The Wendy's Co (WEN) Q1 2021 Earnings Call Transcript

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The Wendy's Co (WEN 0.86%)
Q1 2021 Earnings Call
May 12, 2021, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning. Welcome to The Wendy's Company Earnings Results Conference Call. [Operator Instructions]

Greg Lemenchick, Senior Director, Investor Relations and Corporate FP&A, you may begin your conference.

Greg Lemenchick -- Senior Director-Investor Relations & Corporate FP&A

Thank you, and good morning, everyone. Today's conference call and webcast includes a PowerPoint presentation, which is available on our Investor Relations website ir.wendy's.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, including some highlights from our corporate responsibility report, share our 2021 fourth quarter results and provide an update on our financial outlook. From there, we will open up the line for questions.

And with that, I will hand things over to Todd.

Todd A. Penegor -- President, Chief Executive Officer and Director

Thanks, Greg, and good morning, everyone. We could not be more pleased with the momentum in our business that continued in the first quarter of 2021 as sales significantly exceeded our expectations and fueled our restaurant economic model leading to outsized profits. We delivered another double-digit two year same restaurant sales growth result on the strength of our rest of day business, our breakfast daypart and our growing digital business. Our digital business grew to approximately 7.5% of sales in the quarter and our breakfast business showed growth that was ahead of plan. This sales momentum led to significant year-over-year restaurant margin expansion of almost 700 basis points to 17%.

Our focus remains on ensuring we have a strong restaurant economic model across our system and we are executing. We also continue to make great progress in the area of development as we are seeing strong interest in our new incentive program that we launched earlier this year, and we remain on track to deliver on all of our long-term development targets. As a result of our strong top-line performance, we are meaningfully increasing our outlook for 2021 on all of our key financial metrics, which GP will talk through later in the presentation.

Lastly, we remain fully committed to our long-term growth initiatives, and we continue to make great progress against these. We are confident that we have a lot of growth ahead of us behind these initiatives. Our goal remains the same, which assume to invest and driving efficient accelerated growth, and we are delivering on that commitment.

Our global same-restaurant sales growth of 13% that we delivered in the first quarter exceeded our expectations and highlights the strength and momentum of both our U.S. and international businesses. In the U.S., we once again posted one of our best one and two year same-restaurant sales numbers as we were up 13% on both metrics. The strength of our rest of day business, breakfast, digital and stimulus payments boosted the results that were slightly offset by inclement weather in the quarter. This was our third consecutive quarter of double-digit two year same-restaurant sales growth, which showcases the underlying strength in our business.

Internationally, we saw same-restaurant sales growth turn positive at 7.9%. We attribute this to the strength of our Canadian business, which continues to see digital acceleration and to the business in Puerto Rico, which is firing on all cylinders, and they've added many of our U.S. breakfast items to their menu. This translated into 6.3% international growth on a two year basis and a significant increase from our fourth quarter results as our international markets are continuing to emerge from severe COVID restrictions to pace ahead of plan in 2021.

The strong start to the year and the momentum we are seeing in our global same-restaurant sales has given us the confidence to take up our systemwide sales guidance for 2021 to 8% to 10%. Our franchise system is engaged across the globe, and we are excited about the plans we have in place for the remainder of 2021.

Let's spend a few moments talking about our U.S. same-restaurant sales, which accelerated nicely in the first quarter on the strength of our rest of day business. We launched two new products within the quarter. In the Jalapeno Popper Chicken Sandwich and Salad, which were extremely successful. Our Salad business saw a substantial improvement as the result of this launch, which we were very pleased with. Our recently renovated Classic Chicken, which was a key component of our two for $5 promotion within the quarter is selling more than twice as much as our previous version and continues to drive very strong large sandwich sales mix and higher average checks alongside the continued strength of our Made to Crave platform.

The strength of the Classic Chicken along with the success of the Jalapeno Popper has allowed us to compete very well in the chicken sandwich category. In fact, our share of breaded chicken sandwiches within QSR grew in the month of March despite significant competitive activity. We wrapped up the quarter with a fan-favorite in the $5 Biggie Bag, which drove very strong results to close things out. As we look forward to the rest of 2021, we are very excited about our marketing calendar, which will continue to include a nice balance between our core items and some new product offerings to ensure that we continue to drive customers into our most craveable products.

We have now officially entered our second year of breakfast and we could not be more excited, and the same sentiment is echoed by our franchisees as their energy and excitement is at an all-time high. In the first quarter, all our key breakfast metrics improved, breakfast sales dollars grew, awareness increased and we continue to see higher customer repeat. Breakfast was fueled by our continued marketing pressure, most notably, with our presence as the official breakfast of March Madness, which drove a ton of awareness around our business. And our successful two for $4 promotion, which drove a significant amount of trial. We also continue to see our customer satisfaction scores be our highest at the breakfast daypart as customers are loving the offering that we have.

Lastly, we are seeing some great results out of our legacy breakfast restaurants that had [Technical Issue] before the national launch. They have already grown their breakfast businesses to over 10% of sales, giving us confidence in our long-term targets. Our results in the quarter were ahead of our expectations. And we remain fully committed to our breakfast advertising investment, putting us in a great position to grow our breakfast sales by 30% in 2021 and reach our goal of 10% of sales coming from breakfast by the end of 2022.

Our digital business once again saw acceleration across the globe in the first quarter. Internationally, digital grew again this quarter to more than 10% of sales on the strength of our Canadian delivery business, which continues to grow rapidly. In the U.S., we exited the quarter at approximately 8% of our sales, up from just over 6% in the fourth quarter. This growth has been driven by increases in both delivery and mobile ordering.

On the delivery front, we ran several successful promotions in the first quarter to continue to drive awareness and trial. Delivery has remained strong in markets that have reopened, which is very promising. Our mobile ordering business, which is powered by our loyalty program, continue to grow as we now have 13 million total members enrolled in the program. We continue to see positive benefits from our loyalty program in terms of higher frequency and we are seeing more and more people take advantage of this program.

