Falling chicken wing prices didn’t give investors a rosy outlook when it comes to Wingstop.
The Dallas-based chicken wing chain on Thursday reported strong revenue and profit growth in the fourth quarter ended Dec. 30, and said that chicken wing prices have plunged since peaking in 2017.
But that didn’t keep its stock from falling 8% in morning trading on Friday, as investors were worried about the company’s outlook for 2018 unit growth, which indicated that the chain would grow by 10% this year.
That represented a modest slowdown over Wingstop’s 13.5% unit growth in 2017, and CEO Charlie Morrison on the company’s earnings call Thursday acknowledged that some operators might have slowed development last year in response to the wing cost spike.
“Any brand that deals with a nearly 700-basis-point increase in food cost year over year can expect to see franchisees start to pull back a little bit,” Morrison said on the call.
Chicken wing prices will spike from time to time, given their naturally limited supply and rising demand. For a chain like Wingstop that deals only in wings, such spikes can cause significant problems.
The wing prices led to a 680-basis-point increase in food costs at company stores.
But any slowdown is expected to be temporary. Wing prices hit records last summer, but have fallen since and continued to fall into 2018.
The company says it is now paying $1.35 a pound for chicken wings and expects wing prices to remain modest into next year.
“If you look into late 2018, 2019, there is anticipated increases in capacity among the supply chain, which will support the longer-term, favorable outlook for chicken wings,” Morrison said. “That translates into better profits for our franchisees.”
And, he said, that should help prompt more development. “All in all, we feel very good about where wing prices are right now,” he said.
Morrison emphasized the company’s economic model, which includes a relatively low build-out cost of $370,000 and strong returns, which he believes should continue to encourage operators to build more units.
“There is nothing in our business model that should concern anyone,” Morrison said. “It’s just that we know that, from time to time, we have to weather this wing commodity storm. We have done it before, and it may or may not hit us again.”
Wingstop has been one of the better performing stocks among restaurants on Wall Street over the past year. The stock has risen nearly 75% over the past 52 weeks, entering trading on Friday, as the chain’s same-store sales improved. That has probably inflated investors’ expectations.
The company’s restaurant count increased 13.5% to 1,133 global locations in 2017. Same-store sales in the fourth quarter increased 5.2%—a strong improvement from the same-store sales decline at the outset of the year.
Revenue increased 22% to $28.3 million in the quarter, while net income more than doubled to $10.5 million, or 36 cents per share.
“We overcame some of the greatest challenges that our brand has faced in its 23-year history in 2017,” Morrison said.
The company began national television advertising last year and expects to continue to do so in 2018.
It is also pushing more technology. Wingstop is eager to continue to grow digital orders, given that a typical digital order comes with an average check that is $5 higher. With nearly half of its orders still coming through the phone, Morrison said, “We believe this represents a significant opportunity for conversion to digital.”
The company has ordering through Facebook, Twitter and Amazon’s Alexa and is now on GM’s OnStar marketplace. Morrison promised that there were “several innovative technology projects underway in 2018.”
The company is taking it more slowly when it comes to delivery. The company started delivery in Las Vegas, with DoorDash, and has since expanded that test to Chicago and Austin, Texas—where delivery has lifted sales in the “mid- to high single digits.”
“We remain encouraged by what delivery can add to our brand,” Morrison said.
Yet the company is “optimizing delivery” in these markets, and approaching delivery “in a thoughtful manner.”
The company is “contemplating a market-by-market approach to rolling out delivery nationally,” beginning late this year and continuing into 2019.