Is Wingstop Stock A Sell?

Wingstop Inc (NASDAQ:WING) is a multinational chicken wing chain with an aviation theme. It grew over the years to over 1,600 locations and reported over 17 consecutive years of same-store sales growth. The company has historically specialized in to-go orders with a trimmed-down staff.

That business model proved highly successful over the past couple of years, yet WING share price has remained volatile. With the restaurant industry facing an uncertain future, is Wingstop stock a sell?

Wingstop business model is heavily franchise based, which helps to mitigate the direct costs to some extent as royalties are paid to the holding company. Franchisees account for most of its stores, with just 32 owned outright by the company.  

As food and labor costs rise, restaurants need to manage these expenses carefully to keep margins under control but Wingstop is somewhat buffered from them thanks to its royalty streams.

Although third quarter results fell short of expectations, the restaurant chain is making the necessary changes to grow. It’s expanding from wings to thighs through its digital Thighstop brand, which should help the company secure better prices on its chicken and reduce overall food costs.

Wingstop 101

Wingstop was founded in Garland, Texas in 1994 by Antonio Swad and Bernadette Fiaschetti. They opened the first franchise location three years later and have served one billion wings by 2002. The company went international in 2010 and continued expanding through partnerships with companies like DoorDash (NYSE:DASH).

The company specializes in chicken wings, boneless wings, and chicken tenders. Each can be prepared with a variety of sauces and dry rubs that keep customers coming back. And it has high-margin sides and drinks to fill out the menu.

Wingstop made the news in 2021 when rapper Rick Ross bought his son a Wingstop location for his 16^th birthday. The Miami, Florida-based rapper is said to own 25 franchise locations. It also launched Thighstop as a digital-only brand to use the same flavors as its wingless products.

This move is in response to the wholesale pricing of chicken wings nearly tripling due to supply chain shortages. Here’s a closer look at the chicken market.

Demand For Chicken Recession Proof?

Poultry is a popular protein. The U.S. Department of Agriculture reported 185 million chickens sold in the United States last year. That one million chicken decline from the prior year is attributed to the widespread fallout from the pandemic. Still, the number is a bit deceiving, as chicken wing volume far eclipses that number.

Americans ate a record 1.42 billion chicken wings during the Super Bowl LV alone, according to the National Chicken Council. That is up from 1.4 billion wings during the prior year’s big game, and shows how demand for the protein wanes little even during tougher economic times.

However, a chicken shortage hit suppliers. Major chicken distributor Tyson Foods (NYSE:TSN), the world’s second largest meat processor, attributed the shortage to an unexpected factor: The company switched male roosters, which resulted in fewer eggs hatched. This happened at the same time consumer demand rose, which caused a short supply and rising prices.

This slowed the company’s growth, and that has investors wondering if they should sell.

Is WING Stock a Sell?

Although it was mostly on the upswing this year, Wingstop stock took a dip after reporting fiscal third quarter earnings. Revenue of $65.8 million was a year-over-year increase of three percent, but it fell short of analysts’ estimates of $75 million. This triggered Wing share price to plunge, albeit temporarily.

Digital sales accounted for 61.6 percent of sales for the quarter, showing the company’s ability to meet demand.

Net income for the quarter of $11.3 million represents a 12 percent increase from the prior year’s quarter. Wingstop adjusted EBITDA increased 16.2 percent to $21.4 million. However, its cost of sales also increased from $11.8 million to $15.2 million as the company faced increasing chicken wing prices.

Guidance for the year forecasts about an 8 percent domestic same store sales increase. When combined with the company’s healthy $0.17 quarterly dividend, Wingstop has the ingredients to make for an appetizing investment. Its cash on hand of $50.125 million reflects an increase of nearly 25 percent from the tally at the end of the year.

This is a far cry from its $469 million in debt, and that’s just one of the risks facing this iconic chicken wing chain.

Will Fake Meat Disrupt Wingstop?

A threat to Wingstop is its dependence on one food. Although chicken wings are still popular, there’s a push toward plant-based options. Artificial meat is slowly taking over, and changing consumer tastes could render the company unprofitable over the next 20 years.

Meanwhile, it’s wrestling with higher food costs as chicken wings remain a hot commodity. This inflation will eat into the firm’s treasure chest, and it will need more franchise partners opening more locations at a faster pace to sustain its growth trajectory.

Changing consumer behaviors are a risk factor too. People are dining out less, choosing to cook at home in order to save money and social distance. As a result, the company must rely heavily on its delivery and to-go orders to optimize operational efficiencies.

If prices continue to rise, management may find the debt burden starts to strain the balance sheet. 

Is Wingstop Stock A Sell: The Bottom Line

Wingstop is a fast-growing restaurant franchise that specializes in chicken wings. This delicacy has proven to be largely recession-proof and continues to be associated with major events, like the Super Bowl. However, prices are on the rise, thanks to a supply chain shortage caused by Tyson Foods changing roosters while demand rose.

Wing stock price has been volatile all year. The dips offer value investors an opportunity to snap up shares at potentially undervalued prices. If we examine the firm’s cash flows, we see that the share price is just about fairly valued using a discounted forecast analysis. That suggests a further dip is required to justify a reasonable margin of safety before buying aggressively.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.