Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Wingstop Inc. Fiscal 4th Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation.
Please note that this conference is being recorded today, Wednesday, February 27, 2019. On the call, we have Charlie Morrison, Chairman and Chief Executive Officer and Michael Skipworth, Executive Vice President and Chief Financial Officer. I would now like to turn the conference over to Michael. Please go ahead.
Thank you, and welcome. Everyone should have access to our fiscal 4th quarter fiscal year 2018 earnings release. A copy is posted under the Investor Relations tab on our website at wingstop.com. Our discussion today will include forward looking statements. These forward looking statements are not guarantees of future performance, and therefore, you should not place undue reliance on them.
These statements are also subject to numerous risks and uncertainties that could cause our actual results to
differ materially from the results.
Our recent SEC filings contain a detailed discussion of the risks that could affect our future operating results and financial condition. We also use certain non GAAP financial measures that we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. Reconciliations to comparable GAAP measures are contained in our earnings release. With that, I would like to turn the call over to Charlie.
Thank you, Michael, and thank you all for joining us today. In short, Wingstop had another outstanding year. I want to list some of the highlights that we achieved in 2018 and tie them back to our ongoing strategic growth initiatives with which you are all familiar. We finished up 2018 with system wide sales of $1,300,000,000 a 16% increase. 12 52 Wingstop Restaurants Worldwide, a 10.5% growth rate.
Same store sales growth of 6.5% marking our 15th consecutive year of same store sales growth. Nearly 30% of our sales coming through digital channels, delivery rolled out to 30% of our system and returned $192,000,000 in capital to shareholders, which includes our regular quarterly dividends and an unprecedented 2 special dividends of $3.17 per share in February and $3.05 per share in November. I want to congratulate our franchisees and team members for making another industry leading year possible at Wingstop. The team's hard work and dedication to our mission to serve the world flavor both figuratively and literally paid big dividends to Wingstop shareholders in 2018. The 2018 results were driven by our continued focus against our strategic pillars of sustaining our same store sales growth through increased brand awareness and innovation, maintaining and continuing to enhance our best in class unit economics and expanding our global footprint.
We believe the continued focus on these strategic pillars will enable us to achieve our vision of becoming a top 10 global restaurant brand. To that end, we have enhanced our ability to go after the first strategic pillar, brand awareness and innovation. As of January 1, 2019, we increased the national advertising fund contribution rate from our franchise brand partners and company owned restaurants from 3% to 4% of top line sales. The combination of system wide sales growth and the additional 1% to the contribution rate translates to roughly a 50% increase in marketing resources over last year. We are using these resources to attack what we estimate is a 20% gap to our QSR peers in brand awareness.
Closing this gap by creating more top of mind brand awareness of Wingstop is the essential first step in attracting and retaining incremental customers, which we believe that will have a huge opportunity to expand our audience to QSR users as they learn about Wingstop. We expect that our 2019 advertising is going to be a large source of that awareness. Rather than mayonnaising our TV advertising across the entire year, Our 2019 TV advertising spend is strategically phased with 2 12 week waves. In fact, the first campaign launched just last week and the second one starts as football season kicks off, each carefully designed to achieve our proven breakthrough levels of TRPs each week we are on TV. Further, we have significantly upgraded the creative and production value of our TV advertising with the help of our new agency, Leo Burnett, to support our new advertising campaign entitled Where Flavor Gets Its Wings, which translates the craveable flavor of our wings and fries into a call to action that we believe will draw people into our restaurants.
Ongoing digital advertising will support the campaign throughout the year as well as coordinated local efforts to provide an integrated marketing plan for 2019. On the innovation side, we have previously stated a goal of digitizing Guests can now order from Guests can now order from a slick user interface that first gauges their need for wings from snacky to starving with a wing calculator. I think you get the sense that we have upped the fun factor and have given a decidedly Wingstop flavor to online ordering. Early results tend to show that guests like it with conversion rates rising 6% and an incremental guest check increase of roughly $0.50 Digital is important because it carries with it a $5 higher average ticket and we think that we can continue to drive digital sales without employing discounts or incentives like other brands. As I said at the outset, digital sales approached 30% in December and they actually surpassed the 30% mark in January, the first time for the brand.
But innovation does not end there for Wingstop. We continue to explore other areas of innovation to both drive digital sales mix as well as improving efficiencies within the restaurants, including the evaluation of self ordering kiosks, pickup lockers and the restaurant kitchen display system. As we make more progress in these areas, we will provide you with updates on how we believe these areas of innovation can impact our business. Another strategy that is going to move the needle on digital sales mix is delivery. All delivery orders come in digitally to our restaurants.
We began the national rollout of delivery in the Q4 of 2018. As I noted earlier, 30% of Wingstop Restaurants offered delivery at the end of 2018. By mid-twenty 19, we expect to cover 50% of our restaurants and by the end of 2019, we plan to be at 80 percent system wide with delivery. We continue to see the same sales lift and levels of incrementality that we experienced in our test markets. As a reminder, we have been extremely thoughtful in our approach with delivery, which can be demonstrated with the extensive testing we performed, which started in the Las Vegas market in April of 2017.
