Wingstop Inc., NASDAQ:WING, the American multinational chain of aviation-themed restaurants specialising in chicken wings, published its 2Q22 results on 28th July. The restaurant business topped earnings expectations as the price of chicken wings fell.
Once considered a throwaway, the humble chicken wing is now a big business. Prior to the 1960s, the chicken wing was often ground up into animal feed. It wasn’t until a restauranteur in Buffalo, NY served a plate of wings to customers with a side of blue cheese dip (as this was all she had available) that the wing started to gain popularity. Word quickly spread, and by the 1980s, the wing became a US phenomenon. Today, chicken wings make up some of the most popular fast-food orders at establishments across the globe.
One of the leading brands surfing the rise of chicken wing popularity is Wingstop, a franchise operator founded in 1994 in Dallas, Texas. Wingstop has grown to a scale of over 1,800 restaurants, with 1,588 restaurants in the US, and has become one of the most popular franchise opportunities for restaurateurs to secure, largely due to its best-in-class franchise economics (typically, franchisee investment in a restaurant has a two-year payback).
Franchise growth
Wingstop reported 2Q22 results on the 28th of July, and franchisee optimism was seen in the record-breaking pace of 67 net new restaurants opened in the quarter. This growth in units aided franchise system sales to increase 7.5% to USD633.6m. Wingstop takes a cut of franchisee sales through royalties and also charges franchisees for centrally run advertising campaigns, resulting in revenues derived for the parent of USD83.8m, up 13.2% year-on-year.
Whilst a bumper number of franchised units were added to the Wingstop line up in 2Q22, same-store sales, a measure of how each existing restaurant is performing versus the prior year, was down marginally by 3.3%. This was partly due to tough comparisons with the prior year, where the pandemic led to a surge in orders for take-out and delivery food, and the return of availability to visit other sit-down restaurants. Wingstop has an attractive long-term record of 18 years of same-store sales growth, which is a leading incentive for franchisees to open Wingstop units. With negative same-store sales growth in 2Q22, Wingstop will have its work cut out to defend this record.
Strong franchisee appetite for more Wingstop restaurants provided a relief for investors, who have been concerned over the past year that volatile input costs may have put potential franchisees off the idea of signing new unit agreements. The input cost of most concern is the ‘bone-in chicken wing’, which has experienced some of the most aggressive inflation seen across all commodities in 2021. Spurred on by pandemic-fuelled demand, chicken wing prices leapt 72% in 2021, a phenomenon worsened by the economics of chicken production (the supply of wings is secondary to the number of whole birds processed; thus, supply cannot be scaled up or down easily). However, since the start of 2022, prices are down significantly, and Wingstop noted that costs related to chicken wings are down 18% in Q2 alone. This has helped profitability at Wingstop’s centrally owned stores (only 2% of total) but will also help franchisees make healthier profit margins and shorten unit payback times.
Digitally-enabled wings
Wingstop’s latest results also showcase their continued prowess for digital engagement from their customer base. In Q2, 60.5% of orders were serviced digitally. Wingstop’s ambition is to grow digitally enabled orders to 100% of transaction volume over time as they look to leverage customer data and benefit from improved efficiency.
The long-term story for Wingstop involves adding to its store count through franchisee investment in new units. Wingstop recently upped its estimate for total units to 7,000 globally, providing plenty of runway from the current 1,858. Over the long term, the company sees up to 4,000 units in the US alone and up to 3,000 internationally. Currently, over 90% of restaurant openings are driven by existing franchisees, a strong signal that franchisees see a lucrative opportunity in expanding their own footprint. On an international scale, Wingstop is in the early innings of growth, with only 219 restaurants outside America. In the latest capital markets day, Wingstop addressed the success in one of these international markets – the UK, which has achieved restaurant average order volume of over GBP2m (higher than the US average), 22% EBITDA margins and has been named Deliveroo’s best restaurant for 2021. Success such as this highlights Wingstop’s scalable model, which will allow it to pursue international market growth.
As for outlook, Wingstop reiterated its 2022 full-year guidance in the 2Q22 earnings report. The business expects to achieve low single digit same-store sales growth, which will be its 19th consecutive year, and upgraded its forecast for net new restaurant openings to expect between 220 and 235 new restaurants in the year.
Increased leverage
In the recent capital markets update, Wingstop alluded to its intention to increase leverage for the group, which has taken place to an extent in 2Q22, with long-term debt rising from USD469m to over USD709m from the year prior. This marks management’s increased confidence in the reliability of royalty revenues and brings Wingstop closer to other franchises that use leveraged balance sheets to boost growth for example, Domino’s Pizza Inc’s balance sheet shows 5.5x net debt to EBITDA.
Wingstop is still not a cheap stock, with a valuation of 67 times earnings. But with continued success at scaling towards long-term opportunity, Wingstop will be set to generate significant value for shareholders over time.
