Wingstop Inc (WING) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Wingstop, Inc., fiscal third quarter 2016 earnings conference call. (Operator Instructions). Please note that this conference is being recorded today, November 1, 2016.

On the call, we have Charlie Morrison, President and Chief Executive Officer, and Mike Mravle, Chief Financial Officer. I would now like to turn the conference over to Mike. Please go ahead.

Thank you, operator, and good afternoon. By now, everyone should have access to our fiscal third quarter 2016 earnings release. If not, it can be found at www.wingstop.com under the Investor Relations section.

Before we begin our formal remarks, I need to remind everyone that our discussion today will include forward-looking statements. These forward-looking statements are not guarantees of future performance, and therefore, one should not put undue reliance on them. These statements are also subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. We refer you to our recent SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial condition.

Lastly, during today's call, we will discuss certain non-GAAP financial measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP, and reconciliations to comparable GAAP measures are available in our earnings release.

With that, I would like to turn the call over to Charlie.

Thank you, Mike, and welcome to our call. We appreciate all of you being with us this afternoon to talk about our third quarter performance. We had another strong quarter for development, which is a core long-term strategy for our business. We added 35 net new restaurants, ending with 949 restaurants across 40 states and five countries. This represents a unit growth rate of nearly 18% over the prior-year period.

In the US, we opened restaurants in 18 states, expanding and deepening our domestic footprint. We opened our first restaurant in the Boston, Massachusetts area, and are pleased with its early performance. We also had four international restaurant openings in four countries -- Mexico, the Philippines, Indonesia, and the United Arab Emirates -- showcasing the strength of our emerging international business. Year to date, we have opened 104 net new locations, and they are tracking well in relation to our targets.

Third quarter revenue growth of 14% included domestic same-store sales growth of 4.1%. The top-line growth yielded adjusted EBITDA and adjusted net income growth of 27.1% and 17.6%, respectively, inclusive of the recapitalization we completed at the beginning of the third quarter.

The success of our long-term growth strategy is predicated on new restaurant openings, and we remain confident in our ability to execute that strategy because of our development pipeline. Our strong unit economic growth enables us to attract highly qualified franchisees and extend our relationship with existing, successful Wingstop franchisees eager to continue growing with us.

Wingstop's unit economic model includes AUVs exceeding $1.1 million, a best-in-class sales to investment ratio of 3 times, and targeted new unit unlevered cash-on-cash returns between 35% and 40% in the second year of operation.

We are pleased to be raising expectations for unit growth to between 145 and 155 net openings, which will bring us to approximately 1000 Wingstop restaurants worldwide by year-end. Recall that our original guidance of openings this year was 125 to 135 restaurants. We are well on our way to our long-term target of 2500 domestic restaurants.

Focusing on international, Wingstop franchisees operate 67 units across five countries outside of the US. We've been very pleased with the trends in our international business as measured by both unit count and average unit volume growth.

On our last quarterly conference call, we announced that we will be expanding our global franchise footprint into Saudi Arabia with an exclusive development agreement for 100 new restaurants over the next 10 years. Last week, we announced that we have signed a new agreement for Colombia and Panama for the development of 30 restaurants over the next five years. Our performance in the existing markets, along with the demand for new territories, gives us confidence in the longer-term international opportunity.

Our second core long-term strategy is growing revenue in online channels. In the third quarter, online sales made up 17.7% of total sales, up from 16.9% in the second quarter and up from 14.2% in the prior-year third quarter. While our mix grew by 80 basis points for the entire quarter, we exited the quarter at 19% of total sales.

As we have said, online orders generate a $4 higher average check than our current average order. We are encouraged that 32% of our domestic restaurants had an online sales mix in excess of 20% of total sales. This is up from 27% in the second quarter and 20% in the first quarter.

We still have a substantial amount of total orders that come in over the telephone. With our takeout mix at approximately 75% of sales, we believe that we can continue to grow our online ordering mix much higher over time.

