Market downturns can create rare chances to buy strong businesses at a discount. One such opportunity might be Wingstop(NASDAQ: WING), which has seen its stock price tumble 47% from its June 2024 peak.
The fast-casual chain, famous for its wings, has long commanded a premium valuation -- thanks in part to an unrivaled 21-year streak of same-store sales (comps) growth, a crucial metric for restaurant stocks. But with recent struggles weighing on its share price, is Wingstop a bargain or a stock to avoid? Let's take a closer look.
Wingstop continues to soar
The chain closed out fiscal year 2024 with impressive growth, reporting $625.8 million in revenue, a 36% increase from the previous year. As a predominantly franchise-driven business (98% of its locations are franchised), most of its revenue comes from royalties, franchise fees, and advertising fees.
Franchisees looking to open a U.S.-based Wingstop pay a one-time $30,000 fee for development and opening a new location. Beyond that, they contribute ongoing royalties ranging from 6% of gross sales (net of discounts) and advertising fees of 5.3% of gross sales (net of discounts).
The company opened 349 net new locations in fiscal 2024 to reach 2,563 worldwide. The franchise fees, combined with systemwide sales increasing 36.8% year over year to $4.8 billion, delivered $288.4 million for its royalties and franchise fees revenue, representing an increase of 39.2% year over year.
Advertising revenue also grew significantly, climbing 38.5% year over year to $217.6 million. This increase was partly driven by the company's decision to raise the advertising fee from 5% to 5.3% starting with its fiscal 2024 second quarter.
Here's why Wingstop stock has been clipped
With such strong results, you might wonder why the stock has dropped by half from its highs. One key factor is valuation. Historically, Wingstop has traded at a high multiple, especially for a restaurant stock, with a five-year median price-to-earnings ratio (P/E) of 113.
It doesn't have a direct competitor for valuation comparisons, but franchise-based restaurant chains like Domino's and McDonald's have five-year median P/E ratios of 30 and 26.5, respectively.
With a valuation more reminiscent of a tech stock, investors had high expectations for rapid expansion. So, when management projected only low- to mid-single-digit growth in same-store sales (comps) for fiscal year 2025, many investors chose to sell.
For context, the company delivered impressive 19.9% comps growth in 2024 compared to the previous year. This surge was fueled by increased transaction volume, driven by an expanded menu and a rise in average transaction size.
By contrast, Domino's reported 3.2% growth for its fiscal year 2024, while McDonald's saw a slight decline of 0.1%. And Wingstop management said its three-to-five-year goal for comps growth will be in the mid-single-digits, meaning the company may need to find another avenue for high growth.
The most likely area of expansion is the company's store footprint. As noted, it operated 2,563 locations worldwide at the end of fiscal 2024, with management aiming to grow that number by 14% to 15% annually. Over the long term, leadership envisions reaching 6,000 restaurants domestically and 4,000 internationally, a remarkable growth opportunity of 290% from its current level.
After the most recent stock decline, the company trades at a P/E of 61.8, near a five-year low.
Beyond its growth, Wingstop is a dividend stock, having paid a quarterly dividend since 2017 and having raised it annually since then. Today, the company has a quarterly dividend of $0.27 per share, equating to an annual yield of 0.5%. Moreover, it has paid five special cash dividends since going public, with its most recent coming in 2022.
The company also began a share repurchase program in 2023 and has bought back nearly 1.4 million shares since, effectively lowering its share count by 4.4%. Unfortunately, the timing of these buybacks hasn't proved fortuitous, considering the average price was $272.89 per share, and the stock trades closer to $230 as of this writing. Nonetheless, share buybacks increase shareholders' ownership stake, and the company still had $311.1 million remaining on its share repurchase program at the end of its fiscal year 2024.
Lastly, the company has $890 million in net debt, up 62.2% over the past three years. While it only cost the company $21.3 million to service that in fiscal year 2024, the debt may limit special cash dividends and demonstrates that future growth may come at a cost to the company's balance sheet.
Even after Wingstop's recent pullback, its valuation remains steep, based on traditional value investing standards. However, the company stands out as a strong long-term play with an unmatched track record of comps growth, consistent dividend increases, and ambitious global expansion plans. For investors who can look past the premium price tag, this dip could be a rare chance to buy into a dominant brand with a significant runway ahead.
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Collin Brantmeyer has positions in Wingstop. The Motley Fool has positions in and recommends Domino's Pizza. The Motley Fool recommends Wingstop. The Motley Fool has a disclosure policy.
