Chicken wing restaurant operator and franchiser Wingstop (WING 5.11%) recently released fourth-quarter and full-year 2019 results. While the numbers largely matched the preliminary results provided during the investor day in January, the company provided some three- to five-year guidance that will be very helpful for investors with a long-term view.
Wingstop's fantastic year
Wingstop is coming off one of its best years as a public company. It had 10.6% unit growth (new locations) to bring its total up to 1,385 total restaurants. This was part of the reason sales increased 20.1% in 2019. The other reason for this sales growth was 11.1% domestic comparable-sales growth. This was Wingstop's 16th consecutive year of positive comps -- a feat few restaurants can claim.
Beyond these obviously important milestones, Wingstop made progress toward other under-the-radar goals. First, the company aspires to have 100% of orders be digital. As of January, only 40% of sales are digital, but that's up sharply from 28% in the fourth quarter of 2018. Digital sales improve restaurant speed, provide better up-sell opportunity, and turn every transaction into a stronger data point.
Additionally, Wingstop is taking steps to grow brand awareness. Per the franchise agreement, restaurants must contribute 4% of sales back to the company for national advertising. That's up from the 3% that was previously required. Comparable sales grew for a variety of reasons in 2019, but one was this increased brand awareness from an increased advertising budget. As sales grow, so does the advertising budget, so expect to see more Wingstop advertising in 2020.
Three- to five-year guidance
In a novel move, Wingstop's management offered three- to five-year guidance in a couple of areas during its earnings call. First, the company is guiding for at least 10% annual unit growth. And it's also calling for low single-digit annual comparable-sales growth for domestic locations.
What's great about this guidance is it allows us to crudely forecast where this company will be in five years, which is crucial for investors. At the end of 2019, Wingstop had 1,385 restaurant locations. Assuming a 10% compound annual growth rate, it would end 2024 with over 2,200 locations -- 37% of its long-term goal of opening 6,000 restaurants.
Domestic average unit volumes (AUV) hit $1.25 million in 2019. According to Wingstop, new restaurants start off with much lower volume -- $945,000 AUV for the 2018 class of restaurants -- but consistently grow with time. Assuming just 3% comparable-sales growth over the next five years (in line with guidance), domestic AUV would be $1.45 million at the end of 2024.
That translates to over $3 billion in systemwide sales in 2024, or roughly double 2019 sales. However, Wingstop is about 98% franchised, meaning there's a big difference between systemwide sales and company revenue. Wingstop's full-year 2019 revenue was just under $200 million compared to $1.5 billion in systemwide sales. Yet 28% of the company's revenue came from just 31 company-owned locations. Put another way, systemwide sales growth doesn't move Wingstop's top line that much.
Wingstop intends to maintain its franchised operating model going forward. Assuming revenue from franchised locations grows at the same rate as systemwide sales, and assuming company-owned restaurant revenue grows within the comparable-sales growth guidance, Wingstop is looking at around $350 million in 2024 revenue.
This, of course, is a very rough estimate. But if it approximates Wingstop's 2024 reality, then the stock currently trades at over eight times 2024 revenue. This confirms what some already believe: that investors are paying too high a premium for this stock.
With restaurant stocks, the two operating models are franchised and company owned, with most companies employing a combination of both. Domino's Pizza is another primarily franchised chain with strong business fundamentals, although it's not growing as fast as Wingstop. For comparison, Domino's stock trades at the much lower valuation of four times trailing revenue. It's also much more profitable than Wingstop, which has a trailing price-to-earnings ratio of 145 compared to 39 for Domino's.
In the end, I would say Wingstop is a premium business, but its rich valuation keeps me on the sidelines. On the other hand, many great stock returns have come from companies that once looked overvalued. Considering the strength of Wingstop's underlying business, I sure wouldn't bet against it, even if I wouldn't buy it today.