We later expanded that testing to Chicago and Austin markets and ultimately felt like we clearly understood the impact of delivery and what it would have on our business and we also have a clearly defined playbook to execute as we start the national rollout. We believe delivery can have a meaningful impact on our business which is supported by what we saw in our delivery test markets, mid to high single digit sales lift, highly incremental occasion and even margin accretive at the restaurant level. As we look forward beyond the national rollout of delivery, we would anticipate being able to leverage our national advertising scale to further drive delivery sales in 2020 once we reach the 80% plus system wide rollout of delivery. Wingstop benefited greatly from favorably priced bone in chicken wings during 2018 as compared to the prior year. But we know that wings can be volatile and thus we used 2018 to intensely focus on the unit level economics of our restaurants so that they would be better prepared to withstand any future volatility.
Most notably, we negotiated a strategic supply agreement with Performance Food Group, an $18,000,000,000 broad line distributor, who was already a leading purchaser of chicken. We believe that combining our chicken purchases with PFG will give us scale and a reliable source of fresh chicken wings to protect against market uncertainties. We also eliminated some labor intensive sides from our menu and replaced them with 2 versions of loaded fries and fried corn. In addition to the labor savings, the new sides are selling about 4 times the rate of the old sides. We have some other strategic initiatives in testing that we believe will only enhance our best in class unit level economics.
And it is our superior unit level economics which drive our 3rd strategic pillar, global unit expansion to achieve our long term target of 6,000 units for which we are employing a 3 pronged approach. First, fortressing in the U. S, then international expansion and the expansion of non traditional opportunities. In the U. S, we have identified 25 markets that we are confident we can penetrate and fortress using our established playbook from the Dallas Fort Worth market where we have 109 restaurants today.
We still think we have room to grow in the DFW market, but DFW does prove out the case that enhanced brand awareness results in higher unit volumes, which strengthens the unit level economics. And to be clear, just as we have seen in DFW, our fortressing strategy is not one that is designed to introduce cannibalization, but rather accelerate awareness as well as unit level volumes. We believe that a focused approach of building out these 25 markets which are located in large metropolitan DMAs with sufficient restaurant density is advantageous to over a scattershot approach across the map. The main objective is to build scale in these markets in order to increase brand awareness at a faster pace and gain market recognition as a go restaurant in our guests' consideration set. In turn, this will drive restaurant volumes as well as strengthen the unit level economics that our franchisees enjoy.
As we have noted before, 80% of our development comes from existing franchisees who want to reinvest in the Wingstop brand by acquiring more territory to build more restaurants. Their desire for further development dovetails with our fortressing strategy as these franchisees are keen to grow in their existing and contiguous markets. On an international scale, our growth will have a longer tail than in domestic markets, but we are making progress and have a clear roadmap for success in key markets across the globe and also see an opportunity to leverage unique concepts. Last month, our efforts in Asia were honored with the Best New Concept award by QSR Media Asia for our small box Wingstop flavor studio restaurant, solidifying our belief that our brand and flavors resonate just about anywhere. The smaller square foot model has been successful and is one we hope to replicate in additional markets.
This small footprint asset type is an example of how we can make slight modifications to the model and open the door to expanding our presence in non traditional formats. Today we have wing stops in a small number of non traditional spaces such as casinos, airport terminals and soccer stadiums. We believe there is a lot of non traditional white space and believe that airports, casinos and similar venues are great places to make consumers aware of the Wingstop brand and provide an opportunity to enjoy the bold and unique flavors of Wingstop. Before I pass the call to Michael, I know that you are interested in our Super Bowl sales. Super Bowl this year was a great success for us.
We sold over 16,000,000 wings and enjoyed a nice strong comp. Super Bowl is a big sales day for us because it is a great opportunity for our teams to rally and appreciate one another, but our business is not built only around special events, but rather it is built on driving everyday sales for the long haul. We believe we did a good job of that in 2018, particularly in the Q4 where we saw a nice acceleration in the 2 year same store sales trend. In fact, we've seen this momentum continue into 2019 providing us with a strong start to the year. We are confident in our strategy and remain committed to growing this great brand and continuing to reward our Wingstop shareholders.
With that, I'll turn it over to Michael.
Thank you, Charlie. Before I review the numbers, I would like to remind everyone that our financial results reflect the new accounting rules around revenue recognition that became effective at the beginning of 2018. Our prior year results have been adjusted to reflect this change so that you can compare apples to apples. Our execution against our strategic priorities in 2018 was evidenced by both our domestic same store sales growth and expansion of our global footprint. In the Q4, we expanded our system wide restaurant count by 10.5%, reflecting 51 gross openings in the 4th quarter, ending the year with 12 52 global locations.
