Wendys (WEN) Q3 2021 Earnings Call Transcript

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Wendys (WEN 0.10%)
Q3 2021 Earnings Call
Nov 10, 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 and Corporate Financial planning and analysis

Thank you, and good morning, everyone. Today's conference call and webcast includes a PowerPoint presentation, which is available on our Investor Relations website irwendys.com. Before we begin, please take note of the safe harbor statement that appears at the end of our earnings release. This disclosure reminds investors that certain information we may discuss today is forward-looking. Various factors could affect our results and cause those results to differ materially from the projections set forth in our forward-looking statements. Also, some of today's comments will reference non-GAAP financial measures. Investors should refer to our reconciliations of non-GAAP financial measures to the most directly comparable GAAP measure at the end of this presentation or in our earnings release. On our conference call today our President and Chief Executive Officer Todd Penegor; and our Chief Financial Officer Gunther Plosch, will give a business update, review our 2021 third quarter results and share our revised 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 and Chief Executive Officer, Director

Thanks, Greg. And good morning, everyone. We are extremely proud of the meaningful progress we made in the third quarter against our three strategic growth pillars. We continue to grow our breakfast business. Digital sales accelerated and we expanded our global footprint in a challenging environment. We achieved a strong two-year global same-restaurant sales result of 9.4% driven by growth across the globe, which included an acceleration in our breakfast and digital sales mix throughout the quarter. Our strong performance helped us lengthen our streak of growing or maintaining our QSR burger dollar share to an outstanding nine consecutive quarters and further strengthened our position as the number two hamburger chain in the U.S. Our expansion into Europe through the U.K. continued to accelerate as we've opened several restaurants since the second quarter. We are seeing extremely strong sales across all of our U.K. restaurants as customers are thrilled to have Wendy's in the market, making us even more excited about our growth opportunity. We also announced a new strategic partnership with Google, which we believe will allow us to tap into the capabilities of a world-class technology company to drive growth for us now and into the future. I will also share some results from a recent franchisee survey that highlights the strength of our relationship with our franchisees, which we continue to believe is a differentiator for us as a brand. We remain fully committed to our three long-term growth initiatives to build our breakfast daypart, accelerate our digital sales and expand our global footprint. Our goal remains the same, which is to invest in driving efficient accelerated growth. We are delivering on that commitment with strong year-to-date adjusted EBITDA and free cash flow growth and overall results that are pacing well ahead of our initial 2021 plan.

Let's now turn to our U.S. same-restaurant sales. Our strong programming and continued execution by our restaurant teams drove another impressive two-year same-restaurant sales result as we lapped our best quarter of 2020. Our average check saw continued growth, bolstered by craveable products like the Big Bacon Cheddar Cheeseburger that was launched during the quarter. We achieved strong results this quarter, but we know that several macroeconomic factors that others across the industry experienced related to staffing and shipping mobility due to the Delta Variant impacted results across our entire business. Both the company and our franchisees are committed to making each Wendy's restaurant a great place to work, which will help attract and retain talent in our restaurants to help mitigate some of these impacts moving forward, and we are making progress. We're very excited about the plans we have in place for the rest of the year, including the recent launch of our new game-changing fry innovation. We believe we have a winner with this product. These fries remain hotter and crispier for longer and our consumer preferred nearly 2:1 to McDonald's. This is yet another example of us elevating our core menu, which we expect to help us continue delivering growth on top of growth. I cannot be more proud of our international business, which delivered a second consecutive quarter of double-digit one- and two-year same-restaurant sales growth. These results were driven by an improvement across the globe, both in our larger international markets such as Canada and Puerto Rico, where we continue to take market share and also across the rest of the world as those areas continue to recover. Canada continued to post impressive growth, partially driven by their growing delivery business, which recently added Uber Eats as well as by engaging customers through a Wendy's phone contest that really resonated with our fans there.

We're also seeing strong results in our Latin America and Caribbean region. In Mexico, one of our significant growth markets, sales have not only recovered from COVID impact but have far surpassed 2019 sales levels, and we believe there is still a huge potential for further growth in this market. The strength in recovery of our international business continues to be a catalyst for growth. As of the end of the third quarter, almost 2/3 of our international markets have seen sales recover to at least pre-COVID levels, and we haven't seen a single permanent COVID-related market closure. We are extremely thankful for our team and our international franchisees for their commitment to growing the Wendy's brand across the globe alongside us. We continue to be very pleased with our breakfast business, which grew throughout the third quarter, exiting at our highest monthly mix of 2021 at 7.5% of sales. Our strong performance led to morning meal traffic share gains within the QSR burger category. This growth was driven by the successful two for $4 and $1.99 croissant trial driving promotions. We believe this momentum will continue as we close out the year with our recently launched dollars offering. We continue to see high customer repeat showcasing that these offers are paying off. Incredibly and a little over 1.5 years, we have now moved into the number three spot in terms of overall morning meal share in QSR Burger. While we saw growth in our breakfast business, mobility continues to shift and be depressed during this day part. As a result, we now expect our year-over-year breakfast sales to grow approximately 20% to 30% in 2021. We remain confident in our ability to reach our breakfast goals and remain committed to invest $25 million in breakfast advertising this year to drive trial and awareness, which we believe will set us up for further growth in 2022 and beyond. We continue to see strength in our digital business across the globe in the third quarter, reaching approximately 8.5% mix globally. Our international digital sales were approximately 13% as we saw strong results across several of our markets.