In addition, we are starting to leverage the consumer data that we are seeing and have begun to engage with customers on a more one-to-one basis, which we believe will play a major part in us reaching our digital goals. As consumer behaviors continue to change, along with the technology investments we are making as a brand, we are well on our way to achieving our goal of reaching 10% of U.S. sales coming through digital channels by the end of this year.

Our third strategic growth pillar is expanding our footprint. Just like the other two pillars, we continue to make great progress. As announced earlier this year, we launched a new incentive program and we are seeing substantial interest in it. As a reminder, our new incentives reward franchisees for new restaurant growth, accelerated timing and making multi-year commitments to grow their operations. Franchisees have until the end of June to sign up, and we are confident that we will see a meaningful uptick in commitments.

We are also seeing some new franchisees build their way into the system through this program behind the strong economics, which is exciting to see. Speaking of new franchisees, we continue to see our franchise recruiting pipeline grow significantly on the heels of the investments we made last year to drive our recruitment efforts. We currently have about 150 new potential franchisees globally at different stages of our process, including over 20 that we are evaluating in the U.K. On that note, we remain on track to open our first U.K. restaurant on June the 2nd, which will be operated by the company.

We also recently signed new development agreements with franchisees in Central Asia to open over 50 new Wendy's restaurants by 2030 and in Quebec, Canada, which we expect will double our footprint in the province. These are more examples of where we continue to sign large development agreements to significantly grow our international footprint.

The solid development foundation that we have built, the strong pipeline we have in place and the progress we have made thus far in 2021, gives us confidence that we will deliver on our goal of reaching about 7,000 restaurants globally by the end of 2021 and accelerating to approximately 8,000 by the end of 2025.

Our playbook of investing to drive accelerated growth behind our three long-term pillars to meaningfully build our breakfast daypart, drive our digital business and expand our footprint across the globe remains the same and we are making great progress. These initiatives remain deeply rooted in the foundation of the restaurant economic model. The combination of strong sales and restaurant margins that we displayed in the first quarter will fuel reinvestments into people, technology, reimaging and new development, which drives our confidence in growth for the future.

One of our three foundational items is Good Done Right, which is our commitment to do the right thing in the area of environment, social and governance. We recently launched our 2020 corporate responsibility report, and I wanted to cover a few of those highlights. Good Done Right is the simple phrase that grounds Wendy's approach to three critical areas of our business; food, people and footprint. We made tremendous strides in 2020, in part because we completed our first ever comprehensive ESG materiality assessment to inform our overall strategy. We engaged nearly 1,000 diverse stakeholders to identify Wendy's most material topics that provide the greatest opportunity to make a positive impact. These findings informed existing goals and helped us to create new ones.

We recently released new ESG specific goals. And alongside these, we are sharing a new set of metrics based on established reporting frameworks to track and report our progress. We're committed to transparency through our corporate responsibility journey, and we will continue to benchmark our progress against globally recognized framework such as SASB and GRI. For further information, please go to the What We Value Section of wendys.com or the ESG section of our IR website. Everything We Do At Wendy's is focused on bringing our vision to life, which is to become the world's most thriving and beloved restaurant brand. With the momentum that we have in our business and the partnership we have with our franchisees that has never been stronger, we are well on our way.

I will now hand things over to GP to talk through our first quarter financial results.

Gunther Plosch -- Chief Financial Officer

Thanks, Todd. We are very proud of our first quarter results as our business continues to accelerate to start the year, showcasing same-restaurant sales and core earnings growth that we are well ahead of our expectations. Our global systemwide sales grew 12.5% and our same-restaurant sales reached 13% in quarter one, well ahead of our initial expectations. The sales momentum has continued into the second quarter, but we are expecting our same-restaurant sales in the U.S. to grow 12% to 14%.

Please note that our U.S. same-restaurant sales in the second quarter will be negatively impacted by a shift related to the 53rd week that we had in 2020. After accounting for this shift, we are expecting our strong sales results to continue in quarter two with another quarter of two year double-digit SRS growth. Year-over-year company restaurant margin increased almost 700 basis points to 17%, driven by sales leveraging from our 13% company-operated SRS growth and lower commodity cost. These benefits were partially offset by higher labor rates.

The increase in G&A was primarily driven by a higher incentive compensation accrual as a result of our improved outlook for 2021 that was partially offset by reduced travel expenses.

Adjusted EBITDA increased approximately 35% to $121 million. This was primarily driven by higher franchise royalty revenues and fees as a result of increased same-restaurant sales, the company's new technology fee implemented in 2021 and an increase in company-operated restaurant margin. These benefits were partially offset by the company's incremental investment in breakfast advertising. Adjusted earnings per share increased over 120% to $0.20, driven primarily by our higher adjusted EBITDA.

Finally, our free cash flow in the first quarter increased significantly to approximately $98 million. The year-over-year increase was primarily related to higher net income, a decrease in accrued compensation and related items, the timing of receipts of franchisee rental payments and the timing of vendor incentives. All timing effects had already been contemplated in our original guidance for the year.

Our strong quarter one results and continuing momentum in the business have resulted in a meaningful increase to our 2021 outlook. We are raising our global systemwide sales growth outlook to 8% to 10% based on our outperformance in quarter one and an improved full year sales outlook. We continue to expect that the majority of our sales growth will come through core growth, with the remainder coming from our anticipated increase in our breakfast business and net global unit growth. This improved sales outlook is the major driver and an increase to our adjusted EBITDA outlook by $10 million to approximately $455 million to $465 million.

We are also now expecting our company-operated restaurant margin to be 16% to 17% in 2021, which is being driven by the improved sales outlook and the benefit from average checks remaining elevated longer than we had originally anticipated. These increases are being partially offset by an increase in G&A to approximately $235 million, which is driven by high incentive compensation accrual as a result of our improved outlook. Finally, as a result of our higher adjusted EBITDA expectations, we are raising our free cash flow outlook to approximately $250 million to $260 million.