Domestic same store sales grew by 6% in the 4th quarter and 6.5% for the full year. Our global restaurant expansion and 15th consecutive year of positive same store sales growth resulted in system wide sales growth of 15% to $328,000,000 in the 4th quarter and 16% to $1,300,000,000 for the full year. This top line growth translated to total revenue of $40,500,000 for the quarter, an increase of 15.1% over the prior year quarter. Royalties, franchise fees and other increased $1,700,000 driven by 113 net franchise restaurant openings since Q4 of last year and our 6% domestic same store sales growth. Our company owned restaurants continue to perform well.
Sales grew 25 percent to $12,500,000 in Q4. Dollars 1,900,000 of the increase is associated with opportunistic acquisitions we made in the Dallas market earlier in 2018. The remaining increase is driven by same store sales growth of 4.6 percent in the Q4. This same store sales growth was driven by both an increase in transactions and an increase in average transaction size. Cost of sales decreased as a percentage of company owned restaurant sales by 3 50 basis points.
The decrease was driven by reduction in food, beverage and packaging costs due primarily to a 17% deflation in wing prices compared to Q4 of last year. As we expected, the pace of deflation in wing prices moderated in the 4th quarter, but still resulted in 20.6% deflation for the full year. As we look forward to 2019, the outlook for wing prices suggest inflation in the mid to high single digits for 2019. Advertising expenses were $8,400,000 for Q4 compared to $7,900,000 in the prior year quarter. Under the new accounting guidance, advertising expenses associated with our national advertising fund are recognized at the same time the related revenue is recognized, which does not necessarily correlate to the actual timing of the advertising spend.
Selling, general and administrative expenses increased 28.5 percent to $13,400,000 in the Q4 of 2018 compared to $10,400,000 in the Q4 of 2017. The increase was primarily due to non recurring cost of $1,000,000 related to our securitization financing and subsequent special dividend payout, which occurred in the Q4 of 2018. The remaining increase is primarily due to an increase of $800,000 in stock based compensation and an increase in payroll and benefit expense related to planned headcount additions as compared to the prior year quarter. Adjusted EBITDA, a non GAAP measure, increased 20.3 percent to $12,500,000 for the 4th quarter. Note the reconciliation table between adjusted EBITDA and net income, its most directly comparable GAAP measure that is included in our earnings release.
Adjusted net income in the 4th quarter was $4,300,000 or $0.15 per diluted share, which is comparable to Q4 2017. A reconciliation between net income and adjusted net income is included in the accompanying financial data included in our earnings release. Reflected in the $0.15 per share of adjusted earnings per diluted share is a $0.02 per share impact of the securitization financing we completed in the 4th quarter. We continue to achieve robust cash conversion in 2018, up 92%, marking another strong year of cash flow generation. At the end of December, we had cash and cash equivalents of approximately $12,500,000 $320,000,000 in debt.
As of the end of the 4th quarter, our net debt to adjusted EBITDA for fiscal year 2018 was 6.3x. This is the leverage level that we are comfortable with and we believe that we will continue to delever through a combination of adjusted EBITDA growth and strong free cash flow generation. This increase in the amount of outstanding debt is a result of the completion of a $320,000,000 securitized financing facility, which closed in November of 2018. As a reminder, the securitized notes we issued in the Q4 included a series of Class A2 fixed rate senior secured notes that are subject to a 1% annual amortization, bear interest at a rate of 4.97 percent and have an anticipated repayment date of December 2023. Interest and principal payments on the notes are payable on a quarterly basis.
In addition to the Class A2 fixed rate notes, we also entered into a $20,000,000 variable funding note facility, which will allow us to borrow amount as needed on a revolving basis. No amounts were drawn on the variable funding note facility. We used the proceeds from our securitized financing to repay our credit facility, pay transaction costs associated with refinancing and a return of capital to shareholders. To that end, 2018 marked an unprecedented year of returning capital to shareholders. In addition to our quarterly dividend, we issued 2 special dividends in 2018.
First, we paid a special dividend of $3.17 per share in February of 2018 and then a $3.05 per share special dividend in the Q4 of 2018. When you add it all up, we returned almost $200,000,000 to shareholders in 2018. We remain committed to delivering shareholder value and will continue to return capital to shareholders. Today, our Board of Directors declared a quarterly dividend of $0.09 per share of common stock, totaling approximately $2,700,000 This dividend will be paid on March 27, 2019 to stockholders of record as of March 13, 2019. Now turning to guidance.
As Charlie noted earlier, we believe we are executing against our well defined strategy. Consistent with our prior comments, we remain confident in our long term targets of system wide unit growth of 10% plus and domestic same store sales growth of low single digits and are reiterating those targets today. There are a handful of items specific to 2019 19 that we would like to provide an update on. We expect selling, general and administrative costs to be between $48,000,000 $50,000,000 This includes $5,900,000 in non cash stock based compensation expense, an increase of $2,000,000 over fiscal year 2018. Dollars 2,000,000 of franchisee convention related expenses, an increase of $1,500,000 over the fiscal year 2018.
