How Much Higher Can Wingstop Fly?

Shares of Wingstop (NASDAQ: WING) soared to an all-time high after it posted an impressive second quarter report in early August.

The chicken wing chain's revenue rose 17% annually to $37 million during the quarter, beating estimates by about $0.2 million. Its net income surged 39% to $6.8 million, or $0.23 per share, which topped expectations by three cents. Wall Street expects its revenue and earnings to grow 44% and 15%, respectively, for the full year. Those numbers look solid, but investors might be wondering if the stock still has room to run after more than tripling since its IPO in 2015.

The key facts and figures

Wingstop finished last quarter with 1,188 systemwide restaurants, representing a 12.5% increase from a year earlier. 1,040 of those locations were owned by domestic franchisees, who pay Wingstop franchise fees and royalties. Wingstop only owns and operates 26 of its domestic stores. The remaining 122 stores are owned by international franchisees.

When Wingstop went public, some investors feared that the chain would over-expand and use new store openings to drive its sales growth. However, Wingstop's domestic comps growth indicates that those new stores are still growing at a healthy rate.

Q3 2017

Q4 2017

Q1 2018

Q2 2018

Domestic Comps





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Wingstop's heavy dependence on franchised stores allows it to keep overhead costs low and expand its margins. That's why its operating margin rose from 25.9% in the prior year quarter to 26.8%. Its total cost of sales, as a percentage of company-owned restaurant sales, fell from 77.6% to 67.5%.

The tailwinds and headwinds

One of the biggest tailwinds for Wingstop is the ongoing decline in chicken wing prices, which recently hit a multi-year low. This was partly caused by McDonald's (NYSE: MCD) entrance into the chicken wing market in 2013, which caused suppliers to hoard wings.

Meanwhile, consumers reacted to higher bone-in wing prices by ordering more boneless chicken menu items instead. When McDonald's wing sales fell short of expectations, the resulting supply glut crushed wing prices.

These prices are expected to remain at cyclical lows for the foreseeable future, but a rebound could cause Wingstop's costs to rise. Labor costs, which rose 20% annually and accounted for a third of its cost of sales last quarter, could also become a headwind amid nationwide calls for higher wages.

Another major tailwind is Wingstop's lack of direct competitors. Buffalo Wild Wings is often called a competitor, but Wingstop's stores are smaller, mainly focus on takeout orders (about 75% of its sales), don't serve as much alcohol, and aren't heavily associated with sporting events.

Long-term growth opportunities

Wingstop is also investing heavily in digital sales, which accounted for 24.3% of its revenues during the second quarter. Digital customers also spend more money -- the company's average digital check is $5 higher than its overall average check of $17.

Wingstop plans to launch a new guest spacing app and website, which will be optimized for its expanding delivery platform -- which is being tested with DoorDash in Las Vegas, Chicago, and Austin. During the conference call, CEO Charlie Morrison stated that Wingstop saw "sustained mid to high single-digit sales blips" in all three test markets. Morrison stated that Wingstop was now ready to "move forward with a national rollout" of its delivery platform.

Wingstop also started using a cloud-based CRM (customer relationship management) platform to organize and analyze its customer data, and it's developing a natural voice recognition system that processes phone orders into online orders. Morrison believes that this platform could eventually help Wingstop match the delivery capabilities of pizza chains.

Lastly, Morrison reiterated Wingstop's long-term plan to open over 2,500 domestic restaurants -- which would represent 135% growth from its current store count -- and to eventually become a top ten global restaurant brand.

The valuations and verdict

Wingstop's growth prospects look bright, but the stock trades at almost 70 times next year's earnings. That multiple seems too high relative to its growth potential. For comparison, McDonald's trades at about 20 times next year's earnings.

Investors should wait for Wingstop to cool off a bit before pulling the trigger.

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Leo Sun has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.