Wingstop Stock: Strong Long-Term Growth, Expensive Valuation (NASDAQ: WING)

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Investment thesis

Wingstop is experiencing impressive growth, although it faces short-term headwinds from chicken price inflation. Even after a steep drop, the stock looks slightly overvalued compared to its peers. Wingstop’s higher growth compared to other restaurants makes the attractive stock. Strong digital sales contributed in part to this outperformance. Still, investors should get a better entry point as near-term headwinds and broader market weakness could put additional pressure on the stock.

An overview

Wing stop (NASDAQ: WING) is a wing-focused fast-casual restaurant chain with more than 1,700 locations worldwide. The majority of its restaurants are franchised. The company generates revenue through royalties, advertising fees and franchise fees and by operating company-owned restaurants. About 59% of national restaurants are in four states: Texas (26%), California (21%), Illinois (6%) and Florida (6%).

In the United States, the company generally grants the franchisee the right to operate at a particular location for an initial term of 10 years. Under the franchise agreement, each franchisee pays a royalty of 6% of its gross sales net of rebates. In addition, the franchisee contributes 4% of net rebate gross sales to fund national marketing and advertising. In 2022, this contribution rate will increase to 5% of gross turnover net of discounts.

International franchisees are master franchisees, which grants them franchise and distribution rights for entire regions or countries. Their royalty is set at 6% of sales.

Wingstop’s main raw materials are bone-in and bone-out chicken wings. Chicken represents nearly 69% of all purchases as of fiscal year 2021.

Chart with distribution of restaurants

wing stop

Up to 98% of Wingstop’s restaurants are owned by franchisees.

The 5-year financial statements are impressive

During the 2017-2021 period, Wingstop’s total revenue grew at a CAGR of 20.7%. Total revenue for 2021 was $282.50 million compared to $133.32 million in 2017. Royalties, franchise fees and other revenue grew at 18.6% CAGR during the year. the same period. Advertising expenses increased 28.2%, while company-owned restaurant sales increased 17.3%.

Bar chart showing revenue composition

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Total operating costs and expenses experienced a CAGR increase of 20.4% during the period. Operating profit for 2021 was $73.7 million from $33.87 million in 2017, showing a CAGR growth of 21.5%.

Net income for the period shows growth of 15.5%. Net income for 2021 was $42.66 million compared to $23.94 million for 2017. Operating cash flow also saw similar growth of 15.5% CAGR. Operating cash flow was $48.88 million in 2021 compared to $27.44 million in 2017.

Quarterly results suffered from inflation

For the first quarter of 2022, Wingstop’s total revenue increased by 7.8%. Total revenue for the first quarter of 2022 was $76.20 million compared to $70.69 million in the same quarter last year. Royalties, franchise fees and other income increased 11% due to the net opening of 208 franchise restaurants and national comparable store sales growth of 1.2%. Advertising costs increased 4.7% due to a 12.7% increase in network-wide sales. Meanwhile, company-owned restaurant sales increased 5.9%, primarily due to the addition of four net new units, coupled with a 2.1% growth in company-owned same-store sales.

Cost of sales as a percentage of sales for company-owned restaurants was 84.3% in the first quarter of 2022, compared to 75.6% in the comparable period in 2021. The cost of food, beverages and packaging increased due to a 14.2% increase in the cost of bone-in chicken wings during the year. Net interest expense increased by 10.8% due to a securitized financing transaction in March 2022.

Due to higher costs, operating profit for the quarter was $16.6 million compared to $19.80 million in the same quarter last year, down 16.1% . Net profit fell nearly 34% to $8.67 million for the quarter.

Solid advice

Wingstop’s vision is to become one of the top 10 global restaurant brands. Management estimates that it is possible to reach a number of restaurants of more than 4,000 in the United States and more than 3,000 internationally. In the first quarter of 2022, the company generated 62.3% of its sales through digital channels. Management aims to increase digital sales with continued investments in technology. He also expects bone-in wing deflation.

Management expects to open 220 net new units in 2022. It expects single-digit growth in national same-store sales. Diluted EPS is expected to be between $1.55 and $1.57.

The company recently announced a new development agreement for Indonesia. This should increase the number of restaurants to 120 from the current number of 50.

Evaluation

Wingstop stock is currently trading at a discount to its 5-year median price-to-earnings and price-to-sales ratio. The current P/E stands at 56 versus a 5-year median of 111.8. Yet, despite this year’s steep drop, Wingstop stocks are still trading at a premium to leading stocks in the sector.

Chart
Data by YCharts
Chart
Data by YCharts

Despite Wingstop’s higher growth, the P/E ratio still looks a little high, as seen in the PEG ratio below.

Chart
Data by YCharts

Seeking Alpha’s exclusive quantitative reviews rate Wingstop as “Sell”. The action is rated extremely low on the valuation, which is significantly higher than that of the sector. It is also rated on momentum, although this may change as the stock begins to rally. The stock is well rated on growth and profitability factors.

Conclusion

Wingstop has experienced impressive growth over the past few years. The stock is trading at a discount to its own 5-year median P/E ratio. However, valuations are still not favorable relative to its peers.

In addition, the main purchase (chicken) has seen a price spike. Although management believes the spike was seen in chicken wing prices, commodity prices should be watched. Any further increase could be detrimental to the stock price in the short term. The company also saw lower operating and net income in the last quarter.

So, even if the long-term outlook looks good, the stock could correct a little more before recovering. Investors may want to watch it a bit longer before jumping in.

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