Good morning. Welcome to The Wendy's Company Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there'll be a question-and-answer session. If you'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question, press the pound key. Thank you. Greg Lemenchick, Senior Director, Investor Relations and Corporate FP&A, you may begin your conference.
Thank you, and good morning, everyone. Today's conference call and webcast includes a PowerPoint presentation, which is available on our Investor Relations website, irwendys.com. Before we begin, please take note of the safe harbor statement that appears at the end of our earnings release. This disclosure reminds investors that certain information we may discuss today is forward-looking. Various factors could affect our results and cause those results to differ materially from the projections set forth in our forward-looking statements. Also, some of today's comments will reference non-GAAP financial measures. Investors should refer to our reconciliations of non-GAAP financial measures to the most directly comparable GAAP measure at the end of this presentation or in our earnings release.
On our conference call today, our President and Chief Executive Officer, Todd Penegor, and our Chief Financial Officer, Gunther Plosch, will give a business update, review our 2021 Q3 results, and share our revised financial outlook. From there, we will open up the line for questions. With that, I will hand things over to Todd.
Thanks, Greg, and good morning, everyone. We are extremely proud of the meaningful progress we made in the Q3 against our 3 strategic growth pillars. We continued to grow our breakfast business, digital sales accelerated, and we expanded our global footprint in a challenging environment. We achieved a strong 2-year global same-restaurant sales result of 9.4%, driven by growth across the globe, which included an acceleration in our breakfast and digital sales mix throughout the quarter. Our strong performance helped us lengthen our streak of growing or maintaining our QSR burger dollar share to an outstanding 9 consecutive quarters and further strengthen our position as the number 2 hamburger chain in the U.S. Our expansion into Europe through the U.K. continued to accelerate as we've opened several restaurants since the Q2 .
We are seeing extremely strong sales across all of our U.K. restaurants as customers are thrilled to have Wendy's in the market, making us even more excited about our growth opportunity. We also announced a new strategic partnership with Google, which we believe will allow us to tap into the capabilities of a world-class technology company to drive growth for us now and into the future. I will also share some results from a recent franchisee survey that highlights the strength of our relationship with our franchisees, which we continue to believe is a differentiator for us as a brand. We remain fully committed to our 3 long-term growth initiatives to build our breakfast day part, accelerate our digital sales, and expand our global footprint. Our goal remains the same, which is to invest in driving efficient, accelerated growth.
We are delivering on that commitment with strong year-to-date adjusted EBITDA and free cash flow growth and overall results that are pacing well ahead of our initial 2021 plan. Let's now turn to our U.S. same-restaurant sales. Our strong programming and continued execution by our restaurant teams drove another impressive 2-year same-restaurant sales result as we lapped our best quarter of 2020. Our average check saw continued growth bolstered by craveable products like the Big Bacon Cheddar Cheeseburger that was launched during the quarter. We achieved strong results this quarter, but we know that several macroeconomic factors that others across the industry experienced related to staffing and shifting mobility due to the Delta variant impacted results across our entire business.
Both the company and our franchisees are committed to making each Wendy's restaurant a great place to work, which will help attract and retain talent in our restaurants to help mitigate some of these impacts moving forward, and we are making progress. We are very excited about the plans we have in place for the rest of the year, including the recent launch of our new game-changing fry innovation. We believe we have a winner with this product. These fries remain hotter and crispier for longer and are consumer preferred nearly 2-to-1 to McDonald's. This is yet another example of us elevating our core menu, which we expect to help us continue delivering growth on top of growth. I could not be more proud of our international business, which delivered a second consecutive quarter of double-digit 1- and 2-year same-restaurant sales growth.
These results were driven by an improvement across the globe, both in our larger international markets such as Canada and Puerto Rico, where we continue to take market share, and also across the rest of the world as those areas continue to recover. Canada continued to post impressive growth, partially driven by their growing delivery business, which recently added Uber Eats, as well as by engaging customers through a Wendy's Phone contest that really resonated with our fans there. We're also seeing strong results in our Latin America and Caribbean region. In Mexico, one of our significant growth markets, sales have not only recovered from COVID impacts but have far surpassed 2019 sales levels, and we believe there is still huge potential for further growth in this market. The strength and recovery of our international business continues to be a catalyst for growth.
As of the end of the Q3 , almost 2/3 of our international markets have seen sales recover to at least pre-COVID levels, and we haven't seen a single permanent COVID-related market closure. We are extremely thankful for our team and our international franchisees for their commitment to growing the Wendy's brand across the globe alongside us. We continue to be very pleased with our breakfast business, which grew throughout the Q3 , exiting at our highest monthly mix of 2021 at 7.5% of sales. Our strong performance led to morning meal traffic share gains within the QSR burger category. This growth was driven by the successful 2 for $4 and $1.99 croissant trial driving promotions. We believe this momentum will continue as we close out the year with our recently launched $1 biscuit offering.
