Wingstop Inc – December 15, 2022

Americans love their chicken wings. Opinions as to how they should be prepared and served, can be pretty polarizing, so it is little wonder Wingstop gets a bit emotional about their food. The American multinational chain of aviation-themed restaurants specializing in chicken wings says it’s not in the wing business, it’s in the flavor business. And it’s been on a mission “to serve the world flavor” since it first opened shop almost 20 years ago.

Its restaurants offer a made-to-crave and cooked-to-order menu of chicken wings, boneless wings, chicken sandwiches, and tenders that come in bold, layered flavors that touch all of the senses. Also serving up fresh-cut fries, along with various dips and sides, the chain targets people who demand flavor in everything they do, because Wingstop is “more than a meal, it’s a flavor experience”.

Now operating and franchising a global network of restaurants, the company has become the largest fast-casual chicken wings-focused restaurant chain in the world, with close to 1,900 locations worldwide.

Yet with a vision to become a top 10 global restaurant brand, it is looking to grow to more than 4,000 restaurants across the United States and more than 3,000 internationally, whilst sustaining its extensive record of sales growth and maintaining best-in-class returns.

What began as a small buffalo-style chicken wing restaurant in Texas, quickly became a fan favorite when proprietary recipes, outstanding food, and superior customer service created a demand that could only be satisfied by more locations. As a result, the first franchised Wingstop location was opened in 1997, and within five years, the chain had served the world one billion chicken wings, becoming one of the fastest-growing brands in the restaurant industry.

In 2003, Wingstop was acquired by Gemini Investors, which sold it to Roark Capital Group in 2010, before going public in 2015. Yet despite the changes in ownership, the company continues an impressive run of almost two decades of sales growth.

And as it continues to attract top entrepreneurs and operators with the drive and passion to own their own business, the chain has secured numerous franchise industry awards, including Franchise Business Review’s “Top 30 Food and Beverage Franchises”, Fast Casual’s “Movers & Shakers”, QSR Magazine’s “The Industry’s 9 Best Franchise Deals”, and “The QSR Top 50” for limited-service restaurants in the U.S.

First joining Wingstop in 2014, Michael Skipworth has served as the company’s president and chief executive officer since March 2022, having previously held roles as COO and CFO. Bringing several years of company experience, Skipworth is now focusing on technological innovation as the chain’s digital sales continue to form a majority of transactions. Prior to Wingstop, he maintained senior roles at Cardinal Logistics and was part of the audit and assurance practice for KPMG.

Wingstop’s key leaders also include chief U.S. franchise operations officer, Marisa Carona, who has led key areas of the business including corporate strategy, ESG, training, and marketing, and who prior to joining Wingstop, led strategic initiatives at 7-Eleven. While recently appointed senior VP of U.S. development, Craig Sherwood, brings with him a wealth of experience from global franchised companies including Little Caesars, Sonic Drive-In, and Yum! Brands.

Catered to customers by “Wing Experts”, Wingstop’s numerous order options include eat-in, to-go, and delivery, along with individual, combo meals, and family packs that allow guests to choose the restaurant for any occasion, whether it is a quick snack or a party size order for a group occasion.

Classic wings, boneless wings, and tenders are always cooked to order and hand-sauced-and-tossed in a choice of 11 “bold and distinctive” flavors such as Garlic Parmesan, Lemon Pepper, Hickory Smoked BBQ, Atomic, Mango Habanero, Cajun, Louisiana Rub, and Spicy Korean Q, along with plain, mild, and hot.

The chicken menu is complemented by signature sides including fresh-cut, seasoned fries, and freshly-made ranch and blue cheese dips that are made in-house daily. With the chain proud of the fact that it never uses heat lamps or microwaves in the preparation of its food. Recently, the restaurant introduced chicken sandwiches which also come in all the flavors that the wings are available in.

Wingstop is one of the fastest-growing concepts in the U.S. with franchisees operating in almost 1,900 outlets in 44 states, along with seven countries across the globe. The chain has a relentless focus on ensuring that every franchise location meets the same quality and customer service benchmarks to preserve the consistency and reliability of the brand. Whilst keeping in with a strategy to grow existing franchisees, the company’s domestic franchise base had an average restaurant ownership of approximately six restaurants per franchisee and an average tenure of twelve years.

While agreements may vary, franchisees generally pay a franchise fee of $20,000 for each restaurant opened, and contracts typically provide for a 10-year initial term, with an opportunity to enter into further renewals. Each franchisee is also required to pay Wingstop a royalty of 6% of their gross sales net of discounts. In addition, each restaurant also contributes 5% of gross sales to fund marketing and advertising campaigns. These funds are primarily used to create advertising content and purchase digital and television advertising on a national level.