There are 2 things I want to point out on the convention. First, I would like to remind everyone that our convention occurs in the 4th quarter each year. 2nd, there is an offset in the royalty revenue and franchise fee and other revenue line for the contributions we received to fund our franchisee convention. Also in G and A is an additional 2 point $2,000,000 in payroll and G and A related expenses associated with our national advertising. Expense is offset by advertising contributions recorded in the advertising fees and related income line on the P and L.
Moving on from G and A, we expect interest expense for 2019 to be $17,800,000 We estimate an effective tax rate of approximately 25% and diluted shares outstanding of approximately 29,800,000 shares. I want to thank you all for being with us this afternoon and look forward to delivering another year of strong results, maximizing shareholder value in 20
Thank you. Our first question comes from the line of David Tarantino with Baird. Please proceed with your question.
Hi, good afternoon. Congratulations on a great 2018. My first question, Charlie, is about the comment that you entered the year with strong momentum. And I know you're cycling a very big comparison in the Q1. So I don't know if you would be willing to elaborate on what strong momentum means in terms of what you're running so far in Q1?
Hello, David. And yes, we do feel very good about the strong start we had to the year. I don't have specific numbers to share, but wanted to make sure that you were all aware that the strong momentum that we carried not only from the promotion we did late Q3 into Q4 of last year plus the rollout of delivery in very key markets have both maintained great momentum in Q4 did enable us to have a strong start and that strong start is reflective of the large comp that we were going over from last year, which if you recall was up 9.5% for Q1 in 2018. So nothing more to share, but we do feel very good about how we're coming out of the
gates. Great. Fair enough. And then on the guidance, I just want to clarify there are some, I guess, moving parts with the SG and A line. So is this year a year given the cost structure where I think your long term target for EBITDA growth has been 13% to 15%.
I just wanted to confirm that's still your long term target. And then if you were to do kind of low single digit comps that you're embedded in that long run algorithm, would that be an outcome you would expect for 2019 given the costs that you've given us?
Yes, David, I'll start and then I'll let Michael jump in. One thing, we didn't reinforce the 13% to 15%, but instead chose to provide some clarity into some of the SG and A calculations because we certainly heard some feedback that we anchor on 13% to 15%, but if you do the revenue metrics you may not fall into that particular range. And so what we've offered here is the opportunity to identify what we think are the adjusting items and let your models reflect what we will believe will still be either at or above our long term targets for that adjusted EBITDA growth. Do you want to add anything?
Yes, David, it's Michael. And then on the G and A piece, there are a lot of moving parts. And so we tried to highlight what those items that might look like an increase, but really are not impacting adjusted EBITDA because there's revenue offset. So I think when you adjust for those as well as the increase in non cash stock based compensation, you get to a G and A kind of base G and A number that reflects about an 8% increase off of the 2018 number.
Got it. Thank you for that. And then lastly, Michael, on the interest expense line, just a minor modeling question that that looks a little higher than I guess the implied rate would or the rate would imply. So can you talk about why that's I guess, implying a rate kind of in the upper 5% range?
Yes, David. The delta between just the pure rate on the debt balance of $320,000,000 is the amortization of deferred financing costs. There were about $8,000,000 a little bit north of that of deferred financing costs that get amortized into interest expense over the expected term, which is 5 years.
Got it, perfect. Thank you very much.
Thank you. Thank
you. Our next question is from the line of Jeffrey Bernstein with Barclays. Please proceed with your question.
Great. Thank you very much. A couple of questions as well. From the franchisee perspective and thinking about pricing and now it looks like labor cost pressures, I'm assuming, remain a challenge for you. And now it seems like wing inflation is rearing its head again up mid single to high single digits.
So I'm just wondering how the franchisees are thinking about their restaurant level margins or perhaps on the company operated side, how you're thinking about it, whether that impacts your frequency of promotions or what you're suggesting in terms of menu pricing or whether you'd prefer to kind of absorb the pressure since presumably profitability in 2018 was quite good?
Hi, Jeffrey. I'll start and I'll let Michael jump in if he would like. But a couple of things to think about. First, yes, wing prices were elevated up to Super Bowl, but since then have receded very quickly. In fact, we're now in the we're at $1.67 today from a peak only a few weeks ago of $1.87 a pound.
So as we would have expected, they have fallen back down. And the market would suggest that there's product available and the more traditional economics will play out. So I don't think franchisees are concerned in that regard. As it relates to other pressures on the P and L, certainly as you know there was quite a bit of price taken last year to offset some of those wage pressures. We argued that it was a little higher than we would have expected.
We navigated that very, very well. So as we look to this year, aside from some isolated thoughtful, very strategic increases in various markets that would be considered long term in nature, we would revert back to what our typical thesis has been, which is points, 2 points of price related benefit to the comp. So from here then all growth would be expected to be transaction growth in the business. Aside from that then we noted some of the efficiencies we created by making some product mix changes. We will continue to invest as demonstrated in some of our G and A investments in new technologies and innovations that we believe will continue to take pressure off the front counter and make the transaction more efficient.