One of the key enablers of online ordering growth is the rollout of our new POS system that integrates online orders straight to the kitchen. As of the end of the third quarter, we have reached 83% implementation with our new point-of-sales system and are on track to exceed 90% by year-end.

Finally, I'd like to turn our attention to national advertising. We announced in September that we hired Starcom as our first ever national media agency after a comprehensive agency review. We believe Starcom is best in class and chose them based on their category experience, strategic vision, buying power, and the talented team picked to support our brand. They will oversee strategic media planning and activation as we launch our new digital -- national digital campaign in January and our first national TV campaign in February, just after the Super Bowl.

Recall that in our transition to national advertising, the total franchisee spend on marketing will not change, but the allocation of that spend will shift between national and local. This transition will result in more frequency and reach for our existing media markets and coverage for smaller and new markets where we do not currently leverage TV and radio. We are very excited about the potential increase in brand awareness that will come as we implement this strategy in 2017.

In summary, we are proud of our strong third quarter results and the progress we continue to make against our long-term objectives. With that, I'll turn the call over to Mike.

Thanks, Charlie. Let's now review our quarterly results for the 13-week period ended September 24, 2016, and then I will update our annual guidance. Total revenues increased 14% to $21.8 million for third quarter 2016, from $19.1 million last year. Given that we are a 98%-franchised system, the majority of our revenues consist of royalties and franchise fees. Together, these increased 17.9% to $13.7 million for the third quarter, compared to $11.6 million last year.

As Charlie mentioned, we opened 35 net new restaurants during the third quarter. We ended the quarter with 949 system-wide restaurants, which represents a unit growth rate of 17.6% compared to the year-ago period. In addition to restaurant development, revenue growth was also driven by domestic same-store sales growth of 4.1%.

Our Company-owned restaurant revenue increased to $8.2 million from $7.5 million in the prior year, driven mostly by a 4.8% growth in same-store sales along with contributions from one additional Company-operated restaurant that opened during the second quarter.

Cost of sales increased 14.3% to $6.1 million, from $5.3 million in the prior year. As a percentage of Company-owned restaurant sales, cost of sales increased 400 basis points to 74.7% from 70.7%.

The increase was driven by two primary factors. First, we are making investments in our Company-operated restaurants to maintain our best-in-class performance. This includes investments in roster sizes and staffing as well as costs associated with our current remodel program that are not capitalized. Secondly, our margins were impacted as our new restaurant opened in the second quarter ramps up to normal efficiency.

In addition to these investments, in the fourth quarter, we are opening an additional corporate restaurant and expect year-over-year inflation for bone-in chicken wings of approximately 10% based on current Urner Barry costs.

Selling, general and administrative expenses increased 21.5% to $8.9 million, as compared to $7.3 million in the prior-year comparable period. This year's third quarter included $1.4 million of transaction costs related to the refinancing of our credit agreement and the subsequent dividend payout we completed during the quarter. There weren't any non-recurring expenses in the year-ago period.

Adjusted EBITDA, a non-GAAP measure, increased 27.1% to $8.3 million, from $6.5 million in the third quarter last year. Please review the reconciliation table provided in our earnings release between adjusted EBITDA and net income, its most directly comparable GAAP measure.

Interest expense rose to $1.4 million from $0.8 million in the third quarter last year, reflecting the refinancing of our credit agreement that was completed at the beginning of the third quarter. For the quarter, income tax expense was $1.7 million. Our effective tax rate was 38.5%, compared to 36% in the comparable period in the prior year. We continue to anticipate an annual effective tax rate of between 37% and 38% in 2016.

Net income decreased to $2.8 million, or $0.09 per diluted share, compared to net income of $3.2 million, or $0.11 per diluted share, in the same quarter last year. Weighted average diluted shares outstanding were approximately 29 million for the third quarter of 2016 and approximately 28.9 million for the prior-year period.

Adjusted net income, a non-GAAP measure, increased 17.6% to $3.7 million, or $0.13 per diluted share, compared to $3.2 million, or $0.11 per diluted share, last year. Please review the reconciliation table provided in our earnings release between adjusted net income and net income, its most directly comparable GAAP measure.

