The restaurant industry is brutally competitive, but there are examples of big winners over the years, such as Starbucks or Domino's. Investors could be seeing the same story play out with chicken wing restaurant chain Wingstop (WING 0.26%). The stock's become a multi-bagger since going public in 2016, but the company's growth story might not be finished yet despite its success.
Wingstop seems to have found its rhythm and is popping up all over the United States and abroad. Here's what makes Wingstop a great business, and why the stock can continue producing sizzling total returns for long-term investors.
What is the "secret sauce" at Wingstop?
Wingstop is a quick-service food chain that focuses on bone-in and boneless chicken wings, complemented by french fries and other sides. It operates primarily as a franchise model. Restaurant operators pay a one-time fee to open a location, then pay ongoing royalties and advertising fees to Wingstop on the sales it generates. Wingstop currently has more than 1,700 locations with the vast majority in the United States.
Wings have become increasingly popular as a food item; Americans ate an estimated 1.4 billion wings for the Super Bowl, a 10.3% increase from 2019. Wingstop was started in 1994 and has become one of the "faces" of chicken wings for casual dining, similar to what Domino's is for pizza.
Inflation has hit chicken wing prices especially hard; management reported that its wing costs rose 27.5% year over year in 2021. However, it was able to pass some of that on to consumers as price increases, and Wingstop grew its same-store sales 8% in 2021, its 18th consecutive year of growth.
A long growth runway ahead
The real key to Wingstop's growth, though, is its ability to grow same-store sales and open up new locations simultaneously. The company had 977 worldwide locations at the end of 2016, and has grown that to 1,731 today. Meanwhile, revenue has grown an average of 25% annually over those five years.
If you look at a company like Domino's that has more than 6,400 restaurants in the U.S. alone (and still adding), it illustrates the type of expansion potential that Wingstop has. Could the company have 5,000 U.S. locations someday? There are no guarantees in investing, but Wingstop seems to have shown the momentum for expansion over the past five years to give investors a reasonable hope that it will continue moving forward.
International markets also remain a big opportunity. Wingstop has locations in France, Indonesia, Mexico, Singapore, United Arab Emirates, and the United Kingdom. The number of international stores has grown from 76 in 2016 to 197 today. Chicken wings aren't a sure-fire hit in all markets; Wingstop did close 16 international locations in 2021. Still, the company can expand where it finds traction.
Is the stock a buy today?
Wingstop stock is down roughly 25% from its highs, holding up better than many other growth stocks in this marketwide sell-off. It could be a testament to its strong growth and ability to turn a profit ($42 million in net income in 2021) while many other growing companies are burning cash.
But is it worth paying up for Wingstop? The stock's price-to-sales ratio is currently just under 15. You can see below that this is still toward the higher end of its historical range, and a hefty premium to a stock like Domino's.
The stock can work through its premium valuation if Wingstop can continue growing at a rate similar to what it's done in the past. With that in mind, it seems like Wingstop has a genuine chance of posting strong investment returns over a multi-year time frame.
On the other hand, the stock's valuation is probably more uncertain in the near term because we don't know what Mr. Market will do. The stock could go back to its highs, or it could go lower; it could even stagnate for two years. That's why a dollar-cost averaging strategy can make a lot of sense when trying to accumulate quality stocks with premium valuations. Build a position slowly to prevent yourself from buying at an inopportune time, putting your investment underwater. Hindsight is 20/20, so it can pay to be cautious.