We continue to see high customer repeats showcasing that these offers are paying off. Incredibly, in a little over a year and a half, we have now moved into the number 3 spot in terms of overall morning meal share in QSR burger. While we saw growth in our breakfast business, mobility continues to shift and be depressed during this day part. As a result, we now expect our year-over-year breakfast sales to grow approximately 20% to 30% in 2021. We remain confident in our ability to reach our breakfast goals and remain committed to invest $25 million in breakfast advertising this year to drive trial and awareness, which we believe will set us up for further growth in 2022 and beyond. We continue to see strength in our digital business across the globe in the Q3 , reaching approximately 8.5% mix globally.
Our international digital sales were approximately 13% as we saw strong results across several of our markets. We expect growth to continue moving forward as we integrate new delivery partners and roll out mobile ordering across our markets. Our U.S. digital business accelerated throughout the Q3 , exiting with a digital sales mix north of 8%. This was once again driven by gains in mobile ordering and our strong delivery business. The growth in our mobile ordering business was supported by successful acquisition campaigns, which increased our total loyalty program members by approximately 10% compared to the Q2 , reaching almost 19 million. We have now increased our total members by an impressive 7 million since the start of the year.
We have also been hard at work at an exciting new strategic partnership with Google, which we believe will allow us to tap into the capabilities of a world-class technology company to drive growth. We expect this engagement will drive innovation around our one-to-one activation with customers and deliver better business analytics to drive enhanced insights. We'll also be focused on improving our in-restaurant environment by finding ways to remove friction from our customer and crew experiences. This type of innovative growth-driving partnership is exactly what the technology fee was designed to enable. We remain fully committed to our digital journey and expect continued growth in 2021 and for years to come. Our development momentum continued as we delivered significant growth across the globe, reaching almost 50 new restaurant openings in the quarter.
I am also pleased to share that our development agreement with REEF is off to a great start, with locations now open across the U.S., Canada, and the U.K. As I shared earlier, we are extremely excited about the consumer response to our expansion into the United Kingdom, which showed better than expected sales in these new restaurants during the Q3. We've now opened several restaurants in the U.K. since the Q2 , and we are in the process of bringing additional franchise partners into the family in the near future, which we are extremely excited about. We anticipate having 10 restaurants open by the end of the year, which is incredible given that we just opened our first location in June.
We have also added to our new restaurant commitments with several Groundbreaker development agreements in some of our international markets, further solidifying our path towards our long-term unit growth goal. We remain on track to reach approximately 7,000 restaurants by the end of 2021 as we continue to navigate through a challenging supply chain environment. Our development foundation is extremely strong and we have a robust pipeline of almost 200 potential franchisees, which gives us confidence that we'll reach our goal of 8,500 to 9,000 global restaurants by the end of 2025. Our playbook of investing to drive accelerated growth behind our 3 long-term pillars to build our breakfast day part, drive our digital business, and expand our footprint across the globe remains the same and we continue to make meaningful progress.
Our continued growth and success would not be possible without the partnership we have with our franchisees, who we believe are the best in the business. We recently received the 2021 Franchise Business Review Survey, resulting in another year of Wendy's exceeding industry benchmarks and also paced ahead of our results from 2019. I am particularly pleased with our ratings on overall satisfaction and financial opportunity, which were more than 5 % points ahead of the industry benchmark. We also achieved strong scores on our clear vision and ability to drive the system forward, highlighting our ongoing alignment behind our strategic priorities. Despite the challenges of a global pandemic, over 90% of our franchisees would make the decision to invest in Wendy's again, an increase versus our 2019 results, which we are very proud of.
These results highlight how our strong franchise relationships have been a differentiator for the Wendy's brand. Through this partnership and the dedication of our restaurant crews and support center teams, we will continue our march towards achieving our vision of becoming the world's most thriving and beloved restaurant brand. I will now hand things over to GP to talk through our Q3 financial results.
Thanks, Todd. We are pleased with our Q3 results, which delivered against our financial formula as an accelerated efficient growth company by growing same-restaurant sales and expanding our global footprint, which translated into significant free cash flows. Our global system-wide sales grew 5.3% and our same-restaurant sales growth was a very strong 9.4% on a 2-year basis. This was driven by the outstanding results in our international business and continued growth in our U.S. business. As Todd mentioned earlier on the call, our U.S. same-restaurant sales in Q3 were impacted by macroeconomic challenges. Without these impacts, we believe our U.S. same-restaurant sales results would have been generally in line with our expectations for the quarter.
Year-over-year company restaurant margin decreased 250 basis points, driven by higher than expected labor rate inflation of almost 9.5%, commodity inflation of almost 3%, lower local advertising spend in the prior year, and customer count declines. These were partially offset by the benefits of a higher average check. The increase in G&A was driven by higher incentive and stock compensation expense as a result of our strong financial performance in 2021 that continues to pace well ahead of our initial plan, higher technology costs primarily related to our ERP implementation and increased travel expenses. Adjusted EBITDA decreased approximately 5.5% to $112 million, primarily as a result of higher general and administrative expense and a decrease in company-operated restaurant margin. These decreases were partially offset by higher franchise royalty revenue and an increase in net franchise fees.