To close, I would like to highlight our capital allocation policy, which remains unchanged. Our first priority remains investing in profitable growth, and we are showcasing this through the investments we are making across our three strategic growth pillars. Today, we announced the declaration of our second quarter cash dividend and that we are increasing it by 11% to $0.10 per share. This is on the heels of a 30% increase we announced in the first quarter. Our strong liquidity position, along with the momentum we are seeing in our business, support this increase, while still alleviating flexibility to invest in growth.

Lastly, we plan to utilize excess cash to repurchase shares and reduce debt. On the share repurchase front, we have added an additional $50 million to our existing share repurchase authorization, increasing the total to $150 million after exhausting our authorization due to favorable market conditions. 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 is driving strong systemwide 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.

Greg Lemenchick -- Senior Director-Investor Relations & Corporate FP&A

Thanks, GP. Due to the ongoing travel restrictions, all our investor meetings will once again be virtual events this quarter. To start things off, we'll be doing an NDR focused on the West Coast with Morgan Stanley on May 26. Following the NDR, we will be attending two conferences, which will be the Stifel conference on June 8 and the Evercore conference on June 16. We will also be hosting an investor call on May 19 with MKM Partners, and doing a virtual headquarter visit with Longbow on June 23. If you're interested in joining us at any of these events, please contact the respective sell-side analysts or equity sales contact at the host firm. Lastly, we plan to report our second quarter earnings and host a conference call that same day on August 11.

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 one question only.

And with that, we are ready to take your questions.

Questions and Answers:

Operator

[Operator Instructions] And your first question comes from the line of John Ivankoe with J.P. Morgan.

John Ivankoe -- J.P. Morgan -- Analyst

Hi, great. Thank you. One is a follow-up and secondly is a question. First, in terms of the additional franchise fees year-over-year, is there a way to think about how much of that is going to be recurring, maybe as a percentage of franchise sales related to the technology fee? And then secondly, the part of that that was, I guess, accelerated franchise fee recognitions having to do with NPC. When does that run off? That's, I guess, the first clarification.

And then secondly, the real question is about lapping the average ticket gains that obviously drove much of quick service spending in 2020. I mean, how was that lap kind of ongoing as we come in here and to -- are you able to basically comp that comp from an average ticket perspective? And how do you kind of see average ticket flowing throughout the year relative to your traffic? Thanks.

Gunther Plosch -- Chief Financial Officer

Good morning, John. Yeah, the net franchise fee were up about $8 million versus prior year. The majority of that is definitely driven by the implementation of the new tax fee that we have implemented successfully together with our franchisees.

A couple of other things that drove the increase year-over-year in the quarter. First, we also had an acceleration of development funds that got canceled with NPC, and it drove a little bit of favorability. And the third level of favorability is, we had breakfast investment in the base that we obviously didn't have this year around. As a result of it, right, we had a lot of discussion in the fourth quarter about the acquisition. We said, the fee would be a net increase of 10% to 15%. We have lifted this by about $5 million in our range. So that kind of hopefully explains what's going on in net franchise fees.

Todd A. Penegor -- President, Chief Executive Officer and Director

Yeah, John. And then average ticket, we now expect average ticket to stay elevated through the better part of the summer and into the fall before mobility fully returns. Our average ticket remained about the same as it was in Q4, which is encouraging. We're seeing average party size up still about 10% -- or average items per transaction, up about 10% in the quarter still. But we're also seeing beyond just the party size and the items per transaction, we're seeing strong mix.

You think about how our calendar has paced out, two for $5 is driving mix, $5 Biggie Bag is driving mix. And a lot of the success on our most craveable items, Made to Crave continues to get folks to trade up into our best tasting, highest quality, most craveable sandwiches, which is quite healthy for the business. So we feel good that that can continue throughout the year. And we continue to build a strong calendar to bring news to the party during the rest of the year as last year. We really didn't do a lot of innovation. We really focused on the core, and we'll have more news throughout this year.

Operator

And your next question comes from the line of David Palmer with Evercore ISI.

David Palmer -- Evercore ISI -- Analyst

Thanks. I'm just going to squeeze in two quick ones. With regard to technology, what are you saying to your franchisees that they will be getting from tech investments? And what are you thinking more broadly? I struggle with that myself about how tech really marries with the drive-thru. And then separately, do you see your breakfast order incidence building? Is that really even going to end up being the story of 2021 or is there something else that you think we'll remember the strength being driven by this year? Thanks so much.

Todd A. Penegor -- President, Chief Executive Officer and Director

Yeah, starting on technology, I think there's a couple of things, David. I think as you think about people going into mobile ordering, we're seeing folks with higher average checks 15% to 20%, it's a strong economic ovation to get folks into mobile ordering. We're creating more better experiences in our restaurant. When you think about mobile grab-and-go, you think about curbside, those all help with speed and getting folks through the line much more convenient along the way. And then delivery, as we continue to drive that side of the business, we're seeing average checks of up 40% to 50%.

So a lot as we work to turn our parking lots into frictionless transaction centers to continue to drive throughput, but more importantly, to continue to drive nice average checks and nice flow through for our business, creating better customer experiences and creating better employee experiences, quite honestly, in those restaurants. So a lot to like and a lot more we can continue to do to make that experience even more frictionless in our restaurants for both the consumer and the -- and our employee.

So if you think about breakfast, we're really excited about how breakfast has been performing. When you think about dollar sales continuing to grow, you think about our system being all in on breakfast, you think about awareness continuing to increase even if it's just slightly with very high customer satisfaction, which is driving strong customer repeat, the name of the game is trial. We got to get this great food in consumers' mouths. And we know we can continue to build this business throughout the year between the quality of the food offering that we have. And we look at all of our growth legs is part of our big story this year.

When you think about the business that we have, bringing breakfast to life and how that can continue to grow for years, the digital journey that I just highlighted and what we are doing to provide more access to our brand, not just in North America, but across the globe, there's a lot of growth still out there in front of us with the momentum we have.

Operator

And your next question comes from the line of Andrew Charles with Cowen.