We expect growth to continue moving forward as we integrate new delivery partners and roll out mobile ordering across our markets. Our U.S. digital business accelerated throughout the third quarter, exiting with a digital sales mix north of 8%. This was, once again, driven by gains in mobile ordering and our strong delivery business. The growth in our mobile ordering business was supported by successful acquisition campaigns, which increased our total loyalty program members by approximately 10% compared to the second quarter, reaching almost $19 million. We have now increased our total members by an impressive $7 million since the start of the year. We have also been hard at work at an exciting new strategic partnership with Google, which we believe will allow us to tap into the capabilities of a world-class technology company to drive growth. We expect this engagement will drive innovation around our one-to-one activation with customers and deliver better business analytics to drive enhanced insights. We'll also be focused on improving our in-restaurant environment by finding ways to remove friction from our customer and crew experiences. This type of innovative growth driving partnership is exactly what the technology fee was designed to enable. We remain fully committed to our digital journey and expect continued growth in 2021 and for years to come. Our development momentum continued as we delivered significant growth across the globe, reaching almost 50 new restaurant openings in the quarter. I am also pleased to share that our development agreement with REEF is off to a great start with locations now open across the U.S., Canada and the U.K. As I shared earlier, we are extremely excited about the consumer response to our expansion into the United Kingdom, which drove better-than-expected sales in these new restaurants during the third quarter.

We've now opened several restaurants in the U.K. since the second quarter and we are in the process of bringing additional franchise partners into the family in the near future, which we are extremely excited about. We anticipate having 10 restaurants open by the end of the year which is incredible given that we just opened our first location in June. We have also added to our new restaurant commitments with several groundbreaker development agreements in some of our international markets, further solidifying our path toward our long-term unit growth goal. We remain on track to reach approximately 7,000 restaurants by the end of 2021 as we continue to navigate through a challenging supply chain environment. Our development foundation is extremely strong and we have a robust pipeline of almost 200 potential franchisee, which gives us confidence that we'll reach our goal of 8,500 to 9,000 global restaurants by the end of 2025. Our playbook of investing to drive accelerated growth behind our three long-term pillars to build our breakfast daypart, drive our digital business and expand our footprint across the globe remains the same, and we continue to make meaningful progress. Our continued growth and success would not be possible without the partnership we have with our franchisees, who we believe are the best in the business. We recently received the 2021 Franchise Business Review survey, resulting in another year of Wendy's exceeding industry benchmarks and also paced ahead of our results from 2019. I am particularly pleased with our ratings on overall satisfaction and financial opportunity, which were more than five percentage points ahead of the industry benchmark. We also achieved strong scores on our clear vision and ability to drive the system forward, highlighting our ongoing alignment behind our strategic priorities. Despite the challenges of a global pandemic, over 90% of our franchisees would make the decision to invest in Wendy's again an increase versus our 2019 results, which we are very proud of. These results highlight how our strong franchise relationships have been a differentiator for the Wendy's brand. Through this partnership and the dedication of our restaurant crews and support center teams, we will continue our march toward achieving our vision of becoming the world's most striving and beloved restaurant brand.

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

Gunther Plosch -- Chief Financial Officer

Thanks, Todd. We are pleased with our third quarter results, which delivered against our financial formula as an accelerated, efficient growth company by growing same-restaurant sales and expanding our global footprint, which translated into significant free cash flows. Our global systemwide sales grew 5.3%, and our same-restaurant sales growth was a very strong 9.4% on a two-year basis. This was driven by the outstanding results in our international business and continued growth in our U.S. business. As Todd mentioned earlier on the call, our U.S. same restaurant sales in quarter three were impacted by macroeconomic challenges. Without these impacts, we believe our U.S. same-restaurant sales results would have been generally in line with our expectations for the quarter. Year-over-year company restaurant margin decreased 250 basis points driven by higher than expected labor rate inflation of almost 9.5%, commodity inflation of almost 3%, lower local advertising spend in the prior year and customer count declines. These were partially offset by the benefit of a higher average check. The increase in G&A was driven by higher incentive and stock compensation expense as a result of our strong financial performance in 2021 that continues to pace well ahead of our initial plan, higher technology costs primarily related to our ERP implementation and increased travel expenses. Adjusted EBITDA decreased approximately 5.5% to $112 million, primarily as a result of higher general and administrative expense and a decrease in company-operated restaurant margin. These decreases were partially offset by higher franchise royalty revenue and an increase in net franchise fees. Adjusted earnings per share was flat to the prior year, driven by lower adjusted EBITDA, offset by a decrease in interest and depreciation expense. Finally, our free cash flow increased significantly to approximately $274 million year-to-date.