I will note that we in January exceeded 30% of our sales as digital sales for the business for the first time in a particular period. We're very excited about that and that in and of itself not only drives the higher ticket but also takes some pressure off phone calls and other means by which people approach us. So all of those things are still part of our long term strategic outlook. I don't foresee this year being a year where there are any real inflationary headwinds that we would have to tackle like we have in 2017 or years past.
Got it. And then just on the comp looking back to last year, I know we entered 2018, I guess, talking about low single digit. And I think you kind of framed it as that would seem quite conservative to start the year based on the momentum you had. So you kind of gave some parameters around it. I'm just wondering as we think about 2019, again, you reiterate the long term guide of low single digit.
You would frame it similar to last year that that might very well be the case, but you're just starting with you would frame it similar to last year that that might very well be the case, but you're just starting with a low single digit guide as you would every year or whether there's some reason to believe that low single digit is probably more appropriate in
'19? Yes. I think we will always anchor on the idea that a low single digit comp with 10% plus unit growth will deliver fantastic returns for our shareholders and that will always be our approach. Going into this year and I think we talked a little bit about this earlier in the quarter when we were all together that what we do expect is that other drivers will be there this year inclusive of delivery, inclusive of the incremental spin that we're putting in place for national advertising, the tightening up of our media windows and the strengthening of the TRPs, all are excellent drivers, some of which have been proven drivers of our business. So it's reasonable to expect that and if you look at the 2 year comp coming out of 2018, you'll see that there's some really solid momentum building in the business and we would expect to carry that through 2019.
Got it. And just lastly, any color on the recent management announced turnover? It seems like you have confidence in your team today when you're talking about continuing to be a top 10 restaurant company. But I'm just wondering if there's any thoughts as to your confidence in the team as it is today and the other changes we should expect? Thank you.
Sure. And I appreciate the question. To echo your sentiment, I have extraordinary confidence in our management team. And certainly, we definitely appreciate what Stacy has done for Wingstop in really establishing this brand as a digitally savvy and digitally leading brand in the space. She's going to be missed, But at the same time, we have a fantastic team of very skilled and strategic individuals that are going to carry us well into the future.
And I think just like any organization should be, we're well built for the future. So over the course of the next few weeks, we'll be working through the transition on that. We'll provide a little bit more information about how things will shake out given her departure. But we feel very confident that we are going to be mission focused and strategically focused on the same initiatives that she's been leading over her nearly 6 years of tenure with Wingstop.
Great. Thank you.
Thank you.
Thank you. Our next question is from the line of John Glass with Morgan Stanley.
Charlie, I wanted to drill down a little bit more on the notion of fortressing markets. First, maybe if you could just remind us what the case study was for Dallas or other markets you fortress, kind of what the benefit was to AUVs or comps over time? Can you talk about how long you think this fortressing strategy is going to be in effect? Is it going to be sort of the next several years that you're doing it? And then finally, you mentioned it won't impact same store sales or it's not intended to.
I think other concepts, particularly those that have a lot of delivery, admit that there has to be some level of cannibalization, but that that's appropriate given what they're doing. As you move to more of a delivery model, why would this not prevent or cause a little bit of cannibalization or how do you think about that trade
off? Good afternoon, John and thanks for the questions. I'll address fortressing first And I want to reinforce that other brands have noted as fortressing being something that would cause cannibalization in their brand. That is not the case at Wingstop. The Dallas model that we reflect upon kind of reverts back to when we went public just in 2015.
We talked about it at the time that we had roughly 80 restaurants in the Dallas Fort Worth area. And at that time we believed that we still had opportunity to grow and in fact we do 109 today and still growing in this metroplex. But what we really have noticed is with Wingstop something that perhaps is very unique as compared to other brands. We have our newest markets come out with a good solid base as it relates to their 1st year, 2nd year AUV which we've talked about as what anchors our model. And then over time they continue to comp positive.
That phenomenon can be seen in all of our more mature markets. In the Dallas market for example enjoys about $1,400,000 average unit volume. I'll even highlight our company owned restaurants. The majority of those are in Dallas, enjoy a $1,800,000 AUB. Those restaurants tend to be very much the older restaurants in our portfolio as many as 12 to 13 years old on average.
So that helps support this idea or thesis that as we continue to attack these top 25 markets and aggressively penetrate those with our existing franchisees and grow them out, we will see increased levels of brand awareness which we enjoy in a market like Dallas. Our brand awareness levels are as much as 88% to 90% in terms of aided awareness whereas some of these emerging markets only have awareness levels that can be in the 40% 50% range. So we have a long way to go in each of those. So our approach is get into these markets and aggressively expand and make that our primary focus for our development, which is exactly what we're And we're working with our brand partners, our franchisees on that strategy. The second question as it relates to delivery and its incrementality, as you know unlike a lot of other brands who have just rolled out delivery to the entirety of their chain in a week's notice.