As a reminder to everyone on the call, on June 30, 2016, we announced that we had closed on a new $180-million senior secured debt facility, which we used to refinance our indebtedness under our March 2015 debt facility. The new five-year debt facility bears an initial interest rate of LIBOR plus 275 basis points and consists of a $70-million senior secured term loan with a 5% mandatory amortization and a $110 million senior secured revolving credit facility.

We utilized the proceeds from the new senior secured debt facility in combination with available cash on our balance sheet to fund payment of a $2.90 per share special cash dividend that was paid on July 15, 2016. If you exclude the impact from the extra interest expense related to our recap, our adjusted net income growth rate would have been 29% in the third quarter versus the reported 17.6%.

In terms of our liquidity and balance sheet as of September 24, 2016, we had cash and cash equivalents of approximately $3.8 million and $158 million in debt. Our net debt for the trailing 12-month adjusted EBITDA was approximately 4.6 times, which is down one half-turn from our post-recap leverage in just one quarter. We made $7 million in voluntary debt pay downs against our revolving debt facility during the quarter, and year to date, CapEx was $1.5 million through the third quarter.

Turning to our annual guidance for 2016, we have made updates to several key metrics. We are raising our development forecast to between 145 and 155 net new system-wide restaurant openings, representing approximately 18% annual unit growth. We are increasing our range for total revenue by $500,000, between $90.5 million and $91.5 million. This new range represents approximately 17% growth over 2015. We expect domestic same-store sales between 3.5% and 4%.

SG&A expenses are projected between $34 million and $34.5 million. This range is inclusive of approximately $1.1 million of stock-based compensation expense, $1.1 million of expenses associated with our franchisee convention, $0.8 million of expenses associated with the 53rd week, $0.8 million of incremental ongoing public company costs, $0.5 million of transaction costs related to the March 2016 secondary stock offering, and $1.6 million of transaction costs related to the June 2016 debt refinancing.

Adjusted EBITDA is now anticipated between $34.5 million and $35 million, representing approximately 20% growth over 2015. Our previous range was $33.5 million to $34 million. Adjusted fully-diluted EPS is now expected between $0.55 and $0.57 per share, which is up $0.02 from our most recent $0.53 to $0.55 range issued last quarter. And finally, fully-diluted share count should be approximately 29 million shares, which is unchanged from prior guidance.

As a reminder, fiscal year 2016 includes a 53rd week, and all the guidance just provided includes the 53rd week impact. For context, the impact of the 53rd week is estimated to contribute approximately $1.4 million of revenue and $0.3 million of adjusted EBITDA.

And now I will turn the call back over to Charlie for closing remarks before we begin Q&A.

Thank you, Mike. As you can see, we're having a great year at Wingstop executing against our strategies and seeing all of our stakeholders benefit from those efforts. We're excited to fulfill our mission to serve the world flavor, and it is rewarding to see that the Wingstop brand resonates so well across this country and around the world. Our future is full of possibility, and we intend to take this category of one brand to even higher levels of success.

Thanks again for joining us this afternoon. We appreciate your interest in Wingstop and would be happy to answer any questions that you may have. Operator, please open the line for questions.

At this time, we will be conducting a question-and-answer session. (Operator Instructions). One moment, please, while we pull for questions. John Glass, Morgan Stanley.

I'm wondering if you -- Charlie, maybe you could talk a little bit about early thoughts for 2017 for unit development. And to the extent you can't or aren't willing to talk about that, maybe you can just talk about -- do you feel like any of the acceleration on unit growth this year has been at all at the expense of 2017, or is this -- you can still do whatever you thought you were going to do in 2017 even with these increased numbers?