The increase resulted primarily from higher net income, the timing of receipt of franchisee rental payments and the timing of accrued compensation payments. Before we turn to our outlook, I want to quickly highlight our strong year-to-date results through the third quarter, which continue to pace well ahead of our initial plan for 2021. Our year-to-date global systemwide sales grew 13.2%, and we achieved an impressive two-year global same-restaurant sales growth of approximately 11%. Our year-to-date company-operated restaurant margin has reached almost 17.5%, 350 basis points higher than 2020, driven by sales leverage, which has more than offset headwinds from higher labor and commodity costs. Finally, year-to-date adjusted EBITDA is up approximately 19% versus 2020, primarily driven by our strong sales and company-operated restaurant margin expansion. We continue to expect very strong results in 2021. However, due to the previously mentioned impact we are facing, in addition to being late in the year, we are tightening our outlook ranges across some of our metrics. We now expect full year systemwide sales growth of 11% to 12%. This, in turn, flows through and tightens our expected ranges for adjusted EBITDA and adjusted EPS to $465 million to $470 million and $0.79 to $0.80 respectively. Our adjusted EBITDA outlook is also impacted by our company-operated restaurant margin which we now expect to be approximately 16% to 16.5%. This change in restaurant margin is being driven by the tightening of our sales outlook range and an increase in commodity and labor rates, which we are now expecting to be inflationary approximately 4% and 7% to 8%, respectively. This is being offset by a decrease in G&A to approximately $235 million to $240 million and higher net franchise fees as a result of additional franchise transactions that are expected to close in the fourth quarter. Finally, we are holding our free cash flow at $270 million to $280 million as a reduction in our capital expenditure outlook is offsetting our updated adjusted EBITDA outlook range.

The favorability in capital expenditures is being driven by supply chain challenges, which we believe to be transitory in nature. To close, I would like to highlight our capital allocation policy, which remains unchanged. Our first priority remains investing in profitable growth. We are continuing to showcase this through the investments we are making across our three strategic growth pillars. Today, we announced the declaration of our fourth quarter dividend of $0.12 per share, which are aligned with our capital allocation policy to sustain an attractive dividend payout ratio of more than 50%. Lastly, we plan to utilize excess cash to repurchase shares and reduce debt. We announced today that we have added $80 million to our existing share repurchase authorization to a total of $300 million. With this increased authorization, we are planning to launch a $125 million accelerated share repurchase program in the fourth quarter. As a result of the above actions, we now expect to return approximately $350 million to shareholders by year-end through a combination of dividends and share repurchases. We are fully committed to continue delivering our simple, yet powerful formula. We are an accelerated, efficient growth company that is investing in our strategic pillars and driving strong 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 and Corporate Financial planning and analysis

Thanks, GP. We are excited to announce that we will be hosting a virtual Investor Day on March 10, 2022. During the event, we are planning to provide an update on our long-term strategic vision, reintroduce our long-term outlook and issue our outlook for 2022. The event will be available to all interested parties via webcast from our Investor Relations website at irwendys.com. In advance of the event, we plan to pre-release our fourth quarter and full year earnings on February 10, 2022. We will also host a conference call that same day to review those results. Now turning to our fourth quarter investor outreach events. To start things off, we will be hosting an investor call on November 12 with Truist. This will be followed by a two-day NDR with the first leg in Chicago with Credit Suisse on November 16, and the second in Boston with BMO on November 17. We will follow this up with an NDR in New York with Cowen on November 30 and then head to Nashville on December one for the Stephens conference. We will then hold a virtual NDR focused on the West Coast hosted by Goldman Sachs on December 9, and we'll round things out with a virtual headquarter visit with Deutsche Bank on December 14. If you're interested in joining us at any of these events, please contact the respective sell-side analyst or equity sales contact at the host firm. As we transition into our Q&A section, I wanted to remind everyone on the call that due to the high number of covering analysts, we will, once again, be limiting everyone to one question only.

And with that, we're ready to take your questions.

Questions and Answers:

Operator

[Operator Instructions] And your first question will come from Brian Bittner with Oppenheimer. Your line is open.

Brian Bittner -- Oppenheimer -- Analyst

Thank you. Good morning, everybody. My question is on store level profitability, both for the franchise and the company-owned footprint. Todd, on the last call, you suggested that the company has been a little more conservative over the last several years on pricing, particularly in your company-operated footprint. So the question is, does this allow you to be more aggressive to protect store-level profitability across the system as we move into '22? Or anything else that you can talk about as it relates to profit protection strategies for the system would be helpful. Thanks.

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

Yes, Brian, thanks for the question. You are right. We had been more conservative on pricing historically relative to the system, which puts us in a better spot to take some pricing, and we have started to take some of that pricing. And in fact, as we roll through the third quarter into the fourth quarter, our pricing is probably a little bit ahead of where the franchise system is today, which is a good thing to manage and offset some of the headwinds. But pricing is just one lever that will pull. We'll continue to drive our mix hard. Our major Crave lineup on the premium side continues to do very well, and we'll continue to bring news and support trading consumers up across our menu. If you think about four for $4 plays a role, the $5 Biggie Bags, a nice trade-up to continue to drive margin and really pushing our digital strategy hard, with the delivery business continuing to be strong even with mobility coming back this average techs up 40% to 50%, mobile ordering picking up, that checks up 15% to 20%. All of those things help us to manage the margin, especially with the consumer being a little more healthy today.

Brian Bittner -- Oppenheimer -- Analyst

Thanks.

Operator

Your next question will come from Andrew Charles with Cowen. Your line is open.

Andrew Charles -- Cowen -- Analyst

Great, thanks. I want to talk a little bit about the two-year performance from 2Q to 3Q. You called out some macro headwinds. And I'm just curious within that. How much did staffing challenges weigh in your quarter, whether you look at it from the perspective of slowing service times that we're seeing across the industry or impacting operating hours? And maybe just more within your control. Do you think you need more balanced level of advertising across dayparts that currently skews perhaps a little heavier on breakfast to help accelerate sales at lunch and dinner? Thanks.