Adjusted earnings per share was flat to the prior year, driven by a lower adjusted EBITDA, offset by a decrease in interest and depreciation expense. Finally, our free cash flow increased significantly to approximately $274 million year-to-date. The increase resulted primarily from higher net income, the timing of receipt of franchisee rental payments, and the timing of accrued compensation payments. Before we turn to our outlook, I want to quickly highlight our strong year-to-date results through the Q3 , which continue to pace well ahead of our initial plan for 2021. Our year-to-date global systemwide sales grew 13.2%, and we achieved an impressive 2-year global same-restaurant sales growth of approximately 11%.
Our year-to-date company-operated restaurant margin has reached almost 17.5%, 350 basis points higher than 2020, driven by sales leverage, which has more than offset headwinds from higher labor and commodity costs. Finally, year-to-date adjusted EBITDA is up approximately 19% versus 2020, primarily driven by our strong sales and company-operated restaurant margin expansion. We continue to expect very strong results in 2021. However, due to the previously mentioned impacts we are facing, in addition to being late in the year, we are tightening our outlook ranges across some of our metrics. We now expect full year systemwide sales growth of 11% to 12%. This in turn flows through and tightens our expected ranges for adjusted EBITDA and adjusted EPS to $465 million to $470 million and $0.79 to $0.80, respectively.
Our adjusted EBITDA outlook is also impacted by our company-operated restaurant margin, which we now expect to be approximately 16% to 16.5%. This change in restaurant margin is being driven by the tightening of our sales outlook range and an increase in commodity and labor rates, which we are now expecting to be inflationary approximately 4% and 7% to 8% respectively. This is being offset by a decrease in G&A to approximately $235 million to $240 million and higher net franchise fees as a result of additional franchise transactions that are expected to close in the Q4 . Finally, we are holding our free cash flow at $270 million to $280 million as a reduction in our capital expenditure outlook is offsetting our updated adjusted EBITDA outlook range.
The favorability in capital expenditures is being driven by supply chain challenges, which we believe to be transitory in nature. To close, I would like to highlight our capital allocation policy, which remains unchanged. Our first priority remains investing in profitable growth. We are continuing to showcase this through the investments we are making across our 3 strategic growth pillars. Today, we announced a declaration of our Q4 dividend of $0.12 per share, which aligns with our capital allocation policy to sustain an attractive dividend payout ratio of more than 50%. Lastly, we plan to utilize excess cash to repurchase shares and reduce debt. We announced today that we have added $80 million to our existing share repurchase authorization to a total of $300 million.
With this increased authorization, we are planning to launch a $125 million accelerated share repurchase program in the Q4 . As a result of the above actions, we now expect to return approximately $350 million to shareholders by year-end through a combination of dividends and share repurchases.
We are fully committed to continue delivering our simple yet powerful formula. We are an accelerated efficient growth company that is investing in our strategic pillars and driving strong system-wide sales growth on the backdrop of positive same restaurant sales and expanding our global footprint, which is translating into significant free cash flows. With that, I will hand things back over to Greg.
Thanks, GP. We are excited to announce that we'll be hosting a virtual Investor Day on March 10th, 2022. During the event, we are planning to provide an update on our long-term strategic vision, reintroduce our long-term outlook and issue our outlook for 2022. The event will be available to all interested parties via webcast from our Investor Relations website at irwendys.com. In advance of the event, we plan to pre-release our Q4 and full year earnings on February 10th, 2022. We will also host a conference call that same day to review those results. Now turning to our Q4 investor outreach events. To start things off, we will be hosting an investor call on November 12th with Truist.
This will be followed by a 2-day NDR with the first leg in Chicago with Credit Suisse on November 16th and the second in Boston with BMO on November 17th. We will follow this up with an NDR in New York with Cowen on November 30th and then head to Nashville on December 1st for the Stephens Conference. We will then hold a virtual NDR focused on the West Coast, hosted by Goldman Sachs on December 9th, and we'll round things out with a virtual headquarters visit with Deutsche Bank on December 14th. If you're interested in joining us at any of these events, please contact the respective sell-side analyst or equity sales contact at the host firm.
As we transition into our Q&A section, I wanted to remind everyone on the call that due to the high number of covering analysts, we will once again be limiting everyone to 1 question only. With that, we are ready to take your questions.
Thank you. As a reminder, to ask a question, you will need to press star one on your telephone. Again, that is star, then the number one. To withdraw your question, press the pound key. Please stand by while we compile a Q&A roster. Your first question will come from Brian Bittner with Oppenheimer. Your line is open.
Thank you. Good morning, everybody. My question's on store level profitability, both for the franchise and the company-owned footprint. Todd, on the last call, you suggested that the company has been a little more conservative over the last several years on pricing, particularly in your company operated footprint. The question is, does this allow you to be more aggressive to protect store level profitability across the system as we move into 2022 or anything else that you can talk about as it relates to profit protection strategies for this system would be helpful. Thanks.
Yeah, Brian, thanks for the question. You are right. We had been more conservative on pricing historically relative to the system, which puts us in a better spot to take some pricing. We have started to take some of that pricing. In fact, as we roll through the Q3 into the Q4 , our pricing is probably a little bit ahead of where the franchise system is today, which is a good thing to manage and offset some of the headwinds. Pricing is just 1 lever that we'll pull. We'll continue to drive our mix hard. Our Made to Crave lineup on the premium side continues to do very well, and we'll continue to bring news and support trading consumers up across our menu.