We are taking a very carefully constructed path. We've been working on this since April of 2017. We've gone through very intense testing with our company stores as well as with our brand partners to make sure that we clearly understand the impact delivery will have on our business. I do believe that Wingstop is as well positioned if not the best positioned brand for delivery that is out there today, because of the fact that our business is 75% takeout already. Our customers prefer to bring their product home or to an occasion that they're at.
And so with that, we've been able to demonstrate that it is a highly incremental occasion for us, primarily because and we believe in the research of other delivery companies that have been demonstrated that the delivery customer and the carryout customer tend to be 2 distinctly different guests for us. There is some overlap, we expect that to be upwards of 20%, but that means that about 80% of these transactions should be incremental to the business and that's what we've proven in our testing.
And just to be clear and you don't have to answer this now, Charlie, you're already very generous of your time. I was talking about the delivery in fortressing has hurt delivery centric concepts because you got to split territories. And my only point or question was, if you move towards fortressing and delivery at the same time, do you not net get some cannibalization just because delivery does draw from that was my heart of my question.
Got you. Okay. I just want to clarify that. Okay. Thank you.
And no, I don't believe it has any impact whatsoever by fortressing because there's so much white space available in those markets that we're working in.
Got it. Okay. Thank you very much.
Thank you. Our next question is from the line of Andrew Charles with Cowen. Please proceed with your question.
Great. Thank you. One just quick clarification of my question. Michael, in G and A guidance, is the $2,200,000 in additional payroll related expense, is that fully offset by the advertising revenue?
That's correct, Andrew.
Okay. Thank you. That's helpful. And then my other question was from the comment that delivery margins are accretive to store level. Can you talk us through how you're kind of thinking about that when you embed the delivery commission?
I would imagine that you probably pay a lower commission if the delivery transaction is placed through one of your own channels. So I know it's a high mix of the delivery orders around 2 thirds. But maybe you can walk us through how you guys are thinking about the margins at the store level from delivery?
Well, we definitely believe that we enjoy very competitive mission, I should say, let me be clear, which makes it easier at the low levels of cannibalization we've seen or the high degree of incrementality to be able to have a margin accretive business from delivery. You make a good point that the majority of our orders do come in from our own channel at wingstop.com instead of through the marketplaces. And because of that, we do enjoy a better margin on those transactions or a better lower commission for that. And so our focus and will continue to be our focus well into the future is to continue to drive as many transactions through our channel as possible. And with that, we continue to enjoy the ownership of the customer information that goes with that.
So I believe Wingstop is very, very well positioned to have a strong margin benefit from delivery in addition to the incremental top line sales.
That's helpful. And then just one separate one for me. Last month, you called out obviously the new agreement with Performance Food Groups that that helps mitigate the volatility in wing prices. Can we just dive into that? I'm curious if there's a color in place or if this simply just leads to lower wing prices in general, just taking advantage of the scale of that system.
But if we were to see wing prices kind of at the high end of your guidance, mid to high single digits this year, what reinforcements, if you will, are in place to help mitigate that impact?
Yes, we don't have a collar or any sort of hedging strategy in place because of that agreement. And we haven't had one in the past. Those can be temporarily great and long term very detrimental if we're not careful. And so we tend to follow the spot market here. The really real advantage there are buying synergies not only in chicken wings, but lots of products that Performance offers to their own customers as well.
They tend to buy and aggregate food products and then sell them to a more mom and pop type of concept, whereas specialized distributors or customized distributors will buy what you need and distribute that back to you. Our belief is that we can leverage our collective buying power across a number of items to mitigate the impact of wing inflation should it exist. But the one thing specific to wings is we buy a whole lot of wings and they buy a whole lot of wings. And so we put ourselves in the position to ensure that our stock is available to us as needed. If there was pressure on the supply of the product, which obviously tends to drive the prices up.
So that's really the strategic premise of that agreement.
Just last of all, can you remind us of when that agreement went live?
September of last year, 2018.
Very good. Thanks guys.
Thank you.
Thank you. Our next question is from the line of Karen Holthouse with Goldman Sachs. Please proceed with your question. Hi, thanks for taking the question. One really just quick modeling one for me.
The stock comp timing with the bump up next year, should we also expect that to be 4th quarter weighted or more evenly spaced through the year?
Hey, Karen, it's Michael. There is obviously, if you look at 2018 and you apply that same weighting that you saw, it would be pretty fair to apply that to the increase. I think that's best.
Okay. Great.
That was all I had. All right. Thank you. You too, Karen.
Thank you. Our next question is from the line of Peter Saleh with BTIG. Please proceed with your question.
Great. Thanks for taking the question. I wanted to ask come back on the delivery discussion. Can you talk about the performance of delivery units or your expectations of the delivery units once they're lapped and in the market for a full year, how do they perform in year 2?
Yes. What I'll answer the question based on the test markets first that we've done and then point towards what our strategy is in the future. So in the test markets we've had delivery in, we've been able to sustain our delivery volumes in the 2nd year of the test. We haven't really seen much in the way of an increase across the board. That is driven by the fact that when we launched delivery, we put just a little bit of radio and some digital advertising behind it in those test markets for about a couple of months maybe and then left them alone.