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

Let me start with staffing. So when you think about the staffing challenges that we all experience in the industry, in the third quarter. It did create inconsistency on ours. We had more dining rooms closed during the third quarter on average than we did during the second quarter. The second quarter, we said 95% of our dining rooms are open. We're only 85% in the third quarter. That does put pressure on our digital business. When you think about mobile grab and go, you think about delivery folks coming into the restaurant. You think about throughput that happens on -- in the drive-thru. And you do see throughput challenges with staffing tighter. And along the way, if you see newer folks coming into the restaurant, getting trained up, those do impact throughput. The great news is we're starting to see the applicant flow pick up a little bit going into the fourth quarter, and we're starting to improve staffing a bit, but not enough to get ahead and truly where we need to be because it is tight out there, but we're working through all of those. And one of the big keys for us is to get our dining rooms open to really support taking pressure off of the drive-thru and support our digital business moving forward. On the breakfast, rest of day advertising mix, we feel really good that we've got a good balance. As we've said before, our breakfast advertising is up about 20% year-over-year. We've got the extra money that we're supporting from a company's perspective, $25 million in total. The advertising that we do on the breakfast that daypart really does halo back to the rest of the day with a strong quality message, and the folks that are trialing our breakfast are getting some very high-quality food that gets them confident in the rest of the day. So we feel like we got that balance right between what we're doing on the breakfast side and a nice split between value and premium on the rest of day business.

Andrew Charles -- Cowen -- Analyst

Thank you.

Operator

Your next question will come from Jeffrey Bernstein with Barclays. Your line is open.

Jeffrey Bernstein -- Barclays -- Analyst

Great, thank you very much. Just wondering if you could talk more broadly well on two fronts. One just on the competition across quick service. Just wondering if you share any incremental thoughts in terms of the most recent activity by your competitive set, primarily in the burger category. And then more broadly, whether franchisees in those discussions with franchisees, it sounds like the survey has been quite encouraging, but you mentioned the company operator has now passed franchisees from a pricing standpoint. Just wondering franchisees' desire to reaccelerate pricing? Or is this a concern of pricing them out of the category? Thank you.

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

Yes. From a competitive perspective, it's always competitive. And it's probably no more or no less competitive than it has been historically. We do see a lot of things happening across our category to continue to drive customers in and get folks out is routine -- are not what they used to be. Mobility is back, but the routines are just a little bit different. We expect that will continue for quite some time. We work for share of stomach across our category. On our franchise front, we will continue to partner with them to be smart on pricing. We've got a pricing analytics team that works well with our system to make sure that where we need to take pricing, we take smart pricing. And our biggest opportunity is to continue to drive throughput and drive our digital business hard moving into the future. GP, any other thoughts on that?

Gunther Plosch -- Chief Financial Officer

Yes. I think you said it well. I would also add out our real performance metrics that we are watching closely are very good. right? We gained dollar share in the burger category. So it tells us we are competing with our programs. And as we also said in the prepared remarks, we're winning in breakfast. We are now the number three player, and we gained traffic share again in the morning meal burger category. So overall, we are happy with how we are competing and the marketing mix that we're putting out there.

Jeffrey Bernstein -- Barclays -- Analyst

Thank you.

Operator

Our next question will come from John Ivankoe with JPMorgan.

John Ivankoe -- JPMorgan -- Analyst

Hi, thank you. I wanted to talk about the Google partnership. And I guess, I'll ask the question directly. I mean what makes it, I guess, a partnership versus you being a customer of Google. And I just wanted to understand what may be exclusive to Wendy's that you might get from them relative to the industry, obviously, you're kind of the ultimate kind of data provider. But where do you see the Wendy's brand taking advantage, at least in the near term, where others cannot be based on that relationship?

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

Great, great question, right? I mean it's really a strategic partnership. We are really very happy that such a heavy weight in the technology world is willing to partner with us. To be clear, we have a lot of other partners. They are more the vendor relationship. This is really a strategic partnership. They are putting the best foot forward to help us in various areas, right? It's definitely on the digital side and really helping us with the one-to-one customer activation that they have several very proprietary products that will help us on that front. They are very strong business analytics. So we are definitely going to use their platforms on it. And we really think they can help us on restaurant support and help us really remove friction for us, with our crew members and our customers. So it's a level up over -- for general vendor relationship, it's really strategic. It is a multiyear commitment that we have made and they have made. And as a result of it, we think we are getting a good -- it's a win-win situation, we will get a great return out of the partnership ad they will as well.

John Ivankoe -- JPMorgan -- Analyst

Thank you.

Operator

And your next question will come from Chris Carril with RBC Capital Markets. Your line is open.

Chris Carril -- RBC Capital Markets -- Analyst

Hi, good morning. You noted some encouraging data points around breakfast, including category breakfast share. You did note that you expect breakfast growth though, of 20% to 30%, I think, versus the prior expectation of 30% for this year. So in the context of that, can you talk a little bit more about your investment behind breakfast? I think you said you remain committed to the investment of $25 million in advertising this year. But did note that mobility does remain impacted. So curious if you could just kind of reconcile these two factors and how you're thinking about breakfast support for the remainder of this year and then into next year? Thanks.