Sure. Good afternoon, John. First and foremost, no, we aren't prepared to talk about 2017 numbers specifically or any guidance therein, but I will tell you that we do not expect that any of the openings that are happening this year are going to take away from next year's pipeline. In fact, we feel very confident in our pipeline for 2017 openings. Much of that pipeline has already been established in the form of leases and projects that are already in construction. So, no, I don't believe it'll have any impact.

Okay, great. And just one more for me, and it's on the international side. That seems to be ramping up a little bit. How do you think about approaching some of the larger markets? You talked about some of the markets you identified already, but there are significant large markets, whether it's some of the BRIC countries or some of the larger developed markets in the world. How are you thinking about approaching some of those, both in terms of timing and which ones are more attractive than others at this early stage?

Sure, and I would say that although Colombia and Panama might be an example of a smaller market, it does represent continued investment from one of our existing partners already, and continued growth, so therefore the confidence they have in the Wingstop model internationally.

We continue to search for the best possible partners in all of the markets that we've outlined previously that we think are targets, large markets, primarily certainly markets with high chicken consumption per capita. So I don't have any specific timing as to when certain of these large markets would come about.

I will say that I think the last two deals we've done, one in Saudi Arabia, which does represent a very large opportunity for us at over 100 -- or at 100 stores per development, are examples where when we align with the best possible partner, we will put those deals together very quickly. So it also helps demonstrate that we are gaining a lot of confidence in our international model and validating that model under Larry Kruguer's leadership.

Great. Thanks very much.

You're welcome.

David Tarantino, Robert W. Baird.

Charlie, just a similar question to the first one here on the unit growth outlook. It seems like the pipeline is picking up, or at least the momentum is picking up quite substantially versus what you guided at the beginning of the year, so I'm just wondering if you could talk at a high level what you think the growth rate for the system unit growth might look like over the next couple of years. Is it possible to maintain this mid- to high-teens type growth rate relative to what you're seeing in the pipeline? And I guess how does international also play into that?

Well, I certainly think international has the potential to assist in the overall rate of growth worldwide for Wingstop in terms of helping drive that percentage. Certainly, as we get bigger, David, as you know, the percentages would be expected to come down over time, surely based on the size of the denominator as we get bigger, especially with the number of units that we're growing each year, and as you noted in our updated guidance, we've increased that for this year. But we feel very confident in the pipeline.

As we entered this year, we had over 500 restaurants committed for development in our pipeline domestically. We've maintained a pace to keep that very consistent going into the 2017 fiscal year. So I would expect that we are able to maintain the pace of growth that we've seen, but that may reflect itself in a different percentage, and therefore our long-term guidance has consistently been 10%-plus unit growth, and I think I would stick to that long-term guidance and sort of growing our way into that type of expectation.

Got it. And then just one quick one on the unit development being so robust. Are you seeing any signs of cannibalization in the same-store sales base as you start to penetrate some of these markets? If there's any estimate you'd have for that, it'd be interesting to see.

No, not yet, not at this point. A lot of -- there's still a lot of whitespace territory for the brand out there, and I think we noted earlier that we opened restaurants in 18 different states in the third quarter, so that represents a lot of our open territories continuing to see development happening, and so it's not pressuring us in any way to fill in markets that perhaps have more density of restaurants, and so we expect to see that continue. Don't expect a cannibalization necessarily, other than maybe in some of our core larger markets, but that's not where the lion's share of the development is anyway.

Great. Thank you very much.

You're welcome.

Jeff Farmer, Wells Fargo.

So through the first half of the 3Q earnings season, the list of sector demand headwinds that a lot of these companies have been talking about has gotten longer, and now including mounting healthcare costs in addition to just consumer discussion about the heightened promotional environment, persistent food-at-home inflation, just a laundry list of things that are pressuring the consumer. From my perspective, I actually am curious -- how are you guys thinking about this in your discussions with your franchisees? Your same-store sales are strong, but when you do have your conversations with the franchisees, are they bringing up any of these demand headwinds that a lot of your peers have been discussing over the last couple of quarters?