Andrew Charles -- Cowen -- Analyst

Great. GP, I just wanted to dig in just on the 2Q guidance, 12% to 14%, very -- obviously, continued strength in the overall business. But if I look at it versus 1Q, it's a bit of a deceleration. I was wondering can you disclose what that headwind is from that one week shift? And perhaps, related to that, just kind of talk a little bit more around the philosophy of guidance. It does imply that a bit of deceleration. March was seemingly strong into 1Q. Is there anything else that perhaps you're observing in April, government stimulus rolling off that we should be thinking about?

Gunther Plosch -- Chief Financial Officer

Andrew, I mentioned this a little bit in my prepared remarks that the shifting of the 53rd week is going on. So what does actually mean, right? Realignment of weeks always happens when you deal with the 53rd week, and normally, you don't notice this. This time around, obviously, we had COVID. And what we are seeing now is that the most negatively impacted week that we had in COVID last year shifted from the second quarter into the first quarter. As a result of it, there is actually more headwind than we would expect. So when you adjust for that shifting, you're actually coming out with a two year double-digit SRS number.

Operator

And your next question comes from the line of Brian Bittner with Oppenheimer and Company.

Brian Bittner -- Oppenheimer -- Analyst

Thanks. Good morning. As you look at your stores that are in markets that have fully reopened or where consumer habits have indeed become more normalized, what are you seeing from both an average check perspective and a breakfast perspective that can help shape how we should think about how the system performs when we're fully reopened? Is the average check staying really elevated in these reopened markets? And is that shaping how you're thinking about average check throughout the year? And just talk about if breakfast is outperforming the system in reopened markets?

Todd A. Penegor -- President, Chief Executive Officer and Director

Yeah. If you look at across breakfast and rest of day, as markets continue to reopen and the ones that have reopened versus the ones that are a little slower to reopen, we haven't seen a discernible difference across all of those markets. We're seeing very similar behavior on how customers are reacting. We're seeing very similar behavior on average checks. The only exception to that would be on the breakfast daypart where you've got some pockets that have been slower to recover with 50% of the folks still working from home and a little less mobility in the morning. And as mobility picks up, it's more of a point-to-point mobility rather than a couple of stops along the way.

So we're seeing that be a little bit slower in some respects, which gives us a lot of confidence that there could be even more opportunity as that mobility starts to come back in the morning daypart for the rest of the year. But feeling very confident with the outlook that we laid out there across breakfast and rest of day and how we're looking at the average check dynamics, at least through the fall.

Operator

And your next question comes from the line of Eric Gonzalez with KeyBanc Capital Markets.

Eric Gonzalez -- KeyBanc -- Analyst

Hey, thanks. Just another one on breakfast. I think I recall your breakfast mix being in the mid-six range as you exited the fourth quarter and accelerated the first quarter. And then I look at -- your filing, it says that your breakfast was a 3.7 point lift to same-store sales growth. Can we help fill in the blank in terms of how the breakfast mix trended in the quarter and into the first part of the second quarter? I know you said the dollar contribution did increase, but just maybe if you could talk about how that mix trended and the comp trended in breakfast?

Todd A. Penegor -- President, Chief Executive Officer and Director

Yeah. If you look at our breakfast mix, it remained pretty darn steady in the first quarter at around that 7%. We feel good about that because rest of the day business grew very, very strongly, as you saw it noted in the release. But what we're most proud of is the average weekly dollars across our breakfast business continued to build throughout the first quarter. And if you look at the guidance that we had in the second quarter, we're seeing a nice build between breakfast and rest of day. So we're seeing strong growth across the board on the elements contributing to that growth.

Operator

And your next question comes from the line of Jeffrey Bernstein with Barclays.

Jeff Bernstein -- Barclays Capital, Inc. -- Analyst

Great. Thank you very much. Just a broader question on franchise, profitability and discussions with franchisees. Obviously, as a 95% franchise system, they're critical. It seems like the sales are strong, but the cost pressure seem to be ramping up despite what your restaurant margins showcase. So I'm just wondering what are your discussions like in terms of profitability, whether it's perhaps pricing optionality or other initiatives to mitigate cost pressures? You didn't really discuss it, but any color in terms of commodity outlook for the rest of the year based on what we've seen thus far this year or labor inflation relative to the shortages everyone is talking about. Any thoughts around those inflationary pressures that your franchisees are seeing? And how you might help mitigate that whether on the franchise side or even in your own restaurant margin? Thank you.

Todd A. Penegor -- President, Chief Executive Officer and Director

Yeah. I'll start with the franchise sentiment and turn it over to GP on some of the elements of the restaurant economic model. But you look at how we performed during the course of 2020, we had strong brand alignment with the franchise community, a lot of confidence in our growth initiatives moving into the future. They ended the year with stronger balance sheets. They had very strong profitability to finish 2020. And with the fast start this year, we're seeing strong profitability across the system, which really allows us to continue to reinvest, as we've said in the prepared remarks, into our people, into technology, into the reimaging, into new development, and we have momentum on all of those items.

Yes, there is headwinds out there. Labor is a little more challenged at the moment. We're blessed with better turnover across our system as we work to continue to make sure our restaurants are fun and energizing to work in. But we got to continue to work hard to get those restaurants fully staffed as we work into the summer season, and we're focused on that as a system. But the good news is with the strong start and the health that we have, it gives us some time to continue to work against the outlook for the year as we think about where labor may be going, which could be a little inflationary, but where commodities are, which we're not seeing a lot of inflation on commodity. But I'll let GP talk about that in a little more detail.

Gunther Plosch -- Chief Financial Officer

Yeah. On the labor inflation front, we are forecasting 2% to 3% is unchanged versus what we said a quarter ago. Also, our commodity outlook is actually unchanged. We're expecting about flat. Just to point out, we were actually deflationary on the commodities front in the first quarter. It was worth about 60 basis points. So for the rest of the year, we expect slight inflation. It will be a little bit choppy. We are expecting inflation in quarter two and in quarter four. But within quarter three, we had a domestic spike on beef inflation last year, that one we expect to be deflationary.

Operator

And your next question comes from the line of John Glass with Morgan Stanley.