So much of their business has been sourced organically. As we look beyond on a national scale, we've mentioned that by the end of the year we expect to be in at least 80% of our restaurants by the end of the year with delivery. And our expectation is that in 2020, we would then use our national advertising power to promote delivery. So that means that in 2019, we do not expect to use our national advertising weights to promote delivery. So we believe that that can have a very nice year 2 impact by aiding awareness for delivery for Wingstop.
Thank you. That's very helpful. And it sounds like your mix, your digital mix continues to climb. I think you said about 30% in the month of January. Do you guys anticipate any sort of cost savings within the 4 walls this year that you may see this year versus last year as your digital mix continues to rise?
I don't think we'll have anything that I would consider meaningful this year. Most of our cost saving initiatives inside the 4 walls went into place last year mostly with a reduction in true hours associated with some of our side item replacements that we did. What we believe is that the incremental digital will drive this $5 on average higher average ticket and that certainly creates some margin benefit through the P and L as we continue to grow the check that way.
All right. Thank you very much.
Thank you. The next question is from the line of Chris O'Cull with Stifel. Please proceed with your question.
Thank you. Charlie, I had a follow-up regarding the relationship with Performance Food. Do you believe there's an opportunity to convert the company's fresh wing purchasing program, I guess it's probably based on Urbary to more of a fee based agreement?
I do not, no.
Okay.
And then can you talk a little bit about changes, whether you've seen any changes in the customer satisfaction toward the food quality value or overall, I guess satisfaction in the stores that have been offering delivery?
We one of the things we made sure to do in developing our playbook for delivery as we went through the test was to ensure that we executed the transaction at least the same level of service as measured by our consumer feedback that we get. We get a digital and both walk in in store customer satisfaction measurement on every transaction. So as we do that, we want to make sure that our digital customers and delivery customers have an equal experience. We've been able to do that in our testing processes and even in the early rollout of our new markets, we've experienced very similar levels of quality as measured by our guests in these delivery transactions.
Great. And then my last one, Michael, how should we think about the use of excess cash given the new debt facility doesn't really lend itself to debt repayment beyond the scheduled amortization?
Yes, it's a good question and definitely something we're continuing to look at and think about. Obviously, we can't, as you noted, prepay without incurring a penalty any of the bonds that we've issued. So you will see cash build over time. And I don't think at any point this year, what I expect to see a deviation from our current return of capital policy, which is targeting roughly 40% of free cash flow to return to shareholders.
Great. Thanks guys.
You bet. And this just in, the Urner Barry went down another penny today, so wing prices are even lower than we talked
about earlier. Thank you. Our next question is from the line of Jon Tower with Wells Fargo. Please proceed with your question.
Great, thanks. Hopefully you guys can hear me okay.
Yes, just fine. Thank you.
Great. Awesome. Perfect. So first,
I just wanted to clarify
the quarter to date comments with respect to the momentum you're seeing in the business. Were you describing that on a 1 year or a 2 year basis? If you wouldn't mind clarifying your comments on same store sales? And then secondly, the questions on the unit growth side of the equation. So I know at ICR you discussed the idea that the commitment pipeline was roughly 523 stores at the year end of 2018 versus 450 at the end of 2017.
And today, you're backing the guidance, the long term guidance of 10% plus unit growth. But we're also going over a year where you saw your lowest unit growth in at least 4 years at 10.5% for a system. So should we focus more on the plus side of that unit growth? Or is this going to be another year where unit growth kind of settles closer to that 10% number? Thanks.
Thanks, John. The first comment was it the 1 year comp or 2 year comp in the momentum comment. It was effectively both I guess is the best way to answer that. We're comfortable with the strong start we've had. So that's probably the best answer I can give you.
As it relates to the second question, you want to Yes.
No, I think on your second question, it was I'm sorry, John, what was your second question again? I'm sorry, I didn't
Yes, it just had to do with the unit growth in 2019. I mean 2018 down close to 10.5%. Which way are we going? Are we going to be closer to that 10% or are we going to be closer to the plus side of the equation?
Yes, John. I think as we talked about earlier this year when we were together, we've seen some nice momentum in the development pipeline, as you noted, ending the year up quite a bit from where we were a year ago. And then also as we looked at the development that started to flow in Q1, 51 gross, obviously demonstrates some great momentum, which I think would probably be inclined to be more on the plus than the 10%.
Okay. And then just lastly, I know one of the other topics down at ICR that was discussed was the idea of consolidation of the domestic store base. You've roughly 250 franchisees, I think 120 of them are single unit operators. So where are you in that process of trying to get consolidation or essentially a concentration of these franchisees in the U. S.
Going? And with agreements where you've got consolidation going on, will there be development agreements tied to Store X getting bought by franchisee and 5 more stores on top of that to grow down the line. How are those how should we think about development there?
