Wingstop's Unparalleled Growth Narrative Underpinned by Best-in-Class Unit Economics

Senior Equity Analyst

Sean Dunlop

While we don't quite foresee Wingstop achieving management's target of becoming a top-10 restaurant brand in the upcoming decade, we do see a meaningful development runway for the chicken chain, with our estimates calling for midteens systemwide sales growth over that period. Our forecasts are underpinned by best-in-class unit economics and a sizable development pipeline, validating management's target for more than 10% annual unit growth over the long term. We believe that management's strategy is cogent, with priorities falling into three key buckets: improving unit economics, driving brand awareness, and expanding into international markets.

Considering these points in sequence, we believe that an emphasis on the digital channel, comprising 68% of sales today, represents a durable growth lever, while a 40-million-member database can be leveraged to drive an uptick in visit frequency. Taken in tandem with menu innovations like the chicken sandwich, we envision a viable route to blow through management's targeted $2 million in average unit sales, from $1.8 million at the end of 2023. Better sales leverage should drive a modest improvement to restaurant margins, while a shift toward boneless meat is likely to reduce input cost volatility and commensurately increase franchise development interest.

On the brand awareness side, Wingstop has raised its national marketing budget to 5% of systemwide sales from 4%, eliminating less efficient local co-ops and competing more aggressively for national media spots. Between a larger contribution rate and increasing scale, with $3.5 billion in systemwide sales and nearly $160 million advertising revenue in 2023, we believe that Wingstop should be able to close the recognition gap with its larger peers.

Last, international expansion looks like a natural evolution of the business, with the firm boasting a robust development pipeline and encouraging early unit economics in key markets like Mexico, the UK, Canada, and South Korea. In our view, international success provides icing on the cake to an independently excellent growth story, with Wingstop targeting a self-assessed international addressable market of 3,000 units.

Business Strategy & Outlook

The restaurant industry is intensively competitive, distinguished by minimal barriers to entry, nonexistent switching costs, and consumer preference for variety. Restaurant brands compete for consumer wallet share on the basis of price, perceived value, and convenience, chopping up the $738-billion US restaurant market (Euromonitor) between full service and limited service restaurants, cafes, bars, and foodservice establishments at other venues—airports, entertainment, grocery stores, and more. Further up the value chain, franchisors compete for franchisee interest with compelling store-level economics, meaningful development opportunities, easy access to financing, and the ability to defend profitability over a long-term horizon with strong comparable store sales growth. On balance, we believe that industry dynamics and shifting consumer preferences render it quite challenging for operators to carve out a durable competitive advantage. Those operators that do so, in our view, typically derive excess returns from a brand intangible asset, underpinned by some combination of strong unit economics, consistent comparable store sales growth ahead of category inflation, and a proven ability to successfully make the jump between local, regional, national, and even international markets. As restaurant systems achieve scale, we believe that they can carve out a durable cost advantage as well, with the largest operators in our coverage benefiting from more competitive pricing on input costs and lower commissions on third-party platforms while diffusing marketing, back-office, and technology investment expenses across a much larger base of systemwide sales. As we consider Wingstop’s performance against these criteria, we believe that the operator warrants a narrow moat rating attributable to brand intangible assets, with a 28% average adjusted return on invested capital over the past five years handily exceeding our 8.3% cost of capital estimate for the firm.

More concretely, we believe that Wingstop’s best-in-class unit economics, franchisee willingness to invest heavily in the brand, and comparable store sales outperformance over the past half-decade attest to a durable brand intangible asset. The firm’s international narrative remains nascent, helping us delineate between Wingstop and the largest wide-moat operators in our coverage like McDonald’s and Yum Brands—whose sprawling international footprints attest to proof of concept and brand portability, while underpinning enduring cost advantage moats.