Hi, Jeff. I can't tell you that I've heard any specific headwinds like that demonstrated to us from our franchisees. As you've mentioned, we've maintained fairly strong comps, especially as compared to our peer set in the industry. We're very proud of that, and I think a lot of that just is associated with the strength of our brand and the strength of the offering and the uniqueness of our positioning in the category.

Certainly, those things do represent challenges for all of us to overcome. There are other headwinds that folks have talked about, and certainly we take into consideration things like the declining NFL viewership and things like that that have factored in, but so far we've been able to maintain very strong performance.

I would also say that as we look beyond this year and into 2017, we work our way into a national advertising platform that we believe can help us offset any of those macro headwinds that might exist in the market.

That's helpful. And just a final, unrelated question on international. So as international potentially becomes a larger percentage of that net unit development, how should we be thinking about this or the resulting impact on your average unit volumes moving forward? So you did touch on it, but in terms of, again, getting a lot of restaurants opened outside of the US, would that weigh on those volumes, sort of have a non-impact, potentially benefit them? How should we think about that?

Yes, I think because of the maturity of the US system compared to the international business and the traditional and typical ramp-up that we see in our unit volumes -- even if you look at our new stores in the US, they tend to ramp from a strong position coming out of the gates and then grow. We don't have that honeymoon.

International would behave the same, so it certainly, with faster development, could have some weighting on the overall AUV. And at that point, when it becomes material enough, I would expect that we would separate those two to give you clarity as to how that would impact it.

All right. Thank you.

You're welcome.

Matt DiFrisco, Guggenheim Securities.

Gentlemen, I heard you say something about the cost of wings, bone-in wings, being up about 10% or so, and I think also you guys, or at least the franchisees, have taken us some price in the last couple of weeks. Can you tell us some -- I guess sort of the anatomy of that 4.1 comp, how much was price? Or at least it seems like it ended the quarter with more price than it began with, so would you be running at a higher comp trend? Is that correct to presume?

Yes, I would suggest that where there was any price taken, it was very isolated and market-specific. I wouldn't categorize it as anything that was necessarily domestic chain-wide. So if franchisees elect to take some price, they usually do that either because of the timing and the opportunity or because of some of the wing inflation.

Now, I will say the wing inflation that we have outlined here, much of that has already been experienced in that the Urner Barry price for wings jumped very aggressively early in the quarter and has flattened out, and we have not seen an increase on a particular day or week for a number of weeks now and would expect that, hopefully, to hold. So that 10% increase is already in, but I don't think that that should have any meaningful impact on the overall comp for the quarter at all.

So I guess you're not expecting a response from franchisees to take a meaningful increase. They would have already taken it, or that's evident in the 4.1 already?

Yes, I think anything that's there is -- I'm not sure it's necessarily evident in the 4.1, simply because a lot of these -- the increase in the price of wings happened later in the quarter, and so, in some cases, there may be some reaction to it.

Our franchisees I will say are very conditioned to the idea that at this time of year, wing prices increase, and so many of their pricing decisions take into consideration the average price throughout the year, and if you look at the wing market over the past three years, for the most part, it's followed a very typical seasonal pattern. This fourth-quarter spike was a bit unique and early compared to the past, but as long as it holds and maintains itself into the first quarter, it would end up being something that would be consistent with seasonality that we usually see.

That's very helpful. I guess, also, I know you don't like to necessarily be categorized as simply a football fan viewership place, but did you see any sensitivity or, around the game days, any correlation with the negative -- the down Nielsen TV ratings at-home viewership? Did that correlate or have any relation to your sales on game days?

Not much, nothing that I would say was significant or meaningful. The only thing I would maybe call out is that the scheduling of the Thursday football games has been pretty poor to this point, and so that diminishes viewership, and so if there could be better scheduled games on Thursdays, that might help, but I don't think that's meaningful, because the vast majority of our business is done Friday through Sunday. So all in all, then, it's just up to the relative timing of who's playing on what day and at what time, and that all seems to balance itself out year in and year out.

