What a run it's been for investors in Wingstop (WING -0.88%). Shares of the chicken wing restaurant operator have been on a tear since its 2015 IPO of $19 per share, providing investors with a return greater than 600% in a little over five years. In the process, it's outperformed Wall Street's favorite restaurant stocks like Dominos Pizza, Chipotle, and Starbucks.
Still, there are reasons to think Wingstop's amazing run isn't close to being over. In fact, the pandemic might have boosted its fortunes. Here's what you need to know before buying Wingstop stock.
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Wingstop is in the early innings of growth
Despite the phenomenal returns since its IPO, Wingstop remains a rather small company. As of this writing, its market capitalization is approximately $4 billion, which puts it on the lower end of a mid-cap stock. The point is, there's room for the stock to continue to move higher if it continues to execute on its growth plans.
Broadly, there are two distinct ways restaurants can grow revenue. The first is simply by opening more stores, which the company is doing. At the time of the IPO, there were approximately 785 systemwide restaurants. In the years since, the company has nearly doubled that total, to 1,500 restaurants. Ultimately the company has a goal to open 6,000 restaurants, so it's early in the growth process.
There's a trade-off for opening more stores, and that's the risk of oversaturation. That's why most restaurants report something known as same-store sales, which measures the rate of sales growth only at stores open for one year or greater. Of the two, same-store sales growth is generally considered more desirable as it's indicative of organic growth.
This is what's gotten investors excited about Wingstop: In 2019, the company reported full-year domestic same-store sales growth of 11.1%, the highest figure since its IPO. While incomplete, it's looking like 2020 will be even better: On a quarterly basis, Wingstop has reported quarterly same-store sales growth figures of 9.9%, 31.9%, and 25.4% through the first three quarters, respectively, as digital orders have surged during the pandemic.
Wingstop's digital experience led to pandemic success
While it's easy to mistake the restaurant industry as a simplistic business model, the reality is that success in this space is quite difficult. You face competition on a host of levels, ranging from the incumbents listed above to mom-and-pop restaurants. Success is not assured even for the best of operators, but restaurants that have embraced online ordering seem to be setting themselves apart in this challenging environment.
Wingstop's earlier investments in the digital channel are paying off in a major way, as the company reported digital sales growth of 62% in the third quarter. At the beginning of the year, Wingstop reported that approximately 40% of total orders came through digital channels (including delivery), and it has an audacious goal of 100% of its transactions having a digital component. The company has added pickup lockers for DoorDash couriers and electronic kiosks, and continues to add functionality to the Wingstop mobile app.
It will be hard for competitors to match Wingstop's top-notch digital, as many legacy incumbents did not invest in this technology and will continue to struggle during the pandemic.
Wingstop faces weakened competition
Wingstop faces less competition coming out of the pandemic from fewer independent mom-and-pop restaurants and smaller footprints from large brands. Most large restaurants operate as franchisees. At best, this allows a company to scale quickly because the individual franchisees are supplying growth capital and labor.
In times of economic hardship, this symbiotic relationship becomes contentious, as franchise owners are often stretched in the best of years. It's not just struggling brands, either: McDonald's franchisees have been up in arms for a host of issues, including menu selection, increased franchise fees, and forced upgrade costs. According to the National Restaurant Association, nearly one in six restaurants closed permanently or long-term in the first six months of the pandemic, and at least 100,000 restaurants are expected to close in 2020 alone.
Restaurants that operate with a primarily dining-in model are particularly exposed to the risk of government shutdowns and lower demand from diners afraid of being exposed to COVID-19. If not already, many of these individual franchisees and mom-and-pop brands will eventually close due to the pandemic, and those who do survive will find it difficult to invest and grow. This is an unfortunate event, but an opportunity for Wingstop to pick up share nonetheless. Wingstop remains a strong operator and will continue to be rewarded by investors.