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

Yes, it's been nice to see the momentum as our mix continues to pick up and exiting at the end of the third quarter at 7.5% of breakfast mix is very encouraging, very committed to continue to keep our awareness levels high with the incremental advertising spend that we had into this year. And we've always said was a three-year journey to really drive awareness and ingrain the habit. And we're working through that in a more challenging environment because the breakfast daypart has been the slowest to recover back to 2019 levels. But it is coming back, and we want to stay ahead of that curve. What we're really excited about on breakfast is our awareness is high. Our awareness is at the levels of where Burger King is at, and they've been in breakfast business for a long time. And our repeat is really strong. So if we can get trial to happen, we can help to get a lot of repeat which will help ingrain the habit moving forward. you saw that through the course of the third quarter with $1.99 croissant, two for $4 croissant. And you're seeing that with the support that we have out there with $1 breakfast biscuit right now, which is driving a lot of trial into our restaurant because we really feel confident that the we will be there. That's all support with what we have in the restaurant today. We're trying to be fast, we're trying to be accurate. We're creating the highest customer satisfaction during that daypart in our restaurant today. And as we look forward to next year, it will give us an opportunity to finally start to innovate to bring some news to the category with the support and success we've had to bring our franchise system along for that journey.

Operator

Your next question will come from Jeff Farmer with Gordon Haskett. Your line is open.

Jeff Farmer -- Gordon Haskett -- Analyst

Thanks, good morning. I just wanted to follow up on pricing. I believe on the last call, you mentioned that your menu pricing, at least for the company restaurants was roughly in line with food away from home inflation. I think on the limited service side, food away from home inflation was pushed at almost 7% in the Q3. So is that a fair way to think about the menu pricing level that you have with the company-owned restaurants right now, something close to 6% to 7%?

Gunther Plosch -- Chief Financial Officer

Good morning Jeff, the numbers we are tracking is food away from home inflation at tracks around 4.5%, 4.7%. And we are about in line with that -- with those kind of pricing levels. As Todd mentioned in I think the Q&A is we're obviously watching the best economic model very strongly Pricing is a lever we pull. And then we have pulled the pricing lever in our company restaurants in the fourth quarter already.

Jeff Farmer -- Gordon Haskett -- Analyst

Thank you.

Operator

Your next question will come from Alton Stump with Loop Capital.

Alton Stump -- Loop Capital -- Analyst

Okay, thank you and good morning. Just wanted to ask about the Bacon Cheddar Cheeseburger launch. It certainly seems to be, if not your most differentiated sort of one of the more differentiated products that you've done by Made to Crave so far. Just how much the feedback was on that and how -- if they're in comparison to other offerings that you've introduced on Made to Crave in the past?

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

Yes, we brought some really unique and creative news to the category in our premium side to really drive ownership in that Made to Crave arena and consumers start to expect when you want a high-quality premium differentiated hamburger and affordable pricing can come to Wendy's, and we're very pleased with the performance of that particular offering during the third quarter. And in fact, it really helped lever and drive our mix to its highest levels that we've seen across our total major Crave lineup, which includes both hamburgers and chicken. So we feel good about that, and we'll continue to play that game and it's a nice mix lever and a nice high-level customer satisfaction lever with the high-quality food to allow folks to get something they can only get out of Wendy's.

Operator

Your next question will come from Jared Garber with Goldman Sachs. Your line is open.

Jared Garber -- Goldman Sachs -- Analyst

Hi, thank you for the question. I wanted to circle back on the breakfast business and certainly encouraging that you're taking some share there. But wanted to get a sense of why you think maybe the trial is such a -- maybe more of a challenge? Obviously, it sounds like the repeat business is pretty good, but wanted to get a sense of why you think trial might still be a little bit more challenging here given the level of promotions that we've seen and that incremental advertising spend and I guess, how you kind of square that up with? Is it just improving mobility patterns that need to kind of play out for you to kind of ratchet that number up? Or is there something maybe that we're missing sort of under the hood that is driving that trial challenge? Thanks.

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

I really think it's the latter that you just said, Jared, that we need to continue to get mobility back in the morning daypart and get folks into what their more normal routines will be. As we've said in the past, and we're still seeing it. We're starting to see a little more mix in the breakfast daypart between that 7:00 to 9:00 window, but our two biggest half hours are still the last two half hours 9:30 to 10:00 and 10:00 to 10:30 so folks are eating breakfast lot as a late morning snack and starting to slowly shift into an earlier morning routine. And that's why the breakfast day part has been a little slower to recover relative to rest of the day. But we're really optimistic that, that will continue to come back. And as we've got news out there around good promoted price points on offers, the dollar buck biscuit is clearly a reason to create a routine to get out of the house early in the morning on the way to trial the food. We're confident that, that will help us continue to build our breakfast daypart moving forward for this year. And then we'll start to look at what news can we bring that continue to keep excitement against the category of -- for Wendy's to make sure that we're top of mind and in people through teams moving forward.

Jared Garber -- Goldman Sachs -- Analyst

Great. That's helpful. And could you just update us on the active loyalty membership. It sounds like the overall loyalty program grows. Just want to get a sense of whether it's active loyalty members. Has that level grown over the last quarter or so? I think those levels have remained generally flat. I just want to get a sense of where that's tracking particularly as it relates to one of your large competitors launching a loyalty program a couple of months ago.