John Glass -- Morgan Stanley -- Analyst

Thanks. Thanks, and good morning all. We haven't talked about the image activation in a while, about two-thirds of the fleet is now remodeled. How do those stores perform versus -- I guess, it's a smaller base now, but if you can provide some details on that. How is the digital mix? And are you starting to evolve that at all, as you think digital is -- since you initiated that, digital has become a bigger piece of your business? How have you thought about adding new elements to those AI remodels, which maybe you didn't initially? Thanks.

Todd A. Penegor -- President, Chief Executive Officer and Director

Good morning. John. Yeah, image activation, we are progressing well, right? We're sitting at the end of the quarter, about 66% image activated. It's really the tailwind now, SRS of about 30 basis points. So basically, that's codeword for the mid-to-high single-digit lift that we see, depending on the investment levels the franchisee puts into the image activation project, especially, if you will see that people activate together with it. We keep seeing this over and over again. We do expect we are finishing this program by 2024. So that outlook is unchanged, which is actually quite remarkable, right, since -- through COVID, we have actually given -- allowed the franchisees to actually slow down a little bit. And so they are accelerating up.

From -- in terms of design point of view, we obviously are including new design cues and new options from a digital point of view. And as you know, in the -- we have gone through the process of separating order from pickup. That's a key enabler to do this. And when we do that and execute this in our designs, we are seeing a better experience for our customers for delivery drivers and the likes.

Operator

And your next question comes from the line of Chris Carril with RBC Capital Markets.

Christopher Carril -- RBC Capital Markets -- Analyst

Hi, good morning. Thanks for the question. So I wanted to ask about the dining room reopenings. In the Q, you noted that I think 85% of dining rooms are now open across the system with some offering dine-in services. So I'm curious as to what you're seeing in terms of dining room utilization by guests? To what extent you're seeing drive-thru transactions shift to walk in? And how are you thinking about those changes in guest behavior in relation to the margin impact from dining room reopenings?

Todd A. Penegor -- President, Chief Executive Officer and Director

Yeah, Chris. We've been pleased that we've been able to tick up our dining room reopenings through the first quarter. We've now got 85% of our dining rooms open. For the folks that are actually coming into the dining room, we're at about a 10% mix between dine-in versus drive-thru. A long ways away from where we were pre-COVID at about a third of our mix being in the dining room. And even in the dining room, we're seeing a split between about 50% of those customers coming into the dining room are for takeaway and about 50% are dining in at this stage.

We would expect that to continue to build as more folks get vaccinated and we start to get to the other side of the pandemic. But it will take a while to get back to that third dining room mix over time. And that's why we continue to really focus on how do we make our parking lots frictionless transaction centers and continue to drive speed at the drive-thru, get more folks into mobile ordering so they can get through that line faster, complement that with mobile grab-and-go and curbside.

And all of those initiatives are under way to continue to make sure that we're driving speed at the drive-thru. And we're very pleased in the first quarter that the perception of speed from our consumer feedback has improved. Our overall speed has stayed relatively flat, but that's with 10% more items per transaction that we're managing per customer at this stage. So we feel good about that.

GP, I think you had a couple of other thoughts.

Gunther Plosch -- Chief Financial Officer

Yeah. So from a profitability point of view, right, we have always gone out to franchisees and told them to be gentle. We really only protect the rest of economic model. And I think franchisees has followed that advise. We definitely see pay profit accretion as the dining rooms are open. But if we would compare profitability from a percent of sales point of view that we have now versus pre-COVID levels, it's probably a little bit suppressed because we don't have the same amount of sales going through a pre-COVID level. So as the economy improves, we'll see whether we get back to the full utilization they're used to.

Operator

And your next question comes from the line of Lauren Silberman with Credit Suisse.

Lauren Silberman -- Credit Suisse -- Analyst

Thank you. So just on digital. At your Investor Day, you targeted the digital business at 10% by 2024. You've accelerated that and are on path to get to 10% by the end of '21. So sitting here today, where do you think that digital mix can grow to by 2024? And then can we assume the majority of the 7.5% of digital sales is delivery? And how do you see that evolving?

Todd A. Penegor -- President, Chief Executive Officer and Director

As you think of where we ended the quarter, exiting at an 8% digital mix, we're very pleased with the momentum we're building. Gives us a lot of confidence that we'll get to 10% digital mix by the end of this year. Historically, it's been really driven by delivery. But we're starting to see it now being delivered and driven even more by mobile ordering, especially as we have the loyalty program in there to complement that. So we're seeing nice growth between mobile ordering and delivery here in Q1.

We've had a lot of awareness programs out there. Awareness is still a big opportunity for both delivery and mobile ordering and our loyalty program, quite honestly. But we do see 12 million users in the loyalty program, 3 million active users in there every single day. We're starting to see that continue to build, which is driving frequency for our business, which was the key for that. So I think we're starting to see a nice balance between both of those elements to continue to grow our business. We'll have to see how high digital can go over time. We do think it will continue to be a nice tailwind to our business into the foreseeable future.

Operator

And your next question comes from the line of Dennis Geiger with UBS.

Dennis Geiger -- UBS Securities -- Analyst

Great. Thanks for the question. And Todd and GP, thanks for the latest update on the international performance and the growth outlook. Just wondering, if you could talk a bit more about the international development opportunity. I think certainly, a big number announced this week for the U.K. and you highlighted Canada and some of the agreements in Central Asia just now. But just wondering if anything more to add on sort of the discussions with existing international franchisees, how they're thinking about the growth as well as those new partner discussions that you mentioned? I'm curious, if the COVID challenges at all have impacted those discussions or the pace of opens and any other kind of guideposts that we should be looking out for? Thank you.

Gunther Plosch -- Chief Financial Officer

Yeah, Dennis. Good morning. We're making steady progress on our development. As you know, it's one of the three strategic growth pillars. And we talked to you last time, eight weeks ago, since then, we actually signed a new development agreement in Central Asia with about 50 restaurants. So we also enabled a franchise flipping in Quebec, Canada that actually allows us to unlock that part of Canada, which is totally underpenetrated for us. So it creates growth for us.