Excellent. And then last question -- Mike, I guess regarding the G&A breakout there, it looks like probably maybe $2.1 million of the base for 2016 of G&A probably is not considered recurring for 2017. Is that correct?

Yes, that's correct.

Okay. Thank you.

Andrew Charles, Cowan and Company.

Just looking at the comp guidance for the year, I appreciate the specificity around 3.5 to 4. The math would suggest that it's about a 2% to 4% comp in 4Q, so I just want to confirm that first. And just the cadence is a little bit softer than it had been running, and I'm just kind of curious if there's -- I mean, I understand and respect the fact you guys don't like to talk about quarter date comps, but is there something we should be aware of just around the skittishness around the election? I mentioned that -- I know you mentioned also that the NFL viewership obviously had an immaterial impact, but just anything around that, because it just seemed a little bit out of trend.

Yes, an excellent question. I think certainly there is some cautious optimism for the quarter, but we're talking right now before the election, and any time you have an election or a major event like this, it can have an effect on the business, so I would say the range was built in such a way to accommodate what could happen, but so far, we feel very proud of the results we've already delivered.

I mean, I think one thing to keep in mind, too, is for Wingstop, this will be our 13th consecutive year of positive same-store sales growth, so certainly the backdrop is challenging right now in terms of all the things that have been outlined and discussed as headwinds, so I think our guidance is really just in reference to the caution around the things that could affect our business that are out of our control.

That's helpful. And my other question is just around the flavor profile that you did this quarter on the spicy Korean Q. I know you previously mentioned it was about 5% mix when you first ran it last year. Are you seeing a similar mix this year? I mean, are you seeing -- how have the results been for Korean Q relative to what it did last year?

Yes, actually, it's been very well received, marginally better than what it was previously, so just over 5. It's a fan favorite, and so it'll -- it's one that now we've got to decide how we react to that flavor, because I think a lot of fans would like to see it stay with us. We've been talking with our franchisees about what the long-term outlook is for that product, but it's been a winner for us.

Thanks a lot.

You're welcome.

Jake Bartlett, SunTrust Robinson Humphrey.

My question was around the national advertising and what your, I guess, initial views and guesses of what it could mean for new unit volumes. As franchisees open, there's much higher brand awareness.

Yes, I don't have any specifics that I would share, obviously, until we get it in place, but I do think any market where our overall awareness is quite low, which would be many of the markets up and down the Eastern seaboard and even, in some cases, the Upper Midwest, certainly those restaurants are going to see a benefit, but that doesn't mean we don't do anything for those stores, because right now we do a lot of local activation activity and some digital marketing around those new restaurants.

So it certainly has the potential to have a meaningful impact on those restaurants and certainly any market that is not on TV today, or with the heavier digital spend that we expect in our national approach, we'll make -- it could make a big difference for those markets.

Is there any evidence you've seen of just franchisees looking forward to that and possibly increasing this pace of unit growth? Is that part of a driver of what we're seeing in this acceleration?

Yes, I wouldn't say that it is definitely tied to the acceleration and the pace of growth. I think that's just natural based on the demand we've had from our franchisees, and many of these restaurants that are opening have already been in the pipeline for quite some time, so we made the decision to go national in April. In some of these -- in many cases, the restaurants that are opening in the fourth quarter were already in the pipeline before that.

So I think certainly, one, we have a strong unit economic model out of the gates as it is today, and so that's fueling our growth, so national advertising can only help that. But if we execute on this the way we would expect it to, then it certainly could have an impact on not only the brand new stores that are coming onboard, but the existing stores that might be in those markets and helping support all of those restaurants in those newer, emerging markets.

Great. And then on the shift to digital sales, it looks like, just given how you exited the quarter, there was an acceleration there. Maybe you can confirm that, towards the back half of the end of the quarter, and maybe what drove that, what measures you're taking to increase that mix specifically right now.

Yes, so the third quarter does have a little bit of seasonality as it relates to the pace of digital ordering. The first couple months of the quarter tend to be a little flatter year-over-year. They aren't growing at the consistent pace that we've seen every quarter, and a lot of that is the softness of digital orders during the end of the summer. As soon as we hit football, then that pace accelerates, and that usually follows suit with our advertising and how we deploy our advertising.

