Founded in 1994 in Garland, Texas, Wingstop Inc. is an American fast casual restaurant chain that has primarily focused its business on a single addictive menu item – chicken wings.
After initially franchising in 1997, Wingstop’s wing-centric concept has powered its expansion to over 2,279 restaurants across the United States and around the world as of Q1 2024. Recognising the brand’s powerful traction, Wingstop went public in 2015 and trades on the NASDAQ under the ticker symbol WING.
In the fiercely competitive restaurant landscape, Wingstop has carved out a differentiated niche by centring its entire concept around made-to-order wings tossed in an array of signature sauces like Original Hot, Atomic, Lemon Pepper, and Mango Habanero. The chain’s focused strategy is establishing itself as the go-to destination for chicken wings.
The simplicity of Wingstop’s wings-and-fries menu allows for streamlined operations optimised for efficiently battering, frying, saucing, and swiftly getting piping hot chicken wings out to customers, whether through quick service dine-in, taking out, or delivery.
Best-in-class unit economics
While many restaurant chains have struggled with inflationary pressures and sluggish consumer spending, Wingstop continues to defy the sluggish industry trends. The Texas-based chicken wing chain reported a blowout fiscal first quarter 2024 results that sent its stock soaring to new heights.
Wingstop’s total revenue surged 34% year-over-year to US$145.79 million, easily topping Wall Street’s projections. The company achieved an impressive 21.6% increase in domestic same-store sales for Q1 2024, starkly contrasting the negative or low single-digit same-store sales reported by many casual dining and fast-food peers. The impressive performance was primarily driven by an increase in transaction growth.
One key driver of Wingstop’s success has been its ability to cater to budget-conscious and premium consumers with its differentiated wings-focused concept. Wingstop has retained premium price points and record-high quality scores by emphasising the made-to-order nature and flavours of its signature wings and sauces. At the same time, the shareable value offering of wings, fries, and drinks hits the sweet spot for cost-conscious diners.
The strength was further evidenced by Wingstop’s first US$1 billion quarterly system-wide sales milestone. (System-wide sales refer to the total sales generated across the entire Wingstop system, including both franchise and company-owned stores.)
Average unit volumes (AUVs) also continued climbing, now exceeding US$1.9 million per restaurant annually. This top-line performance has translated to robust profitability for franchisees, with industry-leading unlevered cash-on-cash returns of over 70%. This meansfranchisees typically make back their investment in less than two years.
International expansion
In addition to the standout domestic results, Wingstop’s international business is another channel for growth. AUVs have soared to over US$2.5 million in the key UK market. This stellar performance has prompted Wingstop’s UK franchisee partner to accelerate development, rapidly expanding to over 40 locations.
Newer international markets like Canada, Puerto Rico, and South Korea follow a similar rapid growth trajectory as the UK business. These emerging markets are achieving record-breaking sales weeks as they swiftly build brand awareness, which management believes is on a curve paralleling the UK’s success.
As CEO Michael Skipworth highlighted on the Q1 2024 earnings call:
There is a massive runway for growth internationally, with immense white space and brand awareness opportunity across the globe as consumers have the opportunity to experience our flavor for the first time.
To capitalise on this powerful international momentum, Wingstop has increased its fiscal 2024 outlook for net new restaurant openings to a range of 275 to 295 globally, up from the prior guidance of approximately 270 net openings. The company expects its rapid international footprint expansion to contribute to total unit growth at a similar ratio as 2023’s levels.
With expanding unit economics, a global development pipeline, and accelerating unit growth, Wingstop’s international business appears well-positioned as a growth engine propelling the company toward its vision of becoming a top 10 global restaurant brand.
Navigating commodity costs
Wingstop’s handling of volatile chicken wing prices is critical to its financial performance. Raw chicken wing costs have long been a major headache for the wing-focused chain, with wild swings impacting profitability. in 2021, Wingstop introduced chicken thighs to its menu to diversify ingredient costs.
In 2022, the company introduced a line of premium chicken sandwiches aimed at boosting sales of boneless chicken tenders. The sandwich lineup has been tremendously successful, with tender sales increasing by nearly 50% year-over-year. Tenders now account for a low double-digit percentage of Wingstop’s overall food mix.
This product diversification has allowed Wingstop to capitalise on pricing for chicken breast meat while moderating its exposure to more volatile wing prices. The chain has effectively created a ‘built-in hedge’ against chicken costs by driving a balanced sales mix across wings, tenders, and thighs.
Sky-high valuation
Wingstop is currently trading at over 130 times earnings. Its high valuation has been a point of concern, as the company’s stock trades at a significantly higher earnings multiple compared to its peers in the restaurant industry.
This high valuation is largely driven by strong investor confidence in Wingstop’s growth prospects. However, such a lofty valuation heightens the risk for investors, as any deviation from expected performance, whether in terms of sales growth or profit margins, can lead to sharp declines in stock price. Investors need to be cautious, as the current valuation may not be sustainable if the company faces any significant operational or market challenges.
The fifth perspective
It’s no surprise that Wingstop has emerged as one of the restaurant industry’s biggest winners in 2024. Driven by strong growth and expanding unit economics, Wingstop has solidified its position as one of the most profitable and fastest-growing restaurant concepts. However, its high valuation could imply that much of the future growth is already priced in. This could make it vulnerable to market fluctuations and any potential underperformance. Investors should carefully weigh the company’s growth prospects against its current market valuation to make informed decisions.
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