We have owned Wingstop Inc. (NASDAQ:WING) since spring 2022, adding exposure to this growing restaurant chain that continues to enjoy growth and dazzling comparable sales. It is at nosebleed valuations here, and approaching levels that are met with heavy resistance. Short term, we would expect that shares see some pressure, but long term we remain bullish on future growth.
New money should wait for shares to come back, but those that have been along for the ride at our trading group should consider taking some profit and rolling the rest into a house position, especially if you missed out on the chance to do so in the summer. This stock swings, it is great for trading, but we like it as a long-term investment. Long term we are bullish, but the traders in us rate this stock as neutral here. In this column we discuss the just reported results.
Discussion
Wingstop put out strong results for Q3, and we think the outlook going forward remains strong, despite our concern with valuation near term. This is a growth play, and with the swings in the stock, you will get a chance to buy lower from here. Barring a moderate to strong recession, growth is projected to continue for years to come. We are most impressed with the company’s strong sales and impressive comparable sales.
Wingstop revenues rise and comparable sales dazzle in Q3
One key metric we look for in restaurants is the growth in comparable sales. For Wingstop, revenues rose in Q3 versus the prior year’s third quarter dramatically. Wingstop registered top line revenues of $117.1 million in Q3 2023, up 26.4% year-over-year. This was an $8 million beat versus consensus estimates. With that said, the comparable sales results rose, and they were dazzling. We forecast ongoing comparable sales growth and also believe that there is lots of room for geographic expansion which will further benefit the top line. In this quarter, they opened a net new 53 stores. Lots of room for expansion.
Wingstop saw positive comparable store restaurant sales of 15.3% over last year. This is incredibly positive. That said, the average unit volume for each restaurant was up 1.8% in aggregate. In terms of margins, the so-called cost of sales increased to $17.6 million from $15.7 million a year ago. As a percentage of company-owned restaurant sales, cost of sales decreased to 73.6% from 78.0% in the prior year comparable period. The decrease was primarily driven by food, beverage and packaging costs benefiting from a 13.5% decrease in the cost of bone-in chicken wings, a direct result of lower inflation and more availability. A big benefit. For a while, wing costs were out of control, and there was even a wing shortage if you recall not too long ago. Prices are normalizing.
Earnings growth
Margins are improving thanks to normalizing costs. Further, the company is engaged in an accelerated repurchase program, which is half of the $250 million program previously announced. We would love to see that buying when the shares are at lower levels, though they did dip late in Q3, which helped the accelerated program. So far, management has spent 75% of the $125 million allocation and retired 567,000 shares. Adjusted EBITDA widened 36.7% to $38.5 million. Considering revenues and expenses, net income ballooned 46.0% to $19.5 million, or $0.65 per share. Adjusted net income was up 53.3% to $20.5 million or $0.69 per share.
While the company trades at a very high multiple to earnings, this level of growth justifies much of that multiple, but we would still wait for a pullback to commit new money.
Forward view
Wingstop Inc. cash flow is strong here, and not only is the company buying back shares, it pays a dividend too, another reason to love this stock long term. A $0.22 per share dividend was announced for December 8, 2023 to stockholders of record as of November 17, 2023.
As of September 30, 2023, there were 2,099 Wingstop restaurants system-wide, and while they have expanded significantly, there is much more room for growth, and we see new stores continuing to be opened.
One must watch the hen hatch rates and costs of chicken wings here to understand risk of higher costs, but for now prices have normalized. As we finish 2023, for the year, expect 16% comparable sales growth, up from prior guidance of 12% at the most. This is strong. For the year 2023 we think we see $2.30 in EPS, so we are trading at 83X 2023 earnings here, but we project EPS can grow to $3.00 in 2024, which is still a rich multiple of 64X, but we are looking for consistent long-term growth, and that is why the market has assigned this level of valuation.
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