Why Wingstop Inc. Stock Climbed 15% in August

By Markets Fool.com

Image source: Wingstop Instagram page.

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What happened

Shares of Wingstop Inc.(NASDAQ: WING)rose 15.3% during the month of August, according to data provided byS&P Global Market Intelligence.

So what

Investors boosted the chicken wing chain's stock after its second-quarter 2016 earnings report, released on Aug. 4, revealed brisk revenue improvement of 18% over the prior year. Wingstop has posted top-line growth in the high teens for several quarters, due to its strategy of rapid unit expansion. In the second quarter, the company opened a record 41 stores, an increase of 16.2% over Q2 2015.

Domestic same-store sales of 3.1% also pleased shareholders. This may seem like a modest figure, but the quarter was up against an extremely robust comparison, after second-quarter comps hit 9% last year.

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In the second-quarter earnings release, Wingstop's management team communicated its confidence regarding the back half of the year by raising guidance for the rest of 2016. The company pushed its probable year-end revenue range up by $1 million, to between $90 million and $91 million. It also bumped up total projected unit openings by five restaurants, to a band of between 130 and 140. Finally, Wingstop disclosed a full-year range for net income, which is projected to fall between $14.2 million and $14.7 million.

Now what

August's stock appreciation drove home the sense that, so far, it's been a rewarding year to hold the stock. Shares have gained 29% to date as of mid-September, but when we include a special dividend of $2.90 per share which Wingstop paid out to shareholders in July, the company's stock has pocketed a 44% total return in 2016.

Yet Wingstop still faces similar challenges to its competitors in the sports-centered fast casual restaurant space. Comps growth for next year is projected by management to fall in the low single digits -- which doesn't leave a lot of room for error before comps turn flat or, worse, head into negative territory.

In addition, rising commodity prices in the form of higher chicken wing costs present a margin challenge. Last quarter, bone-in chicken wing costs climbed 8%, which is quite a leap on an annualized basis. Spiraling wing costs were a primary factor behind a 300-basis-point rise in cost of sales among company-operated restaurants.

Overall, investors appear confident that Wingstop can deliver ample earnings growth in the near future. Aggressive franchising, fast total unit development, and an international expansion plan, which is initially focused on wealthy Middle Eastern countries like Saudi Arabia, all point to the possibility of sustained success.But in the near term, it's not too early to anticipate the chain's third-quarter report, due out in November, to seek confirmation that Wingstop's recently adjusted full-year targets can be met.

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Asit Sharma has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.