Wingstop Earnings: Chicken Chain Posts Blowout Quarter but Pricey Shares Give Us Indigestion

Considered in isolation, narrow-moat Wingstop’s WING 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.

While the stock appears to be fully valued--trading at around a 67% premium to our $114 valuation during intraday trading--there’s no denying that the brand continues to fire on all cylinders. The company posted 15.3% same store sales growth during the quarter, raising its full year guide by a full 5 points at the midpoint (to 16% from 11%), and continues to boast the best unit economics in our coverage, with franchisees seeing an astounding two-year payback period (against a quick-service average of four to six years). We foresee a viable route to 7,000 units--triple the existing store base--and $10 billion in systemwide sales longer term, particularly as the firm’s international development narrative gains traction.

Finally, we’re lowering our Uncertainty Rating to High from Very High for the name, consistent with our quantitative methodology.