So it is expected and, hence, why we noted that we exited the quarter at 19. And again, I think we haven't done anything substantially different as it relates to how we promote it. We've been fairly stubborn about the idea that we want to get out point-of-sales system fully deployed by the end of the year. And as I mentioned earlier, 90%-plus of the restaurants will have this new point-of-sales system, which connects everything together digitally, and that's when we can really start to get a little more aggressive in terms of how we promote it.

So this good consistent pace of upwards of three to four points of increase year-over-year has been the tale of Wingstop's growth in digital, and I would expect that to continue as we go forward.

Great. And then a last question, if you could help us out on modeling unit growth for international just in 2016. I think in the past, you said it could be similar to 2015. I was wondering if you could get a little more specific on that for the fourth quarter.

Hey, Jake, this is Mike. Yes, I think we're still thinking it's going to be similar to the prior year. The international growth is a bit back-loaded this year, obviously, if you're looking at the year-to-date openings, and so we have a good pipeline, are expecting a good fourth quarter in terms of openings internationally.

Great. Thank you.

Jeffrey Bernstein, Barclays.

This is Pradeep on for Jeff. I just had a question on the 3Q comps. Any sequential trends to call out? I know a lot of your industry peers have been talking about a very choppy and volatile sales environment, and if there were any things to call out in terms of regional trends, that'd be great. Thank you.

Sure. We did not see anything that we would call out as regional or choppy or otherwise. I think if you -- you may recall we exited Q3 -- or Q2 with one known impact to the quarter, but we carried a very consistent momentum that we had been experiencing into and through the third quarter, so it was about right where we expected it to be, and I wouldn't call out anything significant beyond that.

That's very helpful. And if I could just follow up with one more in terms of delivery. I know on prior calls, you had mentioned that there were no near-term plans to really implement it, but it's been a hot topic in the industry, and I'm just wondering if you've had any -- seen any evidence of consumers asking for it or franchisees actually allowed to test it if they wanted to. Thanks.

Nothing different than what we've talked about before. We remain focused on not allowing third-party delivery into our restaurants, simply because of the risk of food quality degradation. As I've mentioned before, we end cut every potato in our restaurants to make our fresh-cut seasoned fries, and we know that they're best delivered to the customer via the customer, so they get to take them home, and that's been a staple of our business model and what has driven our success over the years.

The risk is that third-party delivery companies will carry those around for as much as an hour or more, and then we do -- when we do get infiltrated by such delivery companies, we do tend to see some guests get very disturbed, and unfortunately, with us, so we maintain a very consistent posture on this that although the technology appears interesting, the delivery to the guest is one of the biggest challenges.

Got it. Thank you very much.

You're welcome.

Karen Holthouse, Goldman Sachs.

Yet another one on the strengthened unit growth that we're seeing. Is there anything that you would call out regionally, sort of by area of the country, or differences in more developed versus some of the newer markets that's driving that strength?

No. Again, I think it's fairly consistent with where we have the opportunity for development, and as we said before, it's fairly balanced between our core strength -- strong markets that we have out there versus the emerging and new markets in terms of what our potential is.

But I think consistently across the board, we've mentioned this brand is very portable. I think we not only demonstrate that by the success of our concept in these new and emerging markets, it's also demonstrated by the success of our concept internationally that wings are a fan favorite. People love our flavors, and that transcends just about anywhere you go, and so I think the key for us is just to continue to scale up and increase the awareness in these newer, emerging markets to see the development continue, so nothing different than anything we've discussed before.

And then we're starting to, I think, see some early signs of success of a loyalty program at Domino's, and there's probably more similarities with wings as a category (inaudible) to them pretty much anything else, given the high degree of takeout, the opportunity to move people towards digital ordering. I'm just curious if there's anything sort of fundamental in terms of customer frequency or order size or something like that, that would suggest you couldn't necessarily -- the idea of a loyalty program might not be as portable as the idea of digital ordering in some of the other similarities.

