Between hurricanes Harvey and Irma, and the earthquake near Mexico City, Wingstop faced its share of challenges in the third quarter. Additionally, inflated wing prices, which hiked cost of sales thanks to a 41.3 percent increase in commodity rates for bone-in chicken wings compared to the prior year period, continued to squeeze the bottom line. As the fourth quarter takes hold, however, it’s no coincidence the brand is rolling out an advertising campaign centered around the idea that “you can’t stop when it comes to your crave for Wingstop.”
“We think that the way that our franchisees and our team members stepped up in the face of these natural disasters is further evidence that you can't stop Wingstop,” Charlie Morrison, chairman and chief executive officer, said in a conference call.
Even with the external factors pressing the brand, Wingstop still showed underlying momentum in its business, reporting domestic same-store sales growth of 4.1 percent. Systemwide sales grew 16.1 percent and the chain kept growing, increasing its unit count 14.6 percent to 1,088 global locations. Total revenue jumped 19.3 percent to 26 million. The revenue mark topped Zacks expected $25 million, and shares hit $32.19 in the final minutes of trading Thursday, representing a climb of 18 percent in the past 12 months.
The primary driver of sales growth were the 32 new openings in the quarter, seven more than the 25 that opened in Q2.
Perhaps most pleasing to investors, though, is Wingstop’s current initiatives to further its growth, both in sales and scale. Some of those moves are already paying dividends.
For starters, in response to the elevated wing prices, Wingstop has been in the process of unveiling a split menu, which positions lower-cost boneless wings at a price point below the more expensive bone-in offerings. So far, roughly half of the chain’s system is converted and Morrison said Wingstop is on track to complete the change at all units by the end of the year.
This split menu has made a significant impact. “The best metric to wrap your head around would be the expected improvement in food cost, which we estimate to be between 100 and 200 basis points for restaurants that implement the menu that may have some regional strength in markets where our boneless wing sales are lower,” Morrison said. “So we have some markets where it's quite high and does well, but in the markets where we really want to strengthen the boneless wing sales, that could have an even more meaningful impact if implemented correctly.”
Wingstop seems to have gotten ahead of the curve on this trend as well. Morrison said the chain has seen wing prices drop dramatically in recent days. On Thursday, he said they were selling at $1.88 per pound, down from a high of $2.16.
Even with the expected normalization in wing prices, however, Wingstop will still change its menu to the split format at all units.
“It's being incorporated into everything we do going forward, including new restaurants,” Morrison said. “What it does for us [is it] gives us a lot of flexibility. We can still create great value through our boneless wings, which are our lower-food-cost item, and adjust carefully the prices of our bone-in wings to the market. … The good news on the wing market is that we've seen it come down almost $0.30 since the early part of the quarter. So it's been a very quick drop. And I think that's indicative of menu changes that are happening, people pulling them off the menus, perhaps, and also the ability for folks to put away their frozen stock for seasonal peak. So I think this trend is very encouraging, at least right now, to all of us.”
Another strategic priority for Wingstop is digital ordering. The company piloted a delivery test in Las Vegas that generated an initial uplift of 10 percent in same-store sales growth, Morrison said. It helped the company produce 5.5 percent same-store sales increases in corporate-owned locations for the quarter. In Las Vegas, this was thanks to increased transactions, which resulted in minimal cannibalization of Wingstop’s existing carryout business—a channel that represents about 75 percent of the chain’s sales.
Just this week, Wingstop expanded its delivery test to its 50 franchises in Chicago. “We chose this market primarily because of its population density and cold-weather seasonality,” Morrison said. “We also plan to launch another test market in a few weeks in a smaller, mature market to further evaluate the