Wingstop views the recent $1.9 trillion American Rescue Plan in two very different lights.
On one hand, the thousands in stimulus sent to most Americans is fueling a near-term tailwind. As a result, domestic same-store sales increased 20.7 percent in Q1, and 30.6 percent on a two-year basis. U.S. comps have remained positive through the first four weeks of April, which is impressive considering Wingstop is lapping a month that saw a 33.4 percent rise in same-store sales. These massive numbers have translated to a U.S. AUV of $1.55 million, compared to $1.27 million last year.
The bad news, according to CEO Charlie Morrison, is that the enhanced stimulus has kept individuals away from the job market—a trend that’s affecting staffing levels in the supply chain. Wingstop is seeing record-high bone-in chicken wing prices, which are expected to remain elevated for the remainder of 2021. Suppliers are struggling to hire people to process chicken, and that’s placing pressure on the amount of bird that can be processed. The labor crunch negatively affects supply of all parts of the chicken in the U.S., not just wings.
“I think the real question for us is around whether or not there’s going to be additional stimulus, and the implications of that on the labor market, particularly the labor market for our poultry suppliers,” said CFO Michael Skipworth during the chain’s Q1 earnings call.
THE COVID ROAD SO FAR FOR WINGSTOP
In Q1, bone-in wings on the spot market increased more than 50 percent year-over-year. However, Wingstop’s data-driven approach to menu pricing and its negotiations with poultry suppliers have effectively lowered the cost of wings relative to the implied market value. The effective year-over-year increase in the price Wingstop paid for wings was 25.8 percent. Skipworth said leverage on labor and other operating expense lines helped offset some of the inflation in food costs.
The chain expects food costs for company-owned restaurants to be roughly 42 percent for 2021. Morrison noted that this particular level is something Wingstop has seen before. In fact, the chain has seen more impact to the P&L in prior years. The difference this year is that sales growth has reached another level. This leads Morrison to believe wing cost headwinds won’t deter franchisees from seeking development.
“The AUV growth and achieving our $1.5 million AUV generates a lot more cash dollars to the bottom line, which we believe is significantly different than what we saw in prior years when we had inflation like this and is continuing to fuel growth in the business,” Morrison said. “I think the combination of [P&L leverage and AUV] is important. Yes there is leverage, but I think the substantial growth in the AUV and the absolute dollars to the bottom line are what give us confidence in the continued growth algorithm that we’re seeing.”
Regarding brands that have recently entered the category, especially through virtual concepts, Morrison said it will be difficult for them to blend elevated wing prices into their desired margin structure. If that is indeed the case, it should take some pressure off for the balance of the year. But Morrison emphasized that the competitive nature of wings is not the only material factor.
“It has as much to do with the impact of government stimulus and creating an artificially high wage rate that is competitive to the people that are necessary to actually process chicken,” Morrison said. “And so the absolute number of chickens that are being processed is down. That’s why you see pressure even in the sandwich business and everywhere on chicken right now. Labor shortages are the real challenge we’re dealing with.”
Investment in Technology
This year, Wingstop is planning to double down on its technological efforts as it continues its journey toward “digitizing every transaction.”
The chain is starting a five-year investment strategy centered around three main facets: globalizing the U.S. digital platform to ensure success for the international business, modernizing and building a business intelligence platform, and elevating and advancing the end-to-end customer experience.
In 2021 alone, Wingstop will invest more than $10 million in capital to establish the foundation of the strategy.
“Now is not a time to rest on our laurels, but instead we must invest,” Morrison said. “We believe the brands that have gone before us regret not making such an investment and realize how hard it is to unwind multiple platforms all over the world after the fact. We’re at another inflection point in our business and believe this critical investment will protect our leading digital position well into the future.”
Wingstop will launch this strategy from an outstanding starting point. In Q1 digital mixed more than 63 percent, compared to 43.3 percent last year. The brand’s database, which is filled with more than 20 million users, has been fueled by an influx of new customers. Wingstop is leveraging its CRM platform to engage these users and increase frequency, which led to a 12-month high in customer retention levels in Q1.
More specifically, Wingstop is attaching information to customers so it can understand their preferences and inviting them back more aggressively. The chain’s long-term goal has been to attract heavy quick-service restaurant users—a type of customer that has a higher income and uses quick-service more than Wingstop’s core users.
And the brand is seeing those types of guests in large numbers. Wingstop would like these customers to visit again within a 90-day period, and hopefully turn them into a heavier Wingstop user at five times per quarter. The restaurant also leveraged an advertising surplus in Q1 to target these heavy quick-service users.
“I think we are starting to see, albeit very early, signs that we are seeing some momentum gaining,” Morrison said. “Because we believe if we can get those guests not to just be once-a-quarter, but even more frequently than that, it can have a meaningful impact on our top line performance. So it is a big lever we’re pulling. We’re applying a lot of resources to it, and we have seen the effectiveness of that strategy start to take place during the first and early second quarter.”
Skyrocketing Unit Growth
In the first quarter, Wingstop opened a net of 41 restaurants—a Q1 record and 11.7 percent increase year-over-year.
The chain currently has the strongest unit development pipeline it’s ever seen, with over 700 commitments at the beginning of 2021. That’s an increase from 610 development commitments last year. Wingstop anticipates new unit growth to reach record levels this year, so the brand is providing guidance of more than 11 percent in unit growth for 2021.
As of March 27, there were 1,579 Wingstop restaurants systemwide. This included 1,404 restaurants in the U.S. — 1,371 franchised and 33 company-owned. Internationally, Wingstop has 175 franchised restaurants, and that number will only increase in the coming years. The brand recently announced a development agreement to bring 100 new stores to Canada over the next 10 years. Morrison said Canada will be the first market to take Wingstop’s domestic digital platform global, something the brand expects to pay significant dividends in the future.
Wingstop grew royalties, franchise fees, and other revenue by $7.4 million in the first quarter. Skipworth said this was due in part to the strength of noncomp restaurants, which are well above $1.2 million in AUV as they enter the comp base. To put it in perspective, the 2019 vintage generated year-one AUVs of just over $900,000.
The chain’s current domestic AUV of $1.55 million — combined with an average initial investment of under $400,000 — generally yields a cash-on-cash return in excess of 50 percent. Morrison believes restaurants have the capacity to go well above the $2.2 million AUV of corporate-owned restaurants. At Wingstop’s highest volume levels, it’s operating around $3.5 million in AUV.
In Q1, total revenue increased 27.5 percent to $70.7 million. Net income grew 62.5 percent to $13.2 million, or $0.44 per diluted share, compared to net income of $8.1 million, or $0.27 per diluted share, in the prior year. Adjusted EBITDA lifted 46.2 percent to $23.9 million.
The company continues to expect mid-single digit U.S. same-store sales growth, consistent with its three- to five-year outlook.
“I’m really excited about the future of our brand and our continued efforts to position our business for long-term growth. Our two-year same-store sales growth of more than 30 percent, strong AUVs of $1.5 million, and opening 100 net new units in just the last two quarters gives us confidence in the road ahead,” Morrison said. “We remain confident that our long-term strategic focus will continue to reward our shareholders, brand partners, and team members as we continue on our journey of becoming a top-10 global restaurant brand.”