Yes, I think certainly step one is the advancement of digital ordering. As you know, we still have roughly 60% of our guests coming in to us over the phone, and so we want to migrate as much of that towards digital as we can.

As it relates to loyalty programs as a key driver, I think we would call that more of a CRM type platform, right, really engaging with the guests, knowing what their order patterns are, understanding what their preferences are, perhaps engaging with them at a deeper level than we do today, and I think that's an advancement that's planned for the future for our brand, but today, really step one, integrate the POS system so that the order process is seamless, step two, make sure that we're fully prepared at the front counter to handle our online order guests with the efficiency that they expect from us, which comes in our new look and feel that we've already been deploying into our business. And then down the road, further engagement with them in order to maintain the level of loyalty that we already have for them.

So I would not call it necessarily a discount-oriented loyalty program, but I would call it one where we're just much more deeply engaged with the guests as we move forward.

Great. Thank you.

You're welcome.

David Carlson, KeyBanc Capital Markets.

I've got a couple questions for you guys related to the national ad fund. Charlie, I have seen some of the commercial Wingstop has run in some of the more, I think as you would call them, TV efficient markets. Do you plan to have a similar message when you launch national advertising next year, or will there be a more specific call to action for consumers?

I think it depends on which commercial you saw. Our most recent one that's out there is promoting the spicy Korean Q product. Prior to that, you may have seen something that was really aimed at talking about the core attributes of our brand and what we're all about, and the focus of that message is that we're all about wings. As the wings experts, as we call ourselves, and for good reason, we would maintain that consistency so that people who have not experienced Wingstop would get a clear message about this brand, the attributes about what makes us great, and a lot of cues on the quality, the freshness, the preparation, the craft and the crave that we deliver.

So that will be the key to our messaging strategy coming out of the gates on national advertising. I think that's much better than some of the cheesy promotional other types of advertising. We're not going to try and inject a lot of humor. It'll be a very straightforward message to the consumer that if you're looking for wings, by far and away, this is the best option you could even consider.

That's fair. And my follow up to that is in the past, some chains migrating to the national ad fund have really struggled to have their message resonate with guests, and I guess really simply put, how confident are you that your message will resonate with consumers?

I'm very confident, and we have gone in -- as part of this, we've tested this message with consumers. We have also tested with our franchisees. They're very excited about it. So, look, I think it's a very straightforward message. It's right down the middle. It's exactly what you want to do when you start something like this, is make sure people are well-educated on your brand and what you're all about.

Thank you.

You're welcome.

Nick Setyan, Wedbush Securities.

Congrats on another great quarter. You kind of touched on the traditional ramp-up of the stores, of the new stores. Have you kind of seen -- I know those numbers are based on a few years ago, so have you seen any change in terms of the three-year ramp? Are the stores maybe starting a little bit higher and maybe their ramp is still the same, or maybe it's a little bit higher or lower?

Yes, I think the data that we talked about previously and through the roadshow and other venues has had a consistent ramp up, and I will say that over time, that curve shifts and has shifted, but I'd say that the class that includes most of 2015 into 2016, that gives us a look at a full year's data, has been very consistent, if not slightly above what that data would have suggested. So, yes, we feel very confident that they're maintaining and, if anything, growing a little bit from that level.

Got it. And I'm just -- would you be able to share the food and labor and other restaurant operating costs, just a breakout of that?

Sure. It's -- I guess we don't have it in the --

Yes, it's in the Q. It's in the Q that has to be filed tomorrow. I've got them here. So for the quarter, the third quarter, food cost is 36%, labor is 23.7%, other is 17.6%, and the vendor rebates were a credit of 2.6%.

Perfect. Thanks very much.

You're welcome.

That does conclude our Q&A session. Ladies and gentlemen, this also concludes our conference. Thank you for your participation. You may disconnect your lines at this time.