Company Reports

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.

In a quarter when many US competitors have been forced to limp through declining consumer traffic and sluggish comparable store sales growth, narrow-moat Wingstop posted 21.6% transaction-driven comparable store sales growth and 45% growth in adjusted EBITDA, and it raised its full-year guidance for both comp sales and development targets. The firm's $146 million in sales and $0.98 in EPS blew through our $136 million and $0.76 EPS estimates, respectively, and topped FactSet consensus revenue and earnings estimates for the seventh-consecutive quarter. As we digest results, we plan to lift our $139 fair value estimate by a high-single-digit percentage. We advise investors to wait on the sidelines, with Wingstop shares still trading at a 145% premium to our revised valuation.

As we gear up for the release of first-quarter earnings, our top picks in the restaurant industry remain wide-moat McDonald's and wide-moat Starbucks, trading at 14% and 19% discounts to our $312 and $105 fair value estimates, respectively. While industry traffic has been depressed for two years, both brands boast strong digital platforms that allow them to defend transaction frequency without indiscriminate national discounting, and both benefit from scale-driven cost advantages that should allow them to meet the needs of the increasingly value-sensitive consumer without sacrificing financial performance. These are the two most important factors, in our view, that will distinguish the best and worst performers in our industry coverage over the coming years. The industry looks fairly priced in aggregate, trading at a 3% premium to our market-cap weighted fair value estimates. The aggregate figure masks a very bimodal return distribution: Brands like narrow-moat Wingstop (up 108% annually) and wide-moat Chipotle (74%)—which boast strong unit economics and have taken material industry transaction share—have materially outperformed brands like no-moat Wendy's (down 9%) and narrow-moat Papa John's (down 17%), which have not. Those top-performing brands are fully priced, trading at material premiums to our intrinsic valuation (163% and 52%, respectively), suggestive of meaningful execution risk.

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 medium to long term. Operationally, 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.

Narrow-moat Wingstop posted great fourth-quarter earnings, with $127 million in sales and $0.64 in diluted earnings per share beating our $118 million and $0.57 estimates, respectively. Its franchisees enjoyed striking 21% domestic comparable store sales growth despite traffic declines across the industry and limited price increases, while unit growth accelerated to 13% during the fourth quarter as the firm added a record 255 net units in 2024. Importantly, the chicken restaurant chain goes from momentum to momentum, with 2024 guidance implying another year of high-teens systemwide sales expansion. After digesting results, we plan to raise our $114 fair value estimate by a low-double-digit percentage, still leaving shares trading at a mind-boggling 120% premium. Our assessment of the firm's prospects remains very optimistic, with a 10-year compound annual growth rate of 16%, 18%, and 21% for revenue, operating profit, and diluted EPS, respectively.

As we survey the U.S. restaurant landscape looking toward 2024, the largest, chained restaurants with durable cost advantages look best positioned to outperform. We expect industry growth to remain low—just 1.3% annually in real terms through 2025, versus a long-term average of 2.5%. The sharp slowdown is predominantly attributable to slowing consumption spending, with pressured U.S. consumers already limiting restaurants’ ability to further increase prices and likely driving an uptick in industry promotional activity.

While we don't 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, corroborating management's target for more than 10% annual unit growth over the medium- to long term. Operationally, 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.

Considered in isolation, narrow-moat Wingstop's third quarter earnings were fantastic, with $117 million in revenue and $0.65 in diluted EPS blowing past our $106 million and $0.53 estimates, respectively. The firm generated double-digit traffic growth despite 0.8% industrywide declines (Revenue Management Solutions), suggestive of ongoing traffic gains, and it benefitted from historically low bone-in wing prices en route to stellar 26.4% restaurant margins, in line with our forecast. Nevertheless, we expect to maintain our $114 fair value estimate as we balance stellar stales against materially higher than expected long-term sales, general and administrative (SG&A) expense guidance, with the firm guiding to SG&A expense of 2%-2.5% of global systemwide sales, contrasting with our forecasts calling for more substantial operating leverage (seeing SG&A clock in at 1.7% of systemwide sales in 2032) as growth skews increasingly towards fully franchised international markets. The net result is a 2032 operating margin forecast around 31%, from 34% prior, with the sharp sales outperformance and time value offsetting that impact.

