Surging Sales And Digital Innovation Propel Brand To Unprecedented Heights

Key Takeaways

• Strong transaction growth and same-store sales are driven by new customer attraction, including the popular chicken sandwich, and initiatives like the MyWingstop digital platform boosting engagement.
  
• Expansion plans, including targeting over 6,000 domestic restaurants and growing internationally, along with delivery channel expansion via DoorDash and Uber Eats, promise substantial revenue growth.
  
• Key vulnerabilities include dependence on transaction growth, fluctuating food costs, reliance on digital platforms, operational efficiency pressures, and uncertain long-term brand impact on sales.

Catalysts

Wingstop Inc., together with its subsidiaries, franchises and operates restaurants under the Wingstop brand.

• Strong transaction growth driven by new customer attraction and increased frequency, particularly from the chicken sandwich, is expanding the customer base and contributing to significant same-store sales growth, which is anticipated to elevate revenues and AUVs (Average Unit Volumes).
  
• Investment in brand awareness and advertising, specifically targeting live sports and online video placements, is set to further increase brand reach and attract new customers, potentially boosting revenue and market share.
  
• Delivery channel expansion through partnerships with DoorDash and Uber Eats offers substantial white space for growth, expected to increase transactions and enhance top-line growth by making Wingstop more accessible to a wider audience.
  
• The rollout of the proprietary MyWingstop digital platform and focus on digital sales, constituting 68.3% of sales, aims at improving customer engagement and personalization, which could drive higher conversion rates, repeat business, and ultimately impact revenue positively.
  
• Expansion strategy with a revised target of over 6,000 domestic restaurants and focus on international growth reflects a strong development pipeline and industry-leading unit economics, promising increased royalties, franchise fees, and overall revenue growth.

Assumptions

• Analysts are assuming Wingstop's revenue will grow by 18.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 17.3% today to 0.2% in 3 years time.
• Analysts expect earnings to reach $173.0 million (and earnings per share of $6.14) by about August 2027, up from $94.6 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $140.9 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 79.2x on those 2027 earnings, down from 118.9x today. This future PE is greater than the current PE for the US Hospitality industry at 19.8x.
• Analysts expect the number of shares outstanding to decline by 2.25% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.14%, as per the Simply Wall St company report.

Risks

• Dependence on transaction growth for same-store sales increases, which if unable to sustain, could negatively affect revenue growth.
  
• Vulnerability to fluctuations in food costs, especially for key ingredients like chicken wings, despite current supply chain strategies minimizing impact, future market volatility could challenge profitability.
  
• Reliance on digital sales (68.3% of sales) and technology platforms like MyWingstop for growth; any technical disruptions or failures could impair sales and customer experience, affecting revenue and margins.
  
• Challenges in maintaining operational efficiency and guest experience as Average Unit Volume (AUV) targets rise to $3 million, which could pressure net margins if additional resources or modifications are needed.
  
• Risk of brand awareness and advertising effectiveness not translating to consistent long-term sales growth, especially if competitive dynamics change or marketing investments do not yield expected returns, potentially impacting earnings.

Valuation

• The analysts have a consensus price target of $412.77 for Wingstop based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $475.0, and the most bearish reporting a price target of just $168.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $916.7 million, earnings will come to $173.0 million, and it would be trading on a PE ratio of 79.2x, assuming you use a discount rate of 7.1%.
  
• Given the current share price of $383.57, the analyst's price target of $412.77 is 7.1% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.