Wingstop Shares Have Been Cut in Half This Year, but Franchisees Can't Open Stores Fast Enough
Key Points
The asset-light franchise model generates high-margin royalty revenue in tough times.
The stock has retreated to levels last seen in 2023 as consumers pull back.
Wingstop's (NASDAQ: WING) reputation as a reliable growth stock took a hit last year as its 21-year streak of positive same-store sales growth came to an abrupt end.
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The weakness in traffic for the fast-casual wing chain has lingered longer than expected, as same-store sales declines accelerated to nearly 9% in the first quarter. The stock has fallen roughly 25% since its first quarter report on April 29, and is now down around 70% from its all-time high.
Yet while sales at existing locations are struggling, the appetite to open new ones has never been stronger. The company opened a record 493 net new restaurants last year and is guiding for another 15% store growth this year. This expansion is driven by a record development pipeline of more than 2,200 committed units.
Image source: Getty Images.
Franchisees are still betting on the brand
Even with recent pressure, a new location still targets an industry-leading unlevered cash-on-cash return of more than 70% in its second year of operation. You know the economics are compelling when more than 90% of all new domestic development has come from existing brand partners for two years in a row.
Wingstop's nearly pure-play franchise model, with 98% of locations run by independent operators, allows it to navigate this environment a bit better than its franchisees. Even as organic growth dips into negative territory, the company continues to collect royalties and advertising fees from a growing base of restaurants.
The company is working to turn things around. A systemwide rollout of its "Smart Kitchen" platform aims to cut ticket times and improve order accuracy. Early results show a 16-percentage-point improvement in the speed of service during peak hours, and the upcoming rollout of its national loyalty program is looking to drive traffic.
The spending pullback hits home
Last year, domestic same-store sales declined by 3.3%, Wingstop's first negative annual print in more than two decades. Management has pointed to a combination of factors, including elevated gas prices and pressure on its lower-income customer base, which makes up roughly a quarter of its sales.
For a brand with an average ticket price in the mid-$20 range, competition from cheaper fast-food and grocery-store options seems to be testing the limits of its value proposition. If same-store sales remain in negative territory for an extended period, it could erode franchisee profitability and slow the brand's expansion plans, which have been a key part of the story.
Wingstop's long track record of organic growth was the result of a solid business model that remains largely intact, driven by franchisee demand for new locations. While the current challenges are real, they appear more driven by external pressures than by a fundamental flaw in the brand, offering patient investors an opportunity to consider picking up shares at a reasonable price.
Bryan White has no position in any of the stocks mentioned. The Motley Fool recommends Wingstop. The Motley Fool has a disclosure policy.