And we're getting more and more excited about the U.K., right? The U.K. consumer seems to be ready for us. We have built a robust franchise pipeline. We said it in the prepared remarks, about 20 franchisees put up their hands. So like I want to help you Wendy's grow in the U.K. And with that, a chief development officer said in one of the interviews in the U.K. that there is no reason to believe why the long-term potential of the U.K. for us shouldn't be 400 restaurants. Just to be clear, there's no development agreement signed for the U.K. It's a belief that we have and that we'll be going after and that's where we're going to make our investment.

Operator

And your next question comes from the line of Jeff Farmer with Gordon Haskett.

Jeff Farmer -- Gordon Haskett -- Analyst

Thank you. You briefly touched on it, but what your current staffing levels look like across the system? And what are some of the common themes of those franchisees that have had the most success with staffing in the current environment?

Todd A. Penegor -- President, Chief Executive Officer and Director

Yeah. As I mentioned a little bit earlier, staffing has gotten a little bit tighter out in our restaurants. We are really focused on ensuring that we're creating restaurants that are fun and energizing, leveraging technology to make them simpler to operate to make sure that our employees have a great experience. So in turn, our customers can have a great experience.

So the focus is really on retention of the employees we have. We have seen folks paying a little bit more. We have seen folks doing things like paid time off. We're seeing folks do things like free lunches, and we're really trying to make sure that we're taking care of our existing employees. We're leveraging a lot of technology and tools that go out there and recruit even more folks to come into what we believe is a very great culture at Wendy's to work in our restaurants.

And reimaging certainly helps to recruit employees into new restaurants, whether that's a new developed restaurant or reimaged restaurant, it certainly helps along the way. But it will be tight for a little bit for a variety of reasons, and we're managing through that as we look at where we're staffing folks in the restaurant and how we're positioning folks to drive the most throughput with how we're staffed.

Operator

And your next question comes from the line of Brian Mullan with Deutsche Bank.

Brian Mullan -- Deutsche Bank -- Analyst

Hey, thank you. Just another question on development. When you think about achieving 3% net unit growth next year, if you could just comment on the U.S. piece of that. Sitting here in May, are franchisees responding how you'd hoped to the incentives? And do you have a good sense already today or do you need to wait until the end of June, which was a deadline I think you cited in the prepared remarks? And are you seeing good response to the conversion piece of those incentives in particular? Really, I'm just asking if you still feel confident about domestic net unit growth acceleration next year.

Gunther Plosch -- Chief Financial Officer

Yeah. Good morning, Brian. Yeah, we feel very confident about our development pipeline. The step up to 3% is really broad-based is on international, north of 10%. We also expect that U.S. is going to step up slightly from the 1% net growth that we're expecting this year. Really encouraging signs on the new incentive program in the U.S.

I can give you a couple of nuggets. The first nugget is that definitely we have now several franchisees that have never built before, starting to show interest. And I think it's because it's a compelling incentive, and they probably have a little bit more confidence, especially, that we've built now a very viable breakfast business that is clearly improving returns. So we have not completed yet the process. We will give ourselves till the end of June to take stock. And I'm sure we're going to report out as part of second quarter earnings how we have done on that.

Operator

And your next question comes from the line of Nicole Miller with Piper Sandler.

Nicole Miller Regan -- Piper Sandler -- Analyst

Thank you. Good morning. On the labor inflation, could you maybe talk a little bit about what is structural or mandated elements versus optional or proactive measures? And then, when you just think about your company-operated stores in the labor line, what percentage of that is related to hourly employees? Thank you.

Gunther Plosch -- Chief Financial Officer

Good morning, Nicole. So if you step back, right, when we operate our company restaurants, we always want to be competitive in the marketplace, otherwise you cannot address talent. So the average labor rates that we have is a function of either minimum wage. And in several states, we are clearly above minimum wage to actually be competitive and attract the talent that you need. In terms of the labor line itself, the majority of the cost is clearly sitting on crew, that's the majority of the people. It's clearly general managers, shift managers and assistant general managers are higher portion of it, like the lion share is our crew.

Operator

And your next question comes from the line of Chris O'Cull with Stifel.

Patrick Johnson -- Stifel -- Analyst

Great. Thanks, guys. This is Patrick on for Chris. I was hoping, we dig in just a little bit more to the loyalty program, and specifically, the 13 million members. And I know you mentioned the one-on-one marketing opportunities in your prepared remarks, but could you dig into that a little bit more about either what you've seen in terms of effective levers of getting people to come more frequently or maybe what you think you've got in terms of opportunity going forward? And maybe even a little bit of color around how much that's closed that visitation gap, you've mentioned in the past to key competitors on an annual basis and what that might tell us about what we could -- how we could think about the impact of that as customers in that program grow? Thanks.

Todd A. Penegor -- President, Chief Executive Officer and Director

Yeah. It's still early in the program. When you think about having 3 million active users fully engaged in the app day in and day out, we are seeing redemption start to increase. We're seeing those be scanned. So that's a digitally enabled order when folks come in for that redemption. And we are seeing frequency uptick among our loyal consumers. So our opportunity is to continue to drive awareness, get more folks into the app, get more folks to actively be using and earning points along the way to give them another reason to want to be digitally engaged with The Wendy's Company.

We've been relatively flat on our awareness around digital activity, whether that be delivery or mobile ordering. Those are opportunities ahead of us to continue to get more customers aware that you can have a digitally enabled order from The Wendy's Company, which gives us a lot of confidence that we can continue to build on the program. The customer satisfaction for the folks that are in the loyalty program is quite high. They like the program. They like the ease of use of it at the restaurant level. And our opportunity is to have our crew even engage more to drive awareness even at point of sale.

Operator

And your next question comes from the line of James Rutherford with Stephens, Inc.

James Rutherford -- Stephens, Inc. -- Analyst

Hey, good morning, and thank you. I wanted to follow-up on breakfast. That mix, I think, was steady sequentially even with mobility increasing nationally. And I think it was March Madness promotion and two for $4 as well. Just curious, Todd, what are the main levers that you want to pull to achieve the breakfast mix growth up to 10% by 2020 -- end of 2022? Is it more a function of frequency of existing or driving new customer trial? And the second part of that is, do you envision breakfast innovation being a component of the growth between now and the end of 2022? Thank you.

