Restaurant IPOs can be hit or miss these days. Chicken wing chain Wingstop (WING 3.33%) went public on June 12 at $19, and shares have rallied 57% to nearly $30. A week later, Brazilian steakhouse Fogo de Chao (NASDAQ: FOGO) went public at $20 per share. After surging to over $27 on the first day of trading, the stock tumbled back to around $23 per share. Are either of these restaurant stocks worth buying today? Let's compare their business models, growth, and valuations to decide.
Source: Wingstop
How Wingstop makes money
Wingstop is one of the fastest growing chicken chains in the United States. Between the end of 2012 and the first quarter of 2015, it increased its store count from 546 to 745 -- over 97% of those stores are franchised. Wingstop only generates royalties and franchise fees from those stores, 5% to 6% of gross sales at each location.
A franchise model keeps margins high and lets Wingstop expand quickly, but franchised locations also generate less revenue and can have inconsistent quality. Wingstop has a long-term growth target of opening 2,500 restaurants in the U.S.. At an average of 1,700 square feet, its restaurants are much smaller than those of Buffalo Wild Wings, which have an average size of 6,200 square feet. Three-quarters of Wingstop business is generated from takeout orders, and the average customer ticket is about $16.
How Fogo de Chao makes money
Fogo de Chao was the fifth fastest growing full service restaurant chain by revenue in the United States last year. The company owned just 13 restaurants in 2010 but now operates 25 locations in the United States, one in Puerto Rico, nine in Brazil, and a joint venture location in Mexico. The company does not sell any franchises, but it plans to open over 100 new locations in the United States, three to five more stores in Brazil, and eventually expand to other international markets like Asia.
Fogo de Chao restaurants have an average size of 10,000 square feet, and the average customer ticket is $59.50. The company features a unique all-you-can-eat format, where servers slice skewers of beef, pork, lamb, and seafood at each table, and diners get unlimited access to a salad bar.
Source: Fogo de Chao
Fundamental comparisons
Wingstop has a solid record of top line growth. Last year, revenue rose 14% annually to $67.4 million as same-store sales improved 12.5%. Yet Fogo de Chao has even better revenue growth -- its annual sales rose 20% to $262.3 million. However, same-store sales only rose 2.9% annually in the U.S. and 11.4% in Brazil.
Fogo generates much greater revenue with fewer stores than Wingstop for three reasons: it owns the restaurants, it serves more customers in larger restaurants, and it sells pricier food.
Net income at Wingstop rose 20% annually in 2014 to $9 million. For Fogo, the bottom line rose from a net loss of $0.9 million in 2013 to a profit of $17.6 million in 2014. Although Fogo generates about twice as much net income as Wingstop, keep in mind that is off nearly four times as much revenue, meaning that it is actually far less profitable. Thanks to its franchise model, Wingstop also enjoyed an adjusted EBITDA margin of 36% last year, easily beating Fogo's EBITDA margin of 24%.
Valuations and risks
Wingstop and Fogo both have robust top and bottom line growth, but the former is fundamentally pricier. Wingstop trades at a whopping 94 times earnings, while Buffalo Wild Wings trades at 33 times and Fogo for 31 times.
Looking ahead, the companies face different challenges. Wingstop must ensure that its franchisees produce consistent service and food and that the soaring price of chicken wings -- which rose 63% between March 2014 and March 2015 -- do not sink them. As a higher-end restaurant, Fogo de Chao could be hurt by economic downturns in Brazil and the U.S., and its overseas earnings could be gobbled up by the strong dollar. The price of beef in the U.S. has also soared 63% over the past decade to all-time highs and will not likely decline anytime soon due to rising global demand.
The winner: Fogo de Chao
Both Wingstop and Fogo de Chao could grow considerably over the next few years. However, at current prices, Fogo de Chao is the better bet. The Brazilian steakhouse has stronger sales and earnings growth on top of a much more reasonable valuation. However, investors should keep an eye on Wingstop if the market hype cools down or if the company is able to actually grow into its lofty valuation.