Well, I don't think it's going to change the rate of new store development to factor in consolidation. What we've said there is that from time to time franchisees will decide to sell their restaurants and our goal would be to continue to encourage existing franchisees to acquire those such that we end up in a with a tighter group of franchisees. We will from time to time bring on a new franchisee to the system if we believe it strategically makes sense in a particular market. So the timeframe for consolidation will take quite a bit of time. Some of that's dependent upon the valuation of the restaurants, what people are enjoying and margin strength in the brand, all of those things really factor in.
So we haven't put a specific timeline to it other than what we do expect to see is over time that the number of net total franchisees will probably reduce.
Great, awesome. Thank you.
Thank you.
Thank you. Our next question is from the line of Jake Bartlett with SunTrust. Please proceed with your question.
Great. Thanks for taking the question. And Charlie, I hate to harp on it, but now I'm compelled to kind of clarify and make sure I understand what your the definition of momentum is. When I think of momentum, I think of Acceler of a comp increasing. So, that was, what I thought you meant on a 2 year basis.
But are you saying that even on a 1 year basis that it's increased momentum has increased quarter to date from the 4th quarter?
Hi, Jake. Yes, I don't want to get into the nuances to try and angle to where the number is. I'd stick firm to the fact that we have had strong a strong start to the year. We exited 2018 with great momentum both in the 1 and 2 year comp. And therefore that same momentum has fueled that strong start to this year.
But I don't want that to cause us get too in the weeds or try to decide whether or not this is meaningfully different from where we've been.
Got it. Got it. That makes sense. And then if you could remind me, I know that your change of strategy of marketing in 2019, I believe that's meant that you've really you've held off on your marketing kind of quarter to date until the after the Super Bowl. And so what I'm asking and what I'm wondering is on a year over year basis did you advertise much less or was there much less impression, fewer impressions quarter to date versus last year?
Well, I think in general, we've always held off marketing until after the Super Bowl. The difference with this year is that we actually started our media campaign about a week to almost 2 weeks later than we did a year ago. So to answer that specifically, yes, we've had fewer impressions through the first call it 7 weeks of the year, but the level of impressions will jump rather dramatically now that we are on air and will be on air for about a 12 week cycle now. So which is different than our cadence previously, we were on for 2, off for 2. In this case, we'll be on for the better part of the remainder of this quarter and the early part of Q2.
Got it. And then just to clarify the comments on G and A And the portion that's being reflected, I guess, there's an expansion G and A and then you're getting the revenue in advertising revenue. But just want to make sure I understand how that works. In this last quarter, revenue was higher than the related expense. Is that what we're looking what we're talking about here?
And for instance, I think by about $400,000 So was G and A higher by about $400,000 because of that? Is that how that kind of neutralizes the ad fund impact?
Yes, that's some of it in Q4. I think there is some other G and A spend in addition to the investments we've made in our marketing team to fund our national advertising efforts. Some of those are related to the initiatives we've talked about before, specifically as it relates to supporting the national rollout of delivery. Some of the investments we're making to made to launch our new custom developed app as a couple of examples. So a little bit of both there.
Okay. But just in 2018, the advertising revenue was about $800,000 more than the related expense. Actually that's not a benefit. Was that $800,000 found in
G and A? Yes. That's a one for one. You're right. That's a one for one.
So that would be in G and A, correct.
Got it. Thank you very much. I appreciate it.
Thank you. Our next question is from the line of Matt DiFrisco with Guggenheim Securities. Please proceed with your question.
Hi, this is Matt Kirschner on for Matt. I have two questions. Just to follow-up on the quarter to date same store sales. Should we expect a New Year's Eve benefit or a weather benefit in the Q1? And then on the restaurant margin, we saw an increase in the other operating expense line during Q4.
I was wondering if which was actually a reversal from the last three quarters. Was that related to the delivery rollout ramping and could that continue into 2019 or is that more of a one time thing that I have maybe missed?
So on the first question, no, there's no specific one time event that I would call out as it relates to weather or New Year's Eve on the comp. On company restaurant margins, no, I think the one thing we would call attention to a couple of things I suppose. 1, we acquired 3 restaurants from a franchisee in the Kansas City area that we are working to reinvest in and prepare them ultimately back for sale, most likely to another franchisee in that market. So we saw a little bit of margin dilution erosion from that in the quarter. And then delivery was not a factor here as the company owned restaurants had not experienced delivery other than the 5 Vegas markets, but they wouldn't that was back in 2017.
So that would have been in the full year.
Okay. And the timing of the KC stores, if you were to sell those back, where would you reflect the gain? Would that hit the income statement or just cash flows?
I mean, I don't know if I would anticipate any sort of material gain associated with that. It's more of us just getting them into a strategic brand partner's hands that continue to grow and develop that market. So I wouldn't really anticipate modeling anything significant there.
Kind of goes back to our consolidation discussion. This is a good example of market we want to consolidate and we're using our own resources to prepare these restaurants for a more strategic franchisee as Michael mentioned.
Understood. Thanks guys.
You bet.
Thank you. Ladies and gentlemen, we have reached the end of our question and answer session. And this does conclude today's teleconference.