Todd A. Penegor -- President, Chief Executive Officer and Director

Yeah. I'll start with innovation. I mean, right now, we have such an opportunity to drive awareness, drive trial of existing offerings. We don't need to bring a lot of new news because we want to continue to introduce the great offerings that we have today. That said, we have a strong pipeline. And when we need to bring innovation, we will.

Our biggest opportunity, and we're starting to see this start to play out is really getting our existing rest of day Wendy's customers to try our breakfast business. Those that have, have become our most loyal and most frequent consumer. There's still a high percentage of the existing Wendy's consumers that have not yet tried our food. And then our opportunity beyond that is just bringing in new users into the portfolio. But it really is a trial game.

We are getting awareness to tick up a little bit within the quarter. But what we need to do is continue to get folks to come in and try our food. And we're confident as mobility, especially in the morning, comes back even more and more. And we start to get into those morning routines again later this year and into 2022, that can really help people to habit of Wendy's for breakfast in the morning.

Operator

And your next question comes from the line of Jared Garber with Goldman Sachs.

Jared Garber -- Goldman Sachs -- Analyst

Thanks for the question. I wanted to circle back on the loyalty program. I think this is the first quarter that you guys have given us the actual rewards numbers that, I think in the presentation, it shows 13 million and 3 million active. Can you give us some color on what those 3 million active members, like what the frequency looks like? Are those customers largely breakfast customers? Are you seeing people transition more from that 13 million into the kind of the 3 million active loyalty members as reopening plays out? Thanks.

Gunther Plosch -- Chief Financial Officer

Good morning, Jared. Yeah, it's all said, right? We have 13 million registered users, that's actually up from the prior quarter. The active users stayed about unchanged. That's not a new number, we've given this out in the fourth quarter. We're not yet ready to prepare to give you a little bit more detail. So I want to ask you to stick with the color that Todd has given. We've see exactly playing out what we have seen in past, which is higher frequency, higher check size, which is exactly strategically why we invested in it, because as you know, as a brand, our biggest opportunity is frequency of consumers into our restaurants, and that's what we will keep working on. And it's going to be one of the drivers to reach 10% overall digital sales and beyond.

Operator

And your next question comes from the line of Andrew Strelzik with BMO.

Andrew Strelzik -- BMO Capital Markets -- Analyst

Hey, good morning. I just wanted to follow-up on the commodity outlook you provided. I guess, I was a little bit surprised in a good way, maintaining the guidance, understanding it's supposed to get a little bit worse as the year progresses. But given what we've seen in kind of the protein markets, etc., I guess, I would have thought that maybe it was going to be a little bit worse going forward. So I'm just trying to understand, is that a function of your contracting? Is there something that you're planning to do around mix that's kind of moderating that kind of inflationary outlook? I'm just trying to understand kind of what the visibility or the risk is as the year progresses. Thanks.

Gunther Plosch -- Chief Financial Officer

Good morning, Andrew. Yeah, we have very good visibility into commodities. The majority of our positions for the year are locked. From a protein point of view, there's obviously a lot of chatter at the moment about chicken. Our chicken contracts are actually fixed for the year. So we have price certainty there. What actually creates a little bit of an open position for us is fresh beef, since there's not a long market for that. We are now securing supply and pricing. We're in the middle of the third quarter now in terms of visibility. And so far, the trends are supporting -- the actual trends are supporting our guidance that we have given.

Todd A. Penegor -- President, Chief Executive Officer and Director

And then in addition, I'm very pleased with our partnership with QSCC, which is our purchasing co-op. They're working hard to make sure that we've got supply continuity and protecting the brand in conjunction with our long-standing supplier partners, who have been great to work with us to make sure that we can continue to support and fuel the growth that we're seeing at the restaurant level.

Operator

And your next question comes from the line of Peter Saleh with BTIG.

Peter Saleh -- BTIG -- Analyst

Great. Thanks for taking the question. I just want to come back to the conversation around development, I guess, primarily in the U.S., but maybe international as well. When -- there's been a lot of conversations around a shortage of labor, obviously, rising construction costs, and now there's a lot of conversation around rising commodity costs. Is that having any impact on the franchisee psyche and willingness to grow and invest, either here in the U.S. or internationally?

Todd A. Penegor -- President, Chief Executive Officer and Director

Yeah, Peter. Those headwinds are out there, but with the momentum that we have in the brand and the fundamentally strong restaurant economic model that we're delivering along with the development incentives, the returns are still compelling. And our opportunity is to continue to grow and build this business right now as we want to provide more access to fast, convenient, high quality food.

So we're leaning in. We've got more franchisees that are coming into the pipeline and even want to build their way into the system. So we're feeling good that despite those headwinds, with all of the tools that we have, both from the restaurant economic model to hiring, to driving digital, to truly engaging our employees and customers that we're well positioned to start growth.

GP, any other thoughts?

Gunther Plosch -- Chief Financial Officer

Yeah. And one of the tools we have is design to value. We have us head talk about it, right? We're constantly working in terms of how can we actually get the better for growth, stunning design to the functional, and it's trying to offset inflation to keep the returns from new build and related.

Operator

And your next question comes from the line of Jon Tower with Wells Fargo.

Jon Tower -- Wells Fargo -- Analyst

Great. Thanks for taking the question. Just I wanted to follow-up on a comment, Todd, you've made earlier. I think you had suggested that the greatest opportunity for your breakfast business is drawing in customers that are already using the rest of day business to try breakfast. So I'm just curious, do you know if there -- these customers are already doing and eating breakfast away from home and where they might be going today? Essentially, I'm just trying to figure out, do you need to build a new habit with this customer or are you just moving them from a competitor's sale?