Considering those points in sequence, we believe that Wingstop’s 70% unleveraged cash-on-cash returns are the strongest among our restaurant coverage, eclipsing even wide-moat peers like Starbucks, Domino’s and Chipotle while representing a tremendous sub-two-year payback period. A franchisees’ return on investment can be broken into three key components: upfront costs, restaurant margins, and restaurant sales volumes, with Wingstop performing well against all three criteria. The firm’s smaller footprints and limited equipment needs result in lower buildout costs than we see at the firm’s quick-service restaurant competitors, particularly relative to freestanding units with a drive-thru. Regarding this, the firm self-reports buildout costs in the $500,000 range, while a freestanding QSR unit averages north of $1.7 million, by our estimates, lowering barriers to entry for Wingstop’s franchise partners and reducing dependence on securing bank financing for unit development. On the top line of the ROI equation, the EBITDA margin a Wingstop franchisee can earn out of the gate is extremely competitive; the model requires only a small operating team, generating leverage over labor expenses, and underpinning restaurant margins of approximately 20% after remitting royalties, in line with returns seen at quickly growing competitors like Taco Bell. Notably, these restaurant margins are held against $1.8 million average unit volumes, a figure that has swelled by 47% between 2019 and 2023 (as reported), attesting to strong concept resonance with consumers despite offering what appears to be an indulgent, lower-frequency meal occasion. On balance, the firm’s commanding store-level returns have underpinned 12% average annual unit growth over the past five years, materially exceeding roughly flat growth across the US restaurant industry in aggregate (Euromonitor data) over the same period. We expect this strength to continue, at least partially reflecting a development pipeline more than half as large as the firm’s 2,214 restaurant base at the end of 2023, with our forecasts contemplating 11.6% annual growth over the next five years. More importantly, we don’t foresee a near-term ceiling for development, with management estimating a global opportunity of 7,000 restaurants, which could prove conservative if the firm is able to achieve similar penetration in large US cities compared with what we’ve seen it achieve in its core Dallas Fort Worth and Los Angeles markets. In our view, franchisee willingness to plow capital into a brand is the strongest possible vote of confidence, with store-level economics serving as a crude proxy for many important variables that collectively reflect brand value—operational prowess, concept resonance, forward prospects, and a healthy franchise system. A striking 95% of net new Wingstop units are opened by existing franchisees.

Pivoting to comparable store sales growth, Wingstop’s 12% average annual growth over the past five years squarely cements the chicken QSR chain in the upper echelons of our coverage, exceeding even top brands like wide-moat Starbucks and wide-moat Domino’s over that period. Further, the firm’s string of 20 years of consecutive comparable store sales growth suggests limited systematic risk and attests to strong, consistent systemwide execution. We view comparable store sales growth as a key determinant of brand strength, with the strongest brands consistently able to drive growth in traffic, mix, and price increases ahead of category inflation, thereby defending store-level economics. Comparable store sales in the restaurant segment are analogous to pricing power elsewhere, with operators that are consistently able to defend store-level profitability finding themselves with a much more durable development runway; an easier route to securing financing for new stores and franchisees and a healthier operating system. In our view it’s no coincidence that 10%-15% of unit development can be explained (according to our own regression analysis) by prior-year comparable store sales growth, with franchisees looking to invest in brands that not only offer attractive returns currently, but figure to generate growing store-level EBITDA over the frequently 10-year term stipulated in their franchise agreements. Perhaps more importantly, we foresee a route to medium-term outperformance on the same-store sales front, with our forecast of 6% annual growth through 2028 comfortably edging 3% long-term inflation in food and hourly labor costs, implying strengthening restaurant margins. More concretely, our forecasts concord with management’s guidance for $2 million AUVs in the long term, with growth driven by increased uptake of the firm’s chicken sandwich platform, a growing delivery mix, with a long-term target of 50% (up from 30% currently), increased brand awareness as the firm leverages a marketing fund north of $150 million annually, and better leverage of digital data, with guest frequency levers helping to narrow the visitation gap between the firm’s light users who visit roughly four times per year and its average user base who visits closer to 12 times. Wingstop’s same-store sales growth, like its economics, are best-in-class in the US restaurant industry, and we expect near-term levers to underpin ongoing economic value creation.

