labor that is really about retention during this time frame, you should be able to see as the volumes grow, exceptional leverage on the P&L, which is under — the underlying [underprint], if you will, on our P&L today. So those — while those are important opportunities for us, I think growing the top line is our key priority. Making sure that we keep our restaurants very efficient and keeping our model simple will yield better labor outcomes than some of the other tactics that we’ve talked about in the past. ——————————————————————————– Operator  ——————————————————————————– And our next question will come from Peter Saleh with BTIG. ——————————————————————————– Peter Mokhlis Saleh, BTIG, LLC, Research Division – MD & Senior Restaurant Analyst  ——————————————————————————– Great. I want to ask, historically, as you mentioned several times on the call, the brand has lived in B real estate. But as you think out the next several years, maybe 5 years or so, are you considering peppering in some better A real estate as we’ve seen with maybe some of the other competitors in the space? ——————————————————————————– Charles R. Morrison, Wingstop Inc. – Chairman, President & CEO  ——————————————————————————– Well, we don’t believe we have a competitor in the space, so — I’ll start with that. So we don’t look at what they’re doing as a guide to what we would do. What I will say to this, Peter, is, I think, if anything, we’re going to continue with our “B locations” as our primary objective. They just work for us. We don’t need that in-capped prominence in a strip center, nor do we need a stand-alone building in order to generate the kind of performance we’ve seen. Separately, if anything, we might go to season Ds by way of incorporating those kitchens into our mix. We think those have a more prominent opportunity. And if anything, maybe reducing seats and dining rooms over time as we continue to drive our digital mix north. Those are probably the more likely outcomes in our real estate strategy. ——————————————————————————– Peter Mokhlis Saleh, BTIG, LLC, Research Division – MD & Senior Restaurant Analyst  ——————————————————————————– Great. Very helpful. Can I just come back to the conversation around delivery given it’s about 1/4 of your business. Can you just talk a little bit about how the delivery customer may be different than your traditional customer? I think you said delivery is bringing in a new guest. So maybe just talk about the characteristics of how they may be different than your traditional guest? ——————————————————————————– Charles R. Morrison, Wingstop Inc. – Chairman, President & CEO  ——————————————————————————– Yes. I mean we’ve noted even years back that the traditional pizza concepts that offer delivery have a distinctly different guests that uses deliveries than uses carryout. Wingstop’s always been a carryout, takeout brand, a little bit of dine-in as well. And so we knew that, that delivery customer was unique in that, that was their preference, and they just don’t want to carry out. So we’ve been able to pick them up. And what we have said over the years is they tend to be more of that heavy QSR user, which represents a much broader mix of the marketplace than perhaps our core customer who typically is in the urban core of markets and is more likely to eat bone-in chicken and chicken wings than others. What we’re doing is expanding that out and broadening the playing field and inviting in those QSR customers that just didn’t know us before, and that’s helping fuel our growth. So generally speaking, a little less diverse and perhaps more income in this new consumer base that’s using us for delivery and growing with us in the digital platform. ——————————————————————————– Operator  ——————————————————————————– And this will conclude our question-and-answer session as well as today’s conference call. Thank you for attending today’s presentation. And at this time, you may now disconnect your lines.