Wingstop's next challenge: High expectations

The chicken wing chain’s system sales soared 27% last year as customers flocked to its restaurants for sandwiches and wings. But its stock price declined.
Wingstop's same-store sales rose 18.3% in 2023. | Photo: Shutterstock.

Everybody is apparently flocking to Wingstop except investors. At least on Wednesday.

The chicken wing chain reported earnings that were by any measure outstanding. Same-store sales increased 21.2%, thanks mostly to transactions. For the year, same-store sales increased 18.3%.

The company and its franchisees opened stores at a breakneck pace in the fourth quarter, opening about one location per day and finishing the year with 13% unit growth. Put those numbers together and systems sales increased 27%. Margins at company restaurants were 26% of sales.

“Not only was it an incredible year delivering a plus 18% same-store sales growth that was primarily driven by transactions,” CEO Michael Skipworth told investors on Wednesday, “but that was against an industry backdrop that, for the most part, was measuring declines in transactions.”

Investors, however, were concerned with the 6.9% growth in net income in the fourth quarter, slower growth than what the chain had boasted earlier in the year. The company’s stock declined 4% on Wednesday.

To be sure, investors have been all over Wingstop in recent years. The stock is up 80% over the past year, making it one of the top-performing restaurant stocks over that period. It has an enterprise value multiple now of 82 times EBITDA or earnings before interest, taxes, depreciation and amortization.

That kind of runup in stock comes with a side effect of high expectations. Wall Street is typically concerned with what’s going to happen, rather than what has already happened, and so 27% system sales growth isn’t enough to offset any perception of slowing profits.

Yet there’s little question Wingstop hit on all cylinders last year.

The company introduced chicken sandwiches in 2022, which helped fuel strong sales and transaction growth that carried the brand through much of 2023 and eased its reliance on chicken wings, where demand is more seasonal and where prices are more volatile.

And the company believes it can sell a lot more of its sandwich. “There’s 2.4 billion chicken sandwich occasions in the U.S. annually,” Skipworth said. “So, we think we’re just scratching the surface there.”

That sandwich gave the brand access to more types of customers. Chicken sandwich customers have higher incomes, come in more often, spend a bit more and order more boneless items. “There’s a lot of runway and additional opportunity for us to bring these new guests in and capture more occasions,” Skipworth said.

Those customers have driven sales at the chain’s restaurants. Demand for the brand is increasing in all ordering channels, executives said. And it’s driven average unit volumes (AUV) to $1.8 million, close to the company’s goal of $2 million.

That, in turn, is driving unit economics. Wingstop restaurants generate a 70% cash-on-cash return, meaning they’re paid off in less than two years. That’s driving unit count expansion, as franchisees that generate stronger returns are more likely to develop new locations.

The company had 1,400 commitments for new locations at the end of the year. Of the 255 new restaurants opened last year, 95% came from existing franchisees.

Wingstop is also unafraid of new entrants in the market. Chains like Popeyes Louisiana Kitchen are marketing and selling wings. But executives say that those entrants aren’t having an impact on their sales.

“When other brands promote wings, it’s actually a benefit to our business,” Skipworth said. “If consumers are aware of Wingstop, there’s not a decision tree when they want wings. They go to Wingstop.”

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