Tying up our thesis, we identify international portability as the one blemish on Wingstop’s otherwise sterling brand performance, underpinning our narrow rather than wide moat designation for the operator. This is at least partially reflects the firm’s limited history, with most multinational Western restaurant brands boasting histories that date back to the 1950’s or 1960’s—though we believe that conservatism is warranted as it pertains to wide moat ratings and a competitive restaurant segment. The firm’s international runway remains quite long, with an attractive footprint in Mexico and plenty of opportunity in the younger UK market and it recently entered Canadian and South Korean geographies. While Wingstop’s international growth has been impressive, compounding at a midteens annual percentage, it has only achieved the key 100-unit threshold that serves as a durable harbinger of market-level success in Mexico, leaving the firm with plenty of execution risk as it tries to grow into an astounding market multiple. The firm plays in an attractive $119-billion ($50 billion) global (US) QSR chicken market (per Euromonitor), and chicken represents both the fastest-growing global protein and the protein most amenable to the global palette. Nevertheless, the presence of large, international competitors like wide-moat Yum Brands’ KFC, narrow-moat Restaurant Brands International’s Popeyes, and Filipino operator Jollibee suggest that Wingstop may struggle to access the largest, best-capitalized franchise partners in the Asia-Pacific or Central Europe, while another international thrust by the ever-popular Chick-Fil-A also merits consideration. In summary, the firm’s international opportunity set is intriguing, but it is difficult for us to look at the strength of the international competitive set and justify Wingstop’s performance as indicative of a wide-moat intangible asset on that pillar (or, indeed, indicative of a moat at all for the international business at this stage).

Last, we believe that further discussion is merited regarding our narrow-moat designation, given an asset-light model and our forecast for commanding adjusted ROICs over the next decade. By any reasonable quantitative metric, Wingstop boasts the returns of a wide-moat firm, with fantastic unit economics, a compelling growth narrative in a strong QSR chicken category, and durable comparable store sales growth, which should defend franchisee economics. Our trepidation comes from its stage in the development lifecycle, with roughly 2,200 units and $3.5 billion in 2023 systemwide sales rendering the firm just the 31st-largest restaurant operator in the US, according to Euromonitor data. With a limited operating history and a relatively niche (and concentrated) menu, it’s challenging for us to suggest that the firm’s brand intangible asset is unassailable, which we believe would be the effective implication of a wide moat rating—suggesting a 20-year horizon for excess returns. In the restaurant industry, 20 years is a long time, and shifting consumer preferences, less development white space than initially foreseen (the only true “category” comparable company for Wingstop may be Buffalo Wild Wings, so it’s challenging to discern the true size of the market), or softening competitive position as peers adapt the features of Wingstop’s model that have underpinned economic value creation to date obstruct our line of sight for 20 years of excess returns. In this regard, it wasn’t that long ago that Subway’s business model was upheld as a marquee example of franchising success amid rampant unit growth, a viewpoint that few industry pundits currently would admit having. Wingstop remains a bit player in the global restaurant industry, and it’s our assessment that wide moat ratings for brand intangible assets should be restricted to the strongest brands with a history of navigating business cycles and shifting consumer dynamics, like wide-moat McDonald’s with its 40,000 global units and $130 billion in 2023 systemwide sales. We believe that Wingstop has the potential to join its esteemed peers in the upper echelons of the global restaurant hierarchy, but maintain conservatism until our uncertainty regarding the firm’s addressable market size and international prospects wanes.

Narrow

Economic Moat

Wingstop

Wingstop, Inc. is a franchisor and operator of restaurants, which engages in the provision of cooked-to-order, hand-sauced, and tossed chicken wings. It operates through Franchise and Company segments. The Franchise segment consists of domestic and international franchise restaurants. The Company segment comprises company-owned restaurants. The company was founded in 1994 and is headquartered in Addison, TX.

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Wingstop, Inc. is a franchisor and operator of restaurants, which engages in the provision of cooked-to-order, hand-sauced, and tossed chicken wings. The company was founded in 1994 and is headquartered in Addison, TX.

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