THE HEDGEYE EDGE
Wingstop is well positioned for the potential change in consumer behavior from COVID-19. Pre-pandemic sales were 75% takeout. The company’s business model is built around takeout, speed, avoiding tipping, digital ordering, and delivery. It is a testament to the strength of the business model that even during a pandemic the restaurants’ sales held up as consumers could pick up their “contactless” purchases.
One of management’s goals before COVID-19 was to increase digital orders. The higher check average and lower labor costs from digital orders are just part of the benefit of digital orders as seen in the following chart. Social distancing and closed dining rooms have accelerated the shift to digital orders.
Wingstop has best in class restaurant margins driven by a simple menu, low fixed costs, and low labor requirements. Increasing customer awareness driven by marketing and fortressing under-penetrated markets has led to consistently growing sales per store as seen in the following chart.
Wingstop meets two of the consumers’ dining needs: “Don’t want to cook” and “Food for a large group.” Chicken wings are also compliant with a number of diets including Keto, Paleo, and Whole30 diets. Wingstop is the first chain to successfully convert wings into a fast-food experience.
LONG TERM (TAIL)
Wingstop is far from fully penetrated in the US and has a significant opportunity at hand for new unit development, with incremental unit growth (fortressing the top 25 DMA’s) adding to same-store sales. The company has room to more than triple its current footprint as they build out underpenetrated markets and build brand awareness. In many ways, this is a reminder of the early days of SBUX, when incremental unit growth increased brand awareness and thus same-store sales. More markets will reach co-op level increasing DMA advertising, improving the cost and reach.
The company’s valuation is high, but it deserves it with the industry-leading 4-wall unit economics, a highly franchised asset-light business model, and unit growth beyond the next decade. The industry leading returns will continue to attract owner-operators to build out the chain, taking advantage of the current availability of real estate.