You think about 4 for $4 plays a role, but $5 Biggie Bag is a nice trade up, Todd, to continue to drive margin and really pushing our digital strategy hard. You know, with, you know, the delivery business continuing to be strong, even with mobility coming back. You know, those average checks up 40% to 50%, mobile ordering picking up, you know, those checks up 15% to 20%. All of those things help us to manage the margin, especially with the consumer being a little more healthy today.
Thanks.
Your next question will come from Andrew Charles with Cowen. Your line is open.
Great. Thanks. I want to talk a little about the 2-year performance from 2Q to 3Q. You called out some macro headwinds, and I'm just curious within that, how much did staffing challenges weigh on your quarter, whether you look at it from the perspective of slowing service times that we're seeing across the industry or impacting operating hours? Maybe just more within your control, do you think you need more balanced level of advertising across day parts that currently skews perhaps a little heavier on breakfast to help accelerate sales at lunch and dinner? Thanks.
Let me start with staffing. You know, when you think about the staffing challenges that we all experienced in the industry in the Q3 , you know, it did create inconsistency on hours. We had more dining rooms closed during the Q3 on average than we did during the Q2 . You know, Q2 , we said 95% of our dining rooms are open. We're only 85% in the Q3 . That does put pressure on our digital business when you think about mobile grab and go, you think about delivery folks coming into the restaurant, you think about throughput that happens in the drive-thru.
You do see throughput challenges with staffing tighter, you know, and along the way, if you see newer folks coming into the restaurant getting trained up, those do impact throughput. You know, the great news is we're starting to see the applicant flow pick up a little bit going into the Q4 , and we're starting to improve staffing a bit, but not enough to get ahead and truly where we need to be because it is tight out there. We're working through all of those. One of the big keys for us is to get our dining rooms open to really support taking pressure off of the drive-thru and support our digital business moving forward.
On the breakfast rest of day advertising mix, we feel really good that we've got a good balance. As we've said before, our breakfast advertising is up about 20% year-over-year. We've got the extra money that we're supporting from a company's perspective, $25 million in total. You know, the advertising that we do on the breakfast day part really does halo back to the rest of the day with a strong quality message. The folks that are trialing our breakfast are getting some very high quality food that gets them confident in the rest of the day. We feel like we got that balance right between what we're doing on the breakfast side and a nice split between value and premium on the rest of day business.
Thank you.
Your next question will come from Jeffrey Bernstein with Barclays. Your line is open.
Great. Thank you very much. Just wondering if you could talk more broadly on 2 fronts. 1, just on the competition across quick service. I'm just wondering if you share any incremental thoughts in terms of the most recent activity by your competitive set, primarily in the burger category, and then more broadly, whether in those discussions with franchisees, it sounds like the survey has been quite encouraging, but you mentioned the company-operated has now passed franchisees from a pricing standpoint. Just wondering, franchisees desire to reaccelerate pricing or this concern of pricing them out of the category. Thank you.
From a competitive perspective, it's always competitive, and you know, it's probably no more, no less competitive than it has been historically. We do see, you know, a lot of things happening across our category to continue to drive customers in and get folks out as routines are not what they used to be. Mobility is back, but the routines are just a little bit different. We expect that will continue for quite some time as we work for share of stomach across our category. On our franchise front, you know, we will continue to partner with them to be smart on pricing. We've got a pricing analytics team that works well with our system to make sure that where we need to take pricing, we take smart pricing.
Our biggest opportunity is to continue to drive throughput and drive our digital business hard moving into the future. GP, any other thoughts on that?
Yeah, I think you said it well. I would also add our real performance metrics that we are watching closely are very good, right? We gained dollar share in the burger category, so it tells us we are competing with our programs. As we also said in the prepared remarks, we're winning in breakfast. We are now the number 3 player, and we gained traffic share again in the morning meal burger category. Overall, we are happy with how we're competing and the marketing mix that we're putting out there.
Thank you.
Your next question will come from John Ivankoe with JP Morgan.
Hi. Thank you. I wanted to talk about, you know, the Google partnership, and I guess I'll ask the question directly. I mean, what makes it, you know, I guess, a partnership versus you being a customer of Google? And I just wanted to understand, you know, what may be exclusive to Wendy's that, you know, you might get from them, you know, relative to the industry. Obviously, it's kind of the ultimate, you know, kind of data provider, but, you know, where do you see, you know, the Wendy's brand, you know, taking advantage, at least in the near term, you know, where others cannot, based on that relationship?
Good morning, John. Great question, right. I mean, it's really a strategic partnership. We are really very happy that such a heavyweight in the technology world is willing to partner with us. To be clear, we have a lot of other partners. They are more the vendor relationship. This is really a strategic partnership. They are putting the best foot forward to help us in various areas, right? Definitely on the digital side and really helping us with the one-to-one customer activation that there are several very proprietary products that will help us on that front. They are very strong in business analytics, so we're definitely going to use their platforms on it. We really think they can help us on restaurant tech and help us really remove frictions for us with our crew members and our customers.