The restaurant industry looks cheap to us for the first time since fall 2022, with the recent market correction creating a buying opportunity for long-term investors. Our coverage trades at a 7% cap-weighted discount to our intrinsic valuations, with wide-moat companies like Yum Brands, Starbucks, and McDonald's looking unusually alluring, each trading at a 10%-12% discount to our respective $139, $103, and $285 fair value estimates. We recognize that slowing same-store sales pose a near-term risk, but believe that large, quick-service operators with scale-driven cost advantages and strong digital touchpoints look poised to capture market share in this dynamic environment. Restaurants are more resilient than many investors realize, with companies that outperform on the basis of "value for the money" like McDonald's and wide-moat Chipotle even posting comparable-store sales growth over the course of the 2007-09 downturn. While we expect consumer spending to slow in 2024, we continue to maintain that the U.S. will avoid an outright recession and believe that investors seeking consumer cyclical exposure would do well to consider turning toward the restaurant industry at current prices.

While we don't 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 low-teens average annual unit growth over that period. Our forecasts are underpinned by best-in-class unit economics and a sizable development pipeline, corroborating management's target for more than 10% annual unit growth over the medium- to long term. Operationally, 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.

Narrow-moat Wingstop reported another quarter of strong results, with second-quarter sales of $107 million and diluted EPS of $0.54, comfortably edging our $99 million and $0.48 estimates, respectively. The chain remains on track to deliver another year of stratospheric growth, with management raising its full-year same-store sales estimate to 10%-12% and full-year net unit growth forecast to 240-250 stores, up from high-single-digits and 240, respectively. Underpinning the firm's momentum are ongoing success with its chicken sandwich platform and its delivery aggregator partnerships, with global comparable store sales growth of 16.8% driven almost entirely by increases in traffic. We expect to raise our own full-year estimates into the guided range, driving a mid-single-digit percentage increase to our $107 fair value estimate but leaving shares looking meaningfully overpriced.

Restaurant stocks look expensive as we take the industry's pulse, with names in our coverage trading at a market-cap-weighted 10% premium to our intrinsic valuations. While demand has held up nicely to date, we're seeing weak spots, with persistent declines in traffic and items per check suggesting price-conscious consumers and a more challenging pricing environment to come. Nominal same-store sales growth remains healthy, up around 5.7% industrywide over the past three months (RMS data), but traffic (down 1.4%) and items per check (down 3.7%) remain points of concern. We expect slowing sales momentum into the first half of 2024, resulting in a more promotional environment for the industry and a three- to four-year route to normalized restaurant-level profitability. The industry's bargain bin looks sparse, but we see modest upside in Wendy's and Starbucks shares, which trade at 6% and 2% discounts to our $23 and $104 fair value estimates, respectively.

While we don't 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 low-teens average annual unit growth over that period. Our forecasts are underpinned by best-in-class unit economics and a sizable development pipeline, corroborating management's target for more than 10% annual unit growth over the medium- to long term. Operationally, 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.

Narrow-moat Wingstop posted another impressive quarter, with $109 million in sales and $0.59 in adjusted EPS meaningfully outpacing our $99 million and $0.42 forecasts, respectively. The firm's growth was underpinned by strikingly high 20.1% same-store sales growth across its U.S. system, 11.4%-unit growth, with the firm opening 37 net new stores during the quarter, and an uptick in franchisees' national advertising fund contribution rate (driving advertising revenues up 66% annually). Encouragingly, comparable store sales were predominately driven by increases in guest frequency, suggesting that the firm has more or less avoided the headwinds in traffic and items per check that we've seen across the industry over the past year, likely attributable to its decision to hold prices steady in 2022 as bone-in wing costs reduced pressure on the firm's operating expenses despite double-digit food cost increases industrywide. As we digest results, we expect to raise our $98 fair value estimate by a high-single-digit percentage, consistent with raised full-year comparable store sales guidance to "high-single-digit" growth (from mid-single-digit growth) and the operating leverage that begets. Despite the move, shares continue to look materially overvalued, surging 7%-8% during intraday trading.

We're initiating coverage of Wingstop with a narrow moat rating and fair value estimate of $98 per share, leaving shares trading at a nearly 90% premium to our intrinsic valuation. While the firm boasts an extraordinary growth runway, with our forecasts already suggesting that it achieves $10 billion in systemwide sales and 5,000 total units in a decade (up from $2.7 billion and nearly 2,000 currently), we don’t surmise its prospects justify such a lofty multiple (93 times forward earnings). Our narrow moat rating is attributable to Wingstop’s brand intangible assets, underpinned by best-in-class unit economics and robust comparable store sales growth.

While we don't 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 low-teens average annual unit growth over that period. Our forecasts are underpinned by best-in-class unit economics and a sizable development pipeline, corroborating management's target for more than 10% annual unit growth over the medium- to long term. Operationally, 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.