What happened
Shares of chicken wing restaurant chain Wingstop (WING 2.15%) flew higher on Wednesday after the company released results for the second quarter of 2020. The company's revenue grew 36% year over year, and net income increased 135%.
When a restaurant reports strong results like this during a pandemic, investors take notice. Not too surprisingly, Wingstop stock is up 14% as of 2 p.m. EDT, touching all-time highs during the session. And shares are up over 70% year to date, sharply outpacing the market.
So what
Wingstop's Q2 revenue grew to $66 million. Because it franchises a large percentage of restaurants, what it records as revenue greatly differs from systemwide sales. Systemwide sales increased 37% year over year to $509 million, thanks to a combination of new restaurants and eye-popping comparable sales growth.
For Q2, Wingstop added 23 net restaurants, but it was slowed down from restrictions imposed by the coronavirus pandemic. Most of the new locations opened in June -- the last month of the quarter. This shows things are picking back up again. From here the company expects restaurant development to further accelerate, opening 120 to 130 new locations total in 2020.
Wingstop was uniquely positioned for the COVID-19 pandemic. In 2019, 80% of its sales were considered off-premise sales -- either carry-out or delivery. That means it wasn't as affected by diners staying home; in fact, it thrived. Sales at domestic locations opened at least one year (known as domestic same-store sales, or comparable sales) increased 32% from last year. And its momentum continues. So far in July, domestic comp sales have increased 28.7%.
When comparable sales increase, it pushes a restaurant's average unit volume (AUV) higher. Wingstop's AUV is almost $1.4 million now. This increase allows it to leverage fixed costs like real estate, pushing profitability higher. Management also noted good prices for chicken wings, which also helped its bottom line. All told, the company earned $11.5 million in Q2.
Image source: Wingstop.
Now what
At the risk of making a mountain out of a mole hill, one new restaurant location has my special attention. Wingstop just opened its second "ghost kitchen" in the United Kingdom. Coupled with its newly opened ghost kitchen location in Dallas, it's opened three such to-go only locations in the past year.
The benefits can't be overstated. The size of a ghost kitchen for Wingstop is only 400 square feet compared to its average restaurant size of 1,750 square feet. And since there are no in-restaurant diners, these kitchens can be operated by fewer people. Therefore, the cost structure is more favorable for Wingstop.
If Wingstop decides to open a larger percentage of locations with this operating model in the future, it could greatly improve its overall profitability. And investors should always be thinking about future profit potential when researching stocks to buy.