It's a level up over a general vendor relationship. It's really strategic. It's a multi-year commitment that we have made and they have made. As a result of it, we think we are getting a win-win situation. We will get a great return out of the partnership, and they will as well.
Thank you.
Your next question will come from Chris Carril with RBC Capital Markets. Your line is open.
Hi. Good morning. You noted some encouraging data points around breakfast, including category breakfast share. You did note that you expect breakfast growth, though, of 20% to 30%, I think, versus the prior expectation of 30% for this year. In the context of that, can you talk a little bit more about your investment behind breakfast? I think you said you remain committed to the investment of $25 million in advertising this year, but did note that mobility does remain impacted. Curious if you could just kind of reconcile these 2 factors and how you're thinking about breakfast support for the remainder of this year and then into next year. Thanks.
Yeah, it's been nice to see the momentum as our mix continues to pick up and exiting at the end of the Q3 to 7.5%, breakfast mix is very encouraging. Very committed to continue to keep our awareness levels high with the incremental advertising spend that we had into this year. We've always said it was a 3-year journey to really drive awareness and ingrain the habit, and we're working through that in a more challenging environment because the breakfast daypart has been the slowest to recover back to 2019 levels. It is coming back and we want to stay ahead of that curve. You know, what we're really excited about on breakfast is, you know, our awareness is high.
You know, our awareness is at the levels of where Burger King is at, and they've been in the breakfast business for a long time, and our repeat is really strong. If we can get trial to happen, we can help to get a lot of repeat, which will help ingrain the habit moving forward. You saw that through the course of the Q3 with $1.99 croissants, 2 for $4 croissants. You're seeing that with the support that we have out there with a $1 breakfast biscuit right now, which is driving a lot of trial into our restaurant, because we really feel confident that the repeat will be there.
That's all supported with what we have in the restaurant today. We're trying to be fast, we're trying to be accurate, we're creating the highest customer satisfaction during that day part in our restaurant today. As we look forward to next year, it will give us an opportunity to finally start to innovate, to bring some news to the category with the support and success we've had to bring our franchise system along for that journey.
Your next question will come from Jeff Farmer with Gordon Haskett. Your line is open.
Thanks, and good morning. I just wanted to follow up on pricing. I believe on the last call you mentioned that your menu pricing, at least at the company restaurants, was roughly in line with food away from home inflation. I think on the limited service side, food away from home inflation was pushing almost 7% in the Q3. Is that a fair way to think about the menu pricing level that you have with the company-owned restaurants right now, something close to 6% to 7%?
Good morning, Jeff. The numbers we are tracking is food away from home inflation. It tracks around 4.5% to 4.7%, and we are about in line with that, with those kind of pricing levels. As Todd mentioned in, I think, the Q&A, is we're obviously watching the rest of the economic model very strongly. Pricing is a lever we pull, and then we have pulled the pricing lever in our company restaurant in the Q4 already.
All right. Thank you.
Your next question will come from Alton Stump with Loop Capital.
Okay, thank you. Good morning. You know, just wanted to ask about the Big Bacon Cheddar Cheeseburger launch. You know, it certainly seems to be, if not your most differentiated, you know, it's one of the more differentiated products that you've done by Made to Crave so far. Just, you know, kind of what the feedback was on that and, you know, how it fared, you know, in comparison to other offerings that you've introduced under Made to Crave in the past.
Yeah, we've brought some really unique and creative news to the category on our premium side to really drive ownership in that Made to Crave arena. Consumers start to expect when you want a high quality, premium, differentiated hamburger at affordable pricing, you can come to Wendy's. We are very pleased with the performance of that particular offering during the Q3 . In fact, it really helped leverage and drive our mix to its highest levels that we've seen across our total Made to Crave lineup, which includes both hamburgers and chicken.
We feel good about that, and we'll continue to play that game as it's a nice mix lever, and a nice high level customer satisfaction lever with high quality food to allow folks to get something they can only get at a Wendy's.
Your next question will come from Jared Garber with Goldman Sachs. Your line is open.
Hi, thank you for the question. Wanted to circle back on the breakfast business, and certainly encouraging that you're taking some share there. Wanted to get a sense for why you think maybe the trial is such a maybe more of a challenge. Obviously, it sounds like the repeat business is pretty good. Wanted to get a sense of why you think trial might still be a little bit more challenging here, given the level of promotions that we've seen and that incremental advertising spend. I guess how, you know, you kind of square that up with. Is it just improving mobility patterns that need to kind of play out for you to kind of ratchet that number up?
Is there something, you know, maybe that we're missing sort of under the hood that is driving that trial challenge? Thanks.
