A quarter after Wingstop saw its same-store sales drop 3.3 percent—its lowest performance since COVID began—the chain is now arguably in a better position than anyone of its size in the fast-casual industry.
In the third quarter, comps increased 6.9 percent, and a majority of that growth came from transactions as 2021 pricing tapered off. On a three-year basis, the concept experienced a 36 percent rise. Also, with an AUV of $1.6 million and initial investment of $400,000, franchisees are averaging 70 percent in cash-on-cash returns. The digital business, which comes with a $5 higher average check, held steady with a 62 percent mix.
Unlike most of its peers, Wingstop is in a position where it doesn’t need to take larger-than-usual price hikes because of all the deflation its feeling. Jumbo bone-in wing prices are $1.05 per pound, which is a 43 percent drop compared to the year-ago period. The restaurant has seen better breast meat prices, as well. Cost of sales decreased by more than 900 basis points year-over-year, driven by a nearly 1,100-basis-point drop in food, beverage, and paper costs, and a 150-basis-point decrease in labor expenses. Executives believe the favorable commodity environment will continue for the rest of the year and into 2023.
“We have clear line of sight to $2 million-plus AUVs, and strategies that will help us navigate uncertain times ahead,” CEO Michael Skipworth said during the company’s Q3 earnings call. “We remain confident in our strategies that will reward our shareholders, franchisees, and team members as we continue on our path to become a top 10 global restaurant brand.”
The lower-cost environment bodes well for Wingstop’s unit economics, and so do the highly successful sales drivers. It starts with the chicken sandwich, which debuted August 29 with 12 flavors; $5.49 for just the sandwich and $7.99 for the combo. The product captured new customers and additional occasions beyond what the chain expected, selling out of four weeks supply in just six days. The company used its “full advertising muscle,” Skipworth said, inclusive of national TV spots, influencers, social media, and PR campaigns. The CEO added that it had a halo effect on overall business, with all channels seeing growth.
The item relaunched in early October with a measured approach, including slowly phasing in advertising support. It’s now mixing in the high single digits—more than two times what Wingstop saw in market tests. The chicken sandwich, made with breast meat, also allows the brand to lean further into its strategy of using the whole bird to mitigate costs. In fact, Wingstop now sees a path to where boneless meat could mix more than 50 percent, which would drive down food costs to the lower 30 percent range. Some franchisees are already realizing this opportunity, Skipworth said.
“Something that we’re really excited about, particularly when we think about the long-term potential for the brand, and we’ve talked about this in the past, where we’ve often with our wing-focused offering have had to navigate that veto vote,” Skipworth said. “We really believe offering a chicken sandwich, which is a pretty universal occasion for just about anyone, this really gives us an opportunity to address some of those issues we’ve seen in the past.”
“It provides us a lot of confidence,” he added. “Not just for this quarter, but this is something that we’re going to be able to build on as we progress through the balance of 2022 and into 2023.”
To reach even more customers, Wingstop in July officially launched on the Uber Eats platform after working exclusively with DoorDash. Without much advertising, early results show highly incremental sales opportunities, in line with expectations. Skipworth said the company is in the early stages of building delivery, and believes the channel can reach a 50 percent mix like some of Wingstop’s peers.
Despite the chicken sandwich and Uber Eats bolstering awareness, the fast casual still believes there’s a glaring gap between itself and national competitors. To close this margin, Wingstop folded its local ad fund into its national ad fund, bringing the contribution rate to 5 percent. The increased firepower allows the chain to use dollars more efficiently and place media in premium time slots, like during NFL games. With continued growth of system sales, the company is on track for another step-up in advertising investment in 2023.
All of these factors are only increasing the confidence of franchisees. Through the first three quarters, Wingstop opened 167 net new restaurants worldwide, including 40 in the third quarter. The chain is on pace to break last year’s record of 193. Wingstop increased its 2022 guidance from 220-235 net new stores to 225-235—an annual growth rate of 13 to 13.5 percent. Skipworth said the development pipeline is actually stronger now than it was at the same point last year.
Wingstop ended Q3 with 1,898 units globally, including 1,673 in the U.S. and 225 internationally. The long-term goal is more than 7,000 stores worldwide.
The CEO noted that Wingstop has been able to work around delays and permitting issues because construction is not that involved. The concept only needs an inline shell, which lowers initial investments and delivers high returns. Plus, the brand is proactive with suppliers to make sure equipment is on time. Staffing hasn’t restricted expansion either. Restaurants are achieving $1.6 million AUVs with as few as three to four employees at once.
Because the current real estate footprint works so well, Wingstop hasn’t felt the need to implement too much innovation around its prototype.
“We’re $1.6 million AUV today in a box that’s anywhere from 1,300 square feet to 1,700 square feet, inline, with majority of our business off-premise,” Skipworth said. “So when you start to introduce complexities around an asset out on a pad, drive-thrus, it starts to change the operating model. You start to add labor, you start to increase occupancy costs. … Really making sure we protect and enhance these unit economics. That’s something that’s paramount for this brand, and what we believe will continue to fuel industry-leading development. We’re going to stay true to that, and we see an ability again to drive AUVs to levels above $2 million with the existing box we have today.”
Systemwide sales increased 17.7 percent to $699.6 million. Net income grew 18.4 percent to $13.4 million, or $0.45 per diluted share, compared to net income of $11.3 million, or $0.38 per diluted share, in the prior fiscal third quarter. Adjusted EBITDA rose 32.7 percent to $28.4 million.
For fiscal 2022, Wingstop still expects same-store sales in the low single digits, which would mark the chain’s 19th straight year in positive territory.