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

Good question. We're a little bit north of three million active users. We like what we see in our loyalty program. We are still seeing high average check. We are seeing higher frequency. And obviously, the key job for us is to actually make that pool of people better, right? We're making a good job in terms of having now 19 with the next user in the database. How do we get them more active? We are definitely excited about our Google partnership. They're definitely trying to drive innovation for us around one-to-one activation. It's one of the reasons why we signed the agreement for them. So I think the future is tied for our loyalty program.

Jared Garber -- Goldman Sachs -- Analyst

Great, thank you.

Operator

Your next question will come from Dennis Geiger with UBS.

Dennis Geiger -- UBS -- Analyst

Great, thank you. Just wondering if you could come back to the core lunch and dinner daypart and just talking a little bit more about the drivers from here. Todd, maybe if you could touch a bit more on sort of some of those biggest contributors looking ahead if it's the menu innovation or the renovation with the fries, the digital loyalty, maybe the dining rooms reopening, the staffing improving again going forward. I don't know how big the opportunity from here is on throughput and service fee. But just kind of speaking a little bit high level a bit more to some of those key contributors to lunch and dinner from here would be great. Thank you.

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

I think there are several drivers. I think first and foremost, it does start with speed as we get stepped up a little bit better and continue to drive throughput and really lean into getting all those dining rooms open, really leverage mobile grab and go, really leverage curbside allow us to take some pressure off of those big drive-through lines. I think all of those things will help drive our business moving forward just on a core operational metric perspective. And I think that's where the consumer wants to go. They expect speed, convenience and affordability from Wendy's, and we want to continue to deliver that on that and differentiate with quality. So if you think about the drivers moving forward, clearly, a lot of opportunity ahead of us on the breakfast day part, and that's why we're driving so hard on trial. Above all else, we're not forgetting about the quality messaging on the rest of the day business that we have out there. And that's why you see us continue to innovate in Made to Crave on -- you see the innovation on french fries. They are hotter and crispier and preferred 2:1 to our lead competitor. And in fact, we're very excited about those plans in place for the rest of the year. Behind the success of the fry innovation and all the trial behind the dollar breakfast biscuits, we are presently pacing ahead of our internal expectations for start of the quarter. So we're feeling good that these things are resonating for the consumer. And as we have applicant pool picking up, staffing getting better, those are things that can continue to help drive our business for the rest of the year. On the staffing front, the one last comment I'll make is our late night business has been very good, but it's a big opportunity to be even better because we do have inconsistency of hours with labor today at that daypart. And that's a big growing area where we think there's a lot of opportunity when we get ourselves staffed in those hours open.

Dennis Geiger -- UBS -- Analyst

Thank you.

Operator

Next question will come from Brett Levy with MKM Partners. Your line is open.

Brett Levy -- MKM Partners -- Analyst

Great, thanks for taking the call. And just following up on your last comment on the inconsistent hours and labor issues. How would you say you are positioned right now? I know you said 95% to 85% dining rooms. If you look around the country, how are you seeing pockets of improvement? What do you think you -- where do you think you're still the most efficient in terms of labor? And how should we think about your commodity position right now in terms of what's locked as we move into '22? How you're thinking about the basket for next year? And what that might do to your menu plans? Thanks.

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

On the labor front, I'd turn it over to commodities for GP. As we look at staffing company restaurants, franchise restaurants, there's no clear pattern where you're understaffed overstaffed. When you look at the regionality across the country you got good pockets by pockets, but not a particular area of the country, that's in a different perspective than the rest of the country. And the focus is really on how do we continue to invest in those people, pay benefits and really set them up for success with some quality training as we bring new folks on, how do we continue to recognize and reward the folks for the great job that they're doing in our restaurants day in and day out, and how do we stay focused on making more fun and energizing to work. So there is the word about that this is a great place to work and bring folks in, and there's opportunity to grow in our restaurant business. And the trend is our friend. We're starting to see staffing improve but still not to the level that we need it to be to really drive all the opportunity that's out there in front of us. And that's going to take a little bit of time because that labor market is not going to snap back overnight. We'll see pockets of pressure, but we'll continue to push to do the right things to make sure that our restaurants are properly staffed. And you're seeing that in some of the labor inflation that GP commented on earlier, it's just costing a little bit more, but there's a good return on that investment in our people because we can drive a great customer experience and drive a lot more business because there's a lot more business to be had. On the commodity front, GP, I'll let you comment.

Gunther Plosch -- Chief Financial Officer

So on your question on there, as you know, we have adjusted our restaurant margin for this year down to about 16% to 16.5%. It's really on the heels of inflation, right? We had previously thought that our commodity inflation would be 2% to 3%. We're ending up dealing with 4% which mainly was beef and some distribution cost. On the labor front, we thought, it would be 5% to 6% inflation. We're actually dealing now with about 7% to 8% inflation. Overall, we are super proud of our restaurant teams, 6% to 6.5% is significantly up in profitability versus prior year and actually even afterwards with these pre-COVID levels. I'm sure your next question is going to be so what is the margin outlook for next year? We're not quite ready to give that outlook but we definitely can leave you with the following picture. First of all, we definitely are expecting elevated labor inflation and commodity inflation for next year. So we are planning for that. We're going to outgrow the inflation combined with pricing and cost containment actions like design to value. We see no reason why our margin for 2022 shouldn't be in line and back to pre-COVID levels that we had in 2019.