Yeah, I really think it's the latter that you just said, Jared, that you know, we need to continue to get mobility back in the morning day part and get folks into what their more normal routines will be. You know, as we've said in the past, and we're still seeing it, we're starting to see a little more mix in the breakfast day part between that 7 and 9 o'clock window, but our 2 biggest half hours are still the last 2 half hours, 9:30 A.M. to 10:00 A.M. and 10:00 A.M. to 10:30 A.M. So folks are using breakfast a lot as a late morning Zoom snack, and starting to slowly shift into an earlier morning routine. You know, that's why the breakfast day part's been a little slower to recover relative to rest of the day.
We're really optimistic that that will continue to come back. As we've got new out there around, you know, good promoted price points on offers, you know, the $1 Buck Biscuits, clearly a reason to create a routine to get out of the house early in the morning on the way to try all the food, we're confident that that will help us continue to build our breakfast day part moving forward for this year. We'll start to look at what new can we bring to continue to keep excitement against the category for Wendy's to make sure that we're top of mind and in people's routines moving forward.
Great. Thanks. That's helpful. Could you just update us on the active loyalty membership? It sounds like the overall loyalty program grows, but just wanna get a sense of what those active loyalty members has that level grown over the last quarter or so? I think those levels have remained generally flat. Just wanna get a sense of where that's tracking, particularly as it relates to, you know, one of your large competitors launching a loyalty program a couple months ago. Thanks.
That's a good follow-up question. We have a little bit north of 3 million active users. We like what we see in our loyalty program. We are still seeing high average check. We are seeing higher frequency. Obviously, the key job for us is to actually make that pool of people better, right? We're making a good job in terms of having now 19 million ex-users in the database. How do we get them more active? We are definitely excited about our Google partnership. They're definitely trying to drive innovation for us around one-to-one activation. It's one of the reasons why we signed the agreement for them. I think the future is bright for our loyalty program.
Great. Thank you.
Your next question will come from Dennis Geiger with UBS.
Great, thank you. Just wondering if you could come back to the core lunch and dinner daypart and just talking a little bit more about the drivers from here. You know, Todd, maybe if you could touch a bit more on sort of some of those biggest contributors looking ahead, if it's the menu innovation or the renovation with the fries, you know, if it's digital loyalty, maybe the dining rooms reopening, the staffing improving, again, going forward. I don't know how big the opportunity from here is on throughput and service speed, but just kind of speaking a little bit high level, a bit more to some of those key contributors to lunch and dinner from here would be great. Thank you.
I think there's several drivers. I think first and foremost, it does start with speed, as we get staffed up a little bit better and continue to drive throughput, and, you know, really lean into, getting all those dining rooms open, really leverage mobile grab and go, really leverage curbside, allow us to take some pressure off of those big drive-thru lines. I think all of those things will help drive, our business moving forward, just on a core operational, metric perspective. You know, I think that's where the consumer wants to go. They expect speed, convenience, and affordability from Wendy's, and we wanna continue to deliver that on that and differentiate with quality.
Now, if you think about the drivers moving forward, clearly a lot of opportunity ahead of us on the breakfast daypart, and that's why we're driving so hard on trial. But we're also not forgetting about the quality messaging on the rest of the day business that we have out there. That's why you see us, you know, continue to innovate in Made to Crave. You see the innovation on French fries. They are hotter and crispier and preferred 2-to-1 to our lead competitor. In fact, we're very excited about those plans in place for the rest of the year. You know, behind the success of the fry innovation and all the trial behind the $1 breakfast biscuits, we are presently pacing ahead of our internal expectations to start the quarter.
We're feeling good that these things are resonating for the consumer. You know, as we have applicant pool picking up, staffing getting better, those are things that can continue to help drive our business for the rest of the year. You know, on the staffing front, the 1 last comment I'll make is our late night business has been very good, but it's a big opportunity to be even better, because we do have inconsistency of hours with labor today at that day part. That's a big growing area where we think there's a lot of opportunity when we get ourselves staffed and those hours open.
Thank you.
Your next question will come from Brett Levy with MKM Partners. Your line is open.
Great. Thanks for taking my call. Just following up on your last comment on the inconsistent hours and labor issues, how would you say you are positioned right now? I know you said 95% went to 85% in dining rooms. If you look around the country, how are you seeing pockets of improvement? Where do you think you're still the most deficient in terms of labor? How should we think about your commodity position right now in terms of what's locked as we move into 2022, how you're thinking about the basket for next year and what that might do to your menu plans? Thanks.
Starting on the labor front and turn it over to commodities for GP. You know, as we look at staffing, company restaurants, franchise restaurants, there's no clear pattern where you're understaffed, overstaffed, when you look at the regionality across the country. You've got good pockets, bad pockets, but not a particular area of the country that's in a different perspective than the rest of the country. You know, and the focus is really on how do we continue to invest in those people, pay benefits and really set them up for success with some quality training as we bring new folks on. You know, how do we continue to recognize and reward the folks for the great job that they're doing in our restaurants day in and day out?
How do we stay focused on making it more fun and energizing to work? There is the word of mouth that this is a great place to work, and we can bring folks in, and there's opportunity to grow in our restaurant business. You know, the trend is our friend. We're starting to see staffing improve, but still not to the level that we need it to be, to really drive all the opportunities that's out there in front of us. That's gonna take a little bit of time because that labor market's not gonna snap back overnight. We'll see pockets of pressure, but we'll continue to push to do the right things to make sure that our restaurants are properly staffed.
