The stock market over the past 12 months has been quite spicy in a dreadful way. But not all spicy is bad. Just ask anyone who has stopped by a Wingstop (WING 3.42%) lately. The fast-casual restaurant chain has been delighting its customers for about three decades.
But arguably, the people it has made even happier in recent times are its investors. Since it went public in 2015, Wingstop has produced a 350% return, crushing the benchmark S&P 500 index. And all signs point to that rewarding journey continuing.
Key pillars in place to propel the business
Founded in 1994 in Garland, Texas, Wingstop is a fast-casual restaurant chain serving up chicken wings, tenders, and chicken sandwiches. That may not sound like anything special, but customers seem to love Wingstop's innovative flavors, its ever-evolving menu, and its smart combos. Plus, an average meal costs a reasonable $8 per person.
The company has now recorded 18 consecutive years of same-store sales growth, and a higher cumulative same-store sales growth from 2017 through 2021 than such industry stalwarts as Starbucks, Chipotle, Domino's Pizza, and McDonald's.
Image source: Getty Images.
About 98% of its restaurants are owned and operated by independent franchisees. The franchise model -- where the franchisees pay Wingstop an initial fee and ongoing royalties for the training, marketing, store setup, and other tech and operational services -- frees up capital that the company can deploy to fuel its growth.
One key area of investment for Wingstop has been growing its brand awareness and building data-driven marketing capabilities. With over 500 data points per customer at its fingertips, the company has built a digital platform to effectively target customers. Additionally, the overall digital transformation of the business -- from online ordering to delivery and other back-office functions -- has improved customer experience and reduced operational costs. In Q3 2022, 62% of Wingstop's orders came through digital channels compared to just 6% in 2014.
Wingstop has also made smart decisions on the operational front. It has been able to keep its leasing costs low by placing its stores in "category B" real estate sites -- sites that are a step down from top-of-the-shelf mall spaces and have lower rents. Its store footprints are also on the smaller side. Wingstop also has simplified its store operations, which allows it to maintain a leaner labor force.
Finally, the company's balanced sourcing and supply chain strategy helped it minimize the effects of periods of high inflation, such as the one in 2021 when prices of raw chicken wings went up by 72%.
Overall, with its well-rounded strategy and focused execution, Wingstop is extending its edge over the competition.
A repeatable framework of success
With its rising popularity, Wingstop's revenue has grown at a compound annual rate of over 25% from the end of 2016 through 2021. Average annual revenue for its U.S.-based restaurants also jumped from $1.1 million in 2016 to $1.6 million as of the end of Q3 2022.
Those growing per-store sales (at an average initial franchise investment of about $415,000) are making Wingstop an enticing proposition for franchisers. It's no surprise that the number of Wingstop stores in operation has grown at a brisk pace, from 998 in 2016 to 1,898 as of the end of Q3 2022, with 225 of those located outside of the U.S.
Also, Wingstop has managed to achieve that growth while being profitable every year since it went public. And it still has a long runway ahead of it. Wingstop believes that it can more than double the number of its U.S. restaurants and increase its international count by several fold to reach a total of more than 7,000 locations. The company also sees a path to increase its average store sales from $1.6 million to over $2 million.
Wingstop has delivered consistent performance over a long period of time. The company has been resilient as it met the challenges of the COVID-19 pandemic, inflation, and supply chain disruptions. It's not a surprise that its relatively discounted share prices attracted investors -- the stock is up 68% in the past six months.
A higher valuation shouldn't keep investors away
Wingstop now trades at a price-to-earnings ratio of 105 and a price-to-sales ratio of 13.7. While both of those metrics are well below the highs they touched in 2021, Wingstop shares are certainly not cheap. But this is a classic case of the market putting a premium on a high-quality company. So how should investors proceed?
One approach for long-term investors who are interested in Wingstop would be to start by opening a small position in the company. Regularly review its performance, ensure it is meeting the high expectations baked into its premium valuation, and add shares incrementally over time, hopefully at favorable valuation points.
Wingstop stock may have gained 68% over the past six months, but these are still early days for this business. The company looks all set to spread its wings further.