Todd A. Penegor -- President, Chief Executive Officer and Director

As you know, Jon, breakfast is very habitual. So we got to continue to build the habit to use the brand for breakfast rather than just dinner, but they already know that they've got high quality offerings during the rest of the day. And when they get introduced to the even higher quality or as high quality offering that we have at that breakfast daypart, they quickly become very loyal, very frequent. And it becomes a new habit quickly. So we got to continue to create awareness to bounce those folks back from lunch and dinner into breakfast, which then drives incrementality to our business, because it's another visit, another frequency that gets picked up along the way.

Operator

And your next question comes from the line of Brett Levy with MKM Partners.

Brett Levy -- MKM Partners -- Analyst

Great. Thanks for taking the call. On the G&A front, you obviously have talked about just the addition of some stock-based comp and also some costs that have stayed off the books. How should we think about your G&A, not just as it flows through this year, but where do you think you can be more aggressive and more conservative in the back half of the year and into 2022, either greater investments or greater leverage opportunities?

Gunther Plosch -- Chief Financial Officer

Good morning, Brett. Yeah, as part of this outlook revision, right, we significantly increased our EBITDA range, basically underlying between restaurant margin and sales by about $25 million. That was offset by about a $15 million increase in G&A. The majority of that is incentive comp, as our financial outlook is going. Our performance grids that are obviously benchmarked with the industry are kicking in and we are needing to protect the P&L for that.

The way to think about it is, we have always said that our ultimate goal is 1.5% of sales. It's all predicated on continue to accelerate our sales performance. The other nugget I would give you is, obviously, it creates an earnings tailwind next year as we are resetting the incentive comp payout back to 100%.

Operator

And your next question comes from the line of Jim Sanderson with Northcoast Research.

Jim Sanderson -- Northcoast Research -- Analyst

Hey, thank you for the question. Just wanted to follow-up on breakfast. I think you mentioned earlier that in legacy stores where breakfast was offered, you'd actually achieved about 10% sales mix. Can you remind us where these stores are located, if there's a regional issue there? And if -- what share of total company stores they represent? And then if breakfast currently is contributing to or creating a headwind on your strong sales margins -- or store margins?Thank you.

Gunther Plosch -- Chief Financial Officer

Good morning, Jim. Yeah, the legacy restaurants are the ones that were hanging in there from prior experiments. So they have created somewhere a breakfast habit already. It's about 300 restaurants. They're spread across the whole nation. They have achieved now, obviously, with the switch to the new breakfast really delighted customers and they're achieving sales north of 10%.

And so that's why we are confident that we can get to our 10% of sales number by 2022, because it seems to play out what we always thought. It's a matter of time. To break the habit is a matter of investments, right? So that's why we're investing around $15 million this year to make sure we have -- we are doing the right thing, driving awareness, awareness leads to trial, trial leads to repeat trial and the repeat leads to growth.

In terms of profitability, really happy. Profitability for the breakfast daypart is playing out as designed, which is basically a past rest of day. So that business is continuing to grow. It provides a tailwind to our restaurant margin for our franchisees and for our restaurant of course.

Operator

And your final question comes from the line of Jake Bartlett with Truist Securities.

Jake Bartlett -- Truist Securities -- Analyst

Great. Thanks for taking the question. Mine is on traffic and the potential desire for competitors to focus more on rebuilding the traffic. And just wondering if you can frame the risk that we -- as the year goes on, the environment, commercial environment becomes more promotional?

Todd A. Penegor -- President, Chief Executive Officer and Director

Yeah. I know everybody will be out there fighting for traffic as folks get back into more normal patterns, but we feel like we've got a lot of compelling value already across our menu. We've got the ongoing four for $4 program that performs quite well. We got $5 Biggie Bag that we commented that is off to a nice start. Things like two for $5 have created compelling value in the consumers' minds. But also having highly craveable, high quality food items like our Made to Crave lineup is value, and it says it's worth what you pay. So we feel like we've got a lineup that's very competitive. We'll always continue to look across the whole spectrum of our menu to make sure that we continue to compete where the competitive set is. But we're trading folks up into our best, highest quality food items, and we'll continue to do that.

And what I'm really pleased about is we did take a hiatus last year with innovation as we focused on the core. Our Made to Crave platform plays so well on the innovation in the chicken, innovation into the hamburger business. And you'll see a little more news coming this way this year. You've already seen it with Jalapeno Popper. You're seeing it with Bourbon Bacon Cheeseburger, and we got a great pipeline of opportunities to continue to bring worth what you pay consumers into our restaurant with great food.

Greg Lemenchick -- Senior Director-Investor Relations & Corporate FP&A

Thank you, Jake. 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 second quarter call in August. Have a great day. You may now disconnect.

Duration: 61 minutes

Call participants:

Greg Lemenchick -- Senior Director-Investor Relations & Corporate FP&A

Todd A. Penegor -- President, Chief Executive Officer and Director

Gunther Plosch -- Chief Financial Officer

John Ivankoe -- J.P. Morgan -- Analyst

David Palmer -- Evercore ISI -- Analyst

Andrew Charles -- Cowen -- Analyst

Brian Bittner -- Oppenheimer -- Analyst

Eric Gonzalez -- KeyBanc -- Analyst

Jeff Bernstein -- Barclays Capital, Inc. -- Analyst

John Glass -- Morgan Stanley -- Analyst

Christopher Carril -- RBC Capital Markets -- Analyst

Lauren Silberman -- Credit Suisse -- Analyst

Dennis Geiger -- UBS Securities -- Analyst

Jeff Farmer -- Gordon Haskett -- Analyst

Brian Mullan -- Deutsche Bank -- Analyst

Nicole Miller Regan -- Piper Sandler -- Analyst

Patrick Johnson -- Stifel -- Analyst

James Rutherford -- Stephens, Inc. -- Analyst

Jared Garber -- Goldman Sachs -- Analyst

Andrew Strelzik -- BMO Capital Markets -- Analyst

Peter Saleh -- BTIG -- Analyst

Jon Tower -- Wells Fargo -- Analyst

Brett Levy -- MKM Partners -- Analyst

Jim Sanderson -- Northcoast Research -- Analyst

Jake Bartlett -- Truist Securities -- Analyst

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