You're seeing that in some of the labor inflation that GP commented on earlier. It's just costing a little bit more, but there's a good return on that investment in our people, because we can drive a great customer experience and drive a lot more business because there are a lot more business to be had. On the commodity front, GP, I'll let you comment.
Yeah, good morning, Brett. So on your question on there, as you know, we have adjusted our restaurant margin for this year down to about 16% to 16.5%. It's really on the heels of inflation, right? We had previously thought that our commodity inflation would be 2% to 3%. We're ending up dealing with 4%, which mainly was beef and then some distribution costs. On the labor front, we thought it would be 5% to 6% inflation. We're actually dealing now with about 7% to 8% inflation. Overall, we are super proud of our restaurant teams. 16% to 16.5% is significantly up in profitability versus prior year and actually even up versus pre-COVID levels.
I'm sure your next question is going to be, so what is the margin outlook for next year? We're not yet quite ready to give that outlook. We definitely can leave you with the following picture. First of all, we definitely are expecting elevated labor inflation and commodity inflation for next year, so we're planning for that. We're going to outgrow that inflation combined with pricing and cost containment actions like Design to Value. We see no reason why our margin for 2022 shouldn't be in line and back to pre-COVID levels that we had in 2019.
Question will come from Nicole Miller with Piper Sandler. Your line is open.
Good morning. Thank you. I wanted to ask about price and store level margin. The question is not that you would take as much price as might be needed, but how much price is needed in the current environment to hold margin as a steady state? What is the underlying ideal steady state store level margin?
Good morning, Nicole. Yeah, from a pricing point of view, right, we believe that pricing in line with food away from home inflation is probably the right spot for us. We're definitely watching competitive actions in the respective trade areas. You know, our pricing is pretty sophisticated. When we talk about price increases, these are not broad pricing changes across the whole menu. We have price elastic items and price inelastic items, and we are kind of operating in that environment. As I just said in the answer to the previous question, even with elevated inflation levels that we are expecting in next year, we see no reason why we shouldn't be hovering around the same margin levels we had in the pre-COVID world.
Your next question will come from Brian Mullan with Deutsche Bank. Your line is open.
Hey, thank you. Just a question on development. Wondering if you could discuss your current expectations for the components of net unit growth next year. In commentary you've made in the past suggested 3% global net unit growth. That was prior to the REEF announcement. Can you just give us your current thinking, possibly split out between traditional, you know, U.S. international and then just expectations for REEF next year, that would be great.
Good morning, Brian. Just to ground us in 2021, we're expecting 2%+ growth and achieving about 7,000 restaurants year-end restaurant count. About 1% growth in the U.S. and 10%+ in international. Because of the new agreement we made with REEF that adds 700 units over the next 5 years, plus a very successful Groundbreaker 2.0 initiative that had us add 240+ incremental development agreements and the launch of a build to suit fund that is about 80 to 90 units. All of that had us increase our unit growth outlook by about 500 to 1,000 units to 8,500 to 9,000 units.
From a CAGR point of view, that is about a 5.5% to 6% growth rate. You can expect for 2022, what I would call a vertical startup in growth. You would expect a 5% to 6% growth rate next year, and the majority of that is driven by REEF since the 700 units are pretty evenly split across all years. As we said in the prepared remarks, the start with our relationship with REEF is positive. We have REEF units in place now in all 3 countries that we have signed agreements for.
Thank you.
Your next question will come from Jon Tower with Wells Fargo.
Great. Thanks for taking the question. Many have already been answered, but I was curious, just kind of going back to the pricing and pricing environment and frankly, the inflation that's driving or running across the industry. How do you plan on keeping the value message front and center for the consumer next year? I mean, are we thinking about using digital channels, specifically the loyalty platform as an effective discounting mechanism relative to the past? And in that context, it sounds like the loyalty active membership remained kind of flattish quarter -over- quarter. So how do you plan on driving greater frequency within that cohort going forward?
I think there's a couple of things. 1, we do have a really strong value proposition on the menu today with 4 for $4 and with $5 Biggie Bags. So we do have an opportunity to really play hard on the value side with a proposition that works for the consumer but also works for the restaurant economic model. You know, on the other side of the equation, I do think as we continue to bring more folks into our loyalty program, as we continue to do more data analytic work, a little more one-to-one communication, you know, the opportunity to better connect and drive some deals and drive more active users into the mobile space is a big opportunity moving forward.
As well as the offers that we'll continue to do within the app to drive more folks into the loyalty program and to drive them to become more active into the future. I think those are the 2 big levers that we have to continue to drive a lot of value across our menu. You did see us do things like, you know, buy 1, get 1 for a dollar, which also drives some value in the minds of the consumer during the Q3 . Those are all tools that are out there in the toolbox.
Your next question will come from James Salera with Northcoast . Your line is open.
Thanks for the question. I wanted to dig into the breakfast daypart a little bit more. I think in the past you had mentioned that some more mature markets had already achieved 10% or more of daypart sales mix. Have those markets maintained or grew their share with the increased promotional activity you have in the marketplace? And have we seen any pickup in the average visits per year in the daypart?