Brett Levy -- MKM Partners -- Analyst

Thank you.

Operator

Your next question will come from Nicole Miller with Piper Sandler. Your line is open.

Nicole Miller -- Piper Sandler -- Analyst

Good morning. Thank you. I wanted to ask about price and store level margin. And the question is not that you would take as much price as might be needed. But how much price is needed in the current environment to hold margin as a steady state? And what is the underlying ideal steady state store-level margin?

Gunther Plosch -- Chief Financial Officer

Good morning, Nicole. Yes, from a pricing point of view, we believe that pricing in line with food away for home inflation is probably the right spot for us. We're definitely watching competitive actions in the respective trade areas. And our pricing is pretty sophisticated. When we talk about price increases, not broad pricing changes across the whole menu. We have price elastic items and price inelastic items, and we are kind of operating in that environment. And as I just said in the answer to the previous question, even with elevated inflation levels that we are expecting in next year, we see no reason why we shouldn't be hovering around the same margin levels we had in a pre-COVID world.

Operator

Your next question will come from Brian Mullan with Deutsche Bank. Your line is open.

Brian Mullan -- Deutsche Bank -- Analyst

Hi, thank you. Just a question on development. Wondering if you could discuss your current expectations for the components of net unit growth next year. In commentary you've made in the past suggested 3% global net unit growth, that was prior to the REEF announcement. So can you just give us your current thinking possibly split out between traditional U.S. international and then just expectations for REEF next year? That would be great.

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

Good morning, Brian. Just to ground us in 2021, we're expecting 2% plus growth and achieving about 7,000 restaurants year-end restaurant count, about 1% growth in the U.S. and 10% plus in international. Because of the new agreement we made with REEF that adds 700 units over the next five years plus a very successful groundbreaker 2.0 initiatives that had us at 240-plus incremental development agreements and the launch of [Indecipherable] fund, there is about 80 to 90 units, all of that had us increase our unit growth outlook by about 500 to 1,000 units to 8,500 to 9,000 units. From a CAGR point of view, that is about a 5.5% to 6% growth rate. You can expect for 2022, what I would call a vertical start-up in growth. So you would expect a 5% to 6% growth rate next year. And the majority of that is driven by REEF since the 700 units could be evenly split across all years. As we said in the prepared remarks, they start with our relationship with REEF positive. We have review it in place now in all the three countries that we have signed agreements for.

Brian Mullan -- Deutsche Bank -- Analyst

Thank you.

Operator

Your next question will come from Jon Tower with Wells Fargo.

Jon Tower -- Wells Fargo -- Analyst

Great, thanks for taking the question. Many have already been answered. But I was curious just kind of going back to the pricing and pricing environment and frankly, the inflation that's driving -- running across the industry. How do you plan on keeping the value message front and center for the consumer next year? I mean, are we thinking about using digital channels, specifically the loyalty platform as an effective discounting mechanism relative to the past? And in that context, it sounds like the loyalty active membership remained kind of flattish quarter-over-quarter. So how do you plan on driving greater frequency within that cohort going forward?

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

I think there's a couple of things. One, we do have a really strong value proposition on the menu today with four for $4 and with $5 Biggie Bag. So we do have an opportunity to really play hard on the value side, with a proposition that works for the consumer but also works for the restaurant economic model. On the other side of the equation, I do think as we continue to bring more folks into our loyalty program, as we continue to do more data analytic work, a little more one-to-one communication, the opportunity to better connect and drive some deals and drive more active users into the mobile space is a big opportunity moving forward as well as the offers that we'll continue to do within the app to drive more folks into the loyalty program and to drive them to become more active into the future. So I think those are the two big levers that we have to continue to drive a lot of value across our menu. And you did see us do things like buy one, get one for $1, which also drives some value in the minds of the consumer during the third quarter. So those are all tools that are out there in the toolbox.

Operator

Your next question will come from James Sanderson with Northcoast. Your line is open.

James Sanderson -- Northcoast -- Analyst

Thanks for the question. I wanted to dig into the breakfast daypart a little bit more. I think in the past, you had mentioned that some more mature markets had already achieved 10% or more of daypart sales mix. Have those markets maintained or grew their share with the increased promotional activity you have in the marketplace? And have we seen any pickup in the average visits per year in the daypart? Thank you.

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

James, great question. And for our legacy restaurants, those that had breakfast free, the new menu that we've created across breakfast. They continue to do quite well. They're mixing 10% plus. They continue to grow the mix in the breakfast daypart in their average weekly volumes continue to grow nicely. And they -- because they already have high awareness and a lot of folks in the team, those folks start to become a little more frequent and you start to acquire new users. So it's very encouraging when we start to see how those businesses perform. And that's why we've always said it's a several year journey to a grain to have it and really get folks to become breakfast loyalists along the way. But we do see that it's a very encouraging sign for the rest of the system. And with success like we have in those legacy restaurants, those folks are always looking for what's the next level of growth, and that's where we get the push on how to innovate? You innovate on food, you innovate into the beverage space. The great news is we're actually getting that whole now from consumers or from franchisees to start to invest more to drive even more growth in the breakfast daypart. And if you recall, we had to start to make it very simple, make it very fast, low labor model, low investment model to prove the success. And now that we've proven we can be successful in breakfast as we move forward into 2022, 2023, we can start to invest in more growth driving opportunities into the future.