As Wingstop approaches a long-term target of more than 7,000 restaurants globally, company management remains focused on sustaining same-store sales growth through brand awareness, innovation, and investment in technology.

Franchisee contributions to its national advertising program were boosted to 5% at the beginning of 2022 to support elevated marketing spending and premium placements through an extensive range of social media and digital marketing channels. It is intended that this will allow Wingstop to target core customers and create top-of-mind consideration with relevant, impactful messaging.

The company is also making focused investments in customer relationship management and its digital platform, which will allow it to transition from the traditional promotion-based marketing approach to a digital platform-based strategy. Particularly, as digital sales continue to make up over 60% of total sales.

Maintaining best-in-class unit economics is a key priority as the operational simplicity of the restaurants translate into attractive financials at both franchised- and company-owned locations. Wingstop’s operating model targets a low average estimated initial investment of approximately $400,000, excluding real estate purchase or lease costs and pre-opening expenses. While its domestic average unit volume (AUV) which represents the average annual sales of all restaurants that have been open for a trailing 52-week period or longer, has grown consistently, reaching approximately $1.6 million in 2021. With the current strategic plans focusing on brand awareness, menu innovation, delivery improvements, data-driven marketing, and digital transformation, the company is targeting for this to increase further to $2 million in the near term.

In a restaurants second year of operation, the Wingstop targets a franchisee cash-on-cash return of more than 50%. Existing franchisees accounted for over 93% of restaurants opened in both 2020 and 2021, which the company believes underscores the financial appeal of the chain’s business model, which has helped drive the continued growth of the system.

With a significant opportunity to expand globally, Wingstop intends to put further efforts into increasing geographic penetration in both existing and new domestic markets, as well as international markets. This includes laying the groundwork for a global supply chain, along with creating a consistent digital presence, and maximizing the brand’s visibility. The company says it has a robust development pipeline with approximately 90% of domestic commitments for new stores coming from existing franchisees, demonstrating the strength of the restaurant’s business model and its positive franchisor-franchisee relationships.

Furthermore, based on a small real estate footprint, simplicity of operations, universal and broad appeal of chicken, along with the ability to customize a wide variety of flavors to local tastes, the restaurant operating model continues to translate well internationally, providing an immense opportunity to build on close to 200 international restaurants already located in six countries.

Keeping it on track to deliver its 19th consecutive year of domestic same-store sales growth, Wingstop delivered another strong quarter in its latest round of results. With 40 net new openings in the September 2022 quarter, total revenue for the period surged over 40% to $92.7 million, driven by both royalty revenue and franchise fees. Whilst the majority of the growth driven was by an increase in transactions, advertising fees also increased by $16.6 million due to the increase in the national advertising fund contribution rate to 5%.

Despite the boost in revenue, cost of sales only increased marginally in the quarter, driven by food, beverage, and packaging costs benefiting from a 43% decrease in the cost of bone-in chicken wings compared to the prior year. As a result, Wingstop also delivered a nearly 20% increase in net income year-on-year to $13.4 million.

Looking ahead, consensus estimates have the company closing out the full year with expected sales of $353.4 million representing year-over-year growth of over 25%. The company is forecasting another robust quarter, as it increased its earnings per share guidance to between $1.61 and $1.63, which is just short of consensus estimates at $1.65, representing 22% growth year-on-year.

In addition to the broader restaurant dining segment, competition in the quick-service-restaurant chicken space alone is fierce, with customers seeking high food quality, restaurant atmosphere, service speed, friendliness of staff, and value for money. Wingstop’s main competitors include giants like KFC, Chick-fil-A, and Popeye’s, along with many more like Church’s Chicken, Buffalo Wild Wings, Hurricane Grill & Wings, and Wings & Rings.

With a forward price-to-earnings ratio that is valued for growth, Wingstop’s key risk is the current macro landscape with rising inflation, increasing wage costs, and higher interest costs, which may impact margins if the current growth trajectory cannot be maintained.

Wingstop has delivered many years of growth and successful expansion even through difficult periods like the covid pandemic and the GFC. And while the company’s valuation is at a premium to the sector, the company’s future outlook gives it an enormous runway for further growth. Furthermore, with softening key chicken wing prices coupled with solid investments to taking advantage of digital sales channels, the company appears well-prepared to continue achieving the market-leading economics of its robust business model.