Thank you.
Yeah, James, great question. You know, for our legacy restaurants, those that had breakfast before the new menu that we've created across breakfast, they continue to do quite well. They're mixing 10%+. They continue to grow the mix in that breakfast day part. You know, their average weekly volumes continue to grow nicely. Because they already have high awareness and a lot of folks in the routine, those folks, you know, start to become a little more frequent, and you start to acquire new users. It's very encouraging when we start to see how those businesses perform, and that's why we've always said it's a several-year journey to ingrain the habit and really get folks to become breakfast loyalists along the way.
We do see that as a very encouraging sign for the rest of the system. You know, with success like we have in those legacy restaurants, you know, those folks are always looking for what's the next level of growth, and that's where we get the push on how do you innovate. Whether you innovate on food, do you innovate into the beverage space. You know, the great news is we're actually getting that pull now from consumers or from franchisees to start to invest more to drive even more growth in the breakfast day part. If you recall, we had to start, make it very simple, make it very fast, low labor model, low investment model to prove the success.
Now that we've proven we can be successful in breakfast, you know, as we move forward into 2022, 2023, we can start to invest in more growth-driving opportunities into the future.
Thank you. A quick follow-up is, are the average visits up as well from the 6.5 level? Are they starting to pick up?
We haven't updated the frequency data. What we've talked about, you know, we were at about 5.5 visits, you know, per year to a Wendy's prior. We're a little over 6.5 now, so a nice 20% increase that was through mid-year. We'll update that more on an annual basis. I'm sure we'll have some more insight on that as we go into Investor Day early next year. That trend is nice. That trend is certainly helping us, not just with breakfast, helping to drive more frequency, but all the work we're doing on rest of day and digital too, so they're all playing a role.
Thank you very much.
Your next question will come from Chris O'Cull with Stifel. Your line is open.
Thanks. Good morning, guys. This is Alec Estrada on for Chris. I just wanted to follow up on development. Getting to 7,000 units by year-end implies a pretty strong Q4 . I was hoping you could provide some additional color around what's driving that expected strength. Is it just a timing shift from this quarter? How is the system balancing that with maybe some difficulties in either equipment sourcing or construction labor availability? Thanks.
Well, good morning. Yeah. We are very proud of our development progress in the Q3 . We opened kind of 50 restaurants. You're right, there is a good amount of restaurants still to come to reach the 7,000 number. The only thing I can tell you, our confidence is high. 90% or so of all these restaurants that need to be built to get to the 7,000 numbers are under construction. Are we managing this tightly? Absolutely. We are hearing about labor shortages and supply chain challenges in the construction industry as well. Could things shift around a little bit? Maybe. Again, 90% of the restaurants are under construction. You might be wondering, what's the remaining 10%?
Well, the remaining 10% is non-traditional units, aka REEF, and others that obviously have super fast construction times.
Our last question will come from James Rutherford with Stephens Inc. Your line is open.
Hey, thanks for getting me in. I just wanted to come back to the breakfast discussion. Todd, I thought it was interesting you mentioning earlier in the Q&A that customers are tending to use the breakfast business a little bit more as a late morning snack, as opposed to early morning, kind of on the way to work routine. I was curious, and I know that coffee is a key element to driving that early morning routine. Your food quality and differentiation is very clear with breakfast, but I haven't heard as much discussion on the performance within the beverage side of the menu.
Just curious if you could comment on what feedback you've heard from consumers on your breakfast beverage lineup and how important that piece of the menu is in terms of future innovation and the overall importance at driving those early morning routines to Wendy's?
Yeah, great question. As we start to look at opportunity, we do think there's an opportunity to drive the beverage strategy even harder, especially as folks get into the morning routine and really think about using, you know, the restaurant on the way to work in the morning. You know, we have a very good coffee in the restaurant and did a lot of work on it before the launch. It's like anything, you know, you need to have coffee prepared fresh, and you gotta have it ready when the consumer's coming. Getting more and more business earlier in the day will certainly help reinforce the quality of the coffee offering we have. We've got some great unique items that are good price value when you think about the iced side with Frosty-ccino.
We'll continue to drive awareness and trial on that. The CSD business, when you think about how many folks are having a soda in the morning, us having the variety with those Coke Freestyles in our restaurant certainly helps too. All that said, you know, as we continue to ingrain the habit, drive the business, you know, we did do things simple, fast, bold, on the menu to really drive the economics and adoption early. We do think that's an area where we can continue to lean in and innovate for many years to come. That's not gonna happen overnight, but we're gonna do it smartly.
We'll do it along the way, and it'll really complement the reasons why you wanna come to Wendy's on the way to your morning destination day in and day out.
Thanks very much.
Thank you, James. That was our last question of the call. Thank you, Todd and GP, and thank you everyone for participating this morning. We look forward to speaking with you again on our Q4 and full year earnings call in February ahead of our Investor Day. Have a great day. You may now disconnect.
This concludes today's conference call. Thank you for participating. You may now disconnect.