James Sanderson -- Northcoast -- Analyst

A quick follow-up is -- are the average visits up as well from the 6.5? Are they starting to pick up?

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

We haven't updated the frequency data. So what we've talked about, we were at about 5.5 visits per year to Wendy's prior. We're a little over 6.5 now. So a nice 20% increase that was through this year. We'll update that more on an annual basis. I'm sure we'll have some more insight on that as we go into Investor Day early next year but that trend is nice. And that trend is certainly helping us not just with breakfast helping to drive more frequency, but all the work we're doing on rest of day in digital, too. So they're all playing a role.

James Sanderson -- Northcoast -- Analyst

Thank you very much.

Operator

Next question will come from Chris O'Cull with Stifel. Your line is open.

Ali Castrol -- Stifel -- Analyst

Thanks, good morning guys. This is Ali Castrol on for Chris. I just wanted to follow up on development. Getting the 7,000 units by year-end implies a pretty strong fourth quarter. I was hoping you could provide some additional color around what's driving that expected strength? Is it just a timing shift in this quarter? And then how is the system balancing that with maybe some difficulties in either equipment sourcing or construction labor availability? Thanks.

Gunther Plosch -- Chief Financial Officer

Good morning. Yes, we are very proud of our development progress in the third quarter. We opened kind of 50 restaurants. And you're right. There is a good amount of restaurants still to come to reach the 7,000 the number. The only thing I can tell you our confidence is high. 90% or so of all these restaurants that need to be built to get to the 7,000 numbers are under construction. Are we managing this tightly? Absolutely. We are hearing about labor shortages and supply chain challenges in the construction industry as well. Could then shift around a little bit? Maybe, but again, 90% of the restaurants are under construction. You might be wondering what's the remaining 10%, well the remaining 10% is nontraditional units, REEF and others that obviously have super fast construction types.

Operator

And our last question will come from James Rutherford with Stephens Inc. Your line is open.

James Rutherford -- Stephens Inc -- Analyst

Hi, thanks for getting me in. I just wanted to come back to the breakfast discussion. Todd, I thought it was interesting you mentioned earlier in the Q&A that the customers are tending to use the breakfast business a little bit more as a late morning snack as opposed to that early morning kind of on the way to work through team. I was curious -- and I know that coffee is a key element to driving that early on routine. Your food quality differentiation is very clear with breakfast, but I haven't heard as much discussion on the performance within the beverage side of the menu. Just curious if you could comment on what feedback you've heard from consumers on your breakfast beverage lineup. And how important that piece of the menu is in terms of future innovation and the overall importance of driving those early morning routines to Wendy's.

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

Yes, great question. As we start to look at opportunity, we do think there's an opportunity to drive the beverage strategy even harder, especially as folks get into the morning routine and really think about using the restaurant on the way to work in the morning. We have a very good coffee in the restaurant and did a lot of work on it before the launch. It's like anything. You need to have coffee prepared fresh and you got to have it ready when the customers are coming and getting more and more business earlier in the day will certainly help reinforce the quality of the coffee offering we have. We've got some great unique items that are good price value when you think about the ice side with frosty Geno. So we'll continue to drive awareness and trial on that. And the CSD business, when you think about how many folks are having a soda in the morning, us having the variety with the core sales in our restaurants certainly helps, too. All that said, as we continue to ingrain the habit drive the business, we did do things simple, fast fall on the middle to really drive the economics and adoption early. We do think that's an area where we can continue to lean in and innovate for many years to come, and that's not going to happen overnight, but we're going to do it smartly, we'll do it along the way and really complement is why you want to come to Wendy's on the way to your morning destination day in and day out.

James Rutherford -- Stephens Inc -- Analyst

Thanks very much. Great.

Greg Lemenchick -- Senior Director Investor Relations and Corporate Financial planning and analysis

Thank you, James. That was our last question of the call. Thank you, Todd and GP, and thank you, everyone, for participating this morning. We look forward to speaking with you again in our fourth quarter and full year earnings call in February, ahead of our Investor Day. Have a great day. You may now disconnect.

Operator

[Operator Closing Remarks]

Duration: 56 minutes

Call participants:

Greg Lemenchick -- Senior Director Investor Relations and Corporate Financial planning and analysis

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

Gunther Plosch -- Chief Financial Officer

Brian Bittner -- Oppenheimer -- Analyst

Andrew Charles -- Cowen -- Analyst

Jeffrey Bernstein -- Barclays -- Analyst

John Ivankoe -- JPMorgan -- Analyst

Chris Carril -- RBC Capital Markets -- Analyst

Jeff Farmer -- Gordon Haskett -- Analyst

Alton Stump -- Loop Capital -- Analyst

Jared Garber -- Goldman Sachs -- Analyst

Dennis Geiger -- UBS -- Analyst

Brett Levy -- MKM Partners -- Analyst

Nicole Miller -- Piper Sandler -- Analyst

Brian Mullan -- Deutsche Bank -- Analyst

Jon Tower -- Wells Fargo -- Analyst

James Sanderson -- Northcoast -- Analyst

Ali Castrol -- Stifel -- Analyst

James Rutherford -- Stephens Inc -- Analyst

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