Wingstop (NASDAQ:WING) definitely ended last week on a high note. Keep in mind that, on Friday, the shares roared by 18%. And even this week, the momentum continued, as WING stock has added another 1.6%.
All this has to do with the standout earnings report. In fact, it was really tough to find anything wrong with it.
During the latest quarter, revenues increased by 17% to $37 million and earnings came to $6.8 million, or 23 cents a share, up from $4.9 million, or 17 cents a share, for the year-ago period. The Street was calling for revenues of $36.8 million and earnings of 20 cents a share.
It’s true that that the same-store sales growth underperformed a bit at 4.3% (the expectation was for 5.4%). But keep in mind that the year-over-year comparison was tough.
Regardless, there is little doubt that the growth story is still intact, which has meant strong interest from franchisees. Note that the two-year cash-on-cash return ranges from 35% to 40%. As a result, about 80% of new unit development continues to come from existing franchisees.
There is also much room for growth, as the company estimates that there could be over 2,500 locations in the US alone. Currently, there are 1,040.
Innovation and WING Stock
A critical part of the franchise model is to invest heavily in marketing and brand advertising. But this is really just the table stakes. In today’s highly competitive world, there also needs to be a focus on digital technologies.
The good news is that Wingstop has been at the cutting-edge on that front. In the recent quarter, digital sales hit 24.3% of total sales — and that just scratches the surface. To put things into perspective, Papa John’s International (NASDAQ:PZZA) and Domino’s Pizza (NYSE:DPZ) get about 60% of their sales from digital sales.
Something else: the average check is $5 higher than the average of $17 when it comes to digital sales. Basically, by offering more convenience and leveraging analytics, Wingstop has been able to find nice opportunities for up-selling and cross-selling. Besides, about 75% of the business comes from takeout. So by offering digital technologies, there are higher efficiencies, especially when compared to phone orders.
But Wingstop is far from done with its innovation efforts. For example, the company has recently implemented a new CRM and has also been investing in natural voice recognition technologies. There is also an effort to provide delivery (Wingstop has partnered with Door Dash). While still in the early stages, there are already positive signs, such as improved check sizes.
Bottom Line on WING Stock
When it comes to WING stock, there are definitely risk factors. Consider that a key part of the strong earnings has come from lower chicken costs. Yet, this can easily reverse. What’s more, McDonald’s (NYSE:MCD) has been pushing hard to provide value meals, which could have an adverse impact on the profitability of the food services industry.
But perhaps the biggest issue for WING stock is the valuation. After all, the price-to-earnings ratio is at a nose-bleed 65. The dividend yield is also a meager 0.5%.
Interestingly enough, even Wall Street is a bit skeptical, with the average price target set at $57. This actually implies 5% downside!
So, yes, Wingstop continues to make the right moves. But, for now, it seems like much of the good news is baked into the valuation. In light of this, it’s probably best to wait to get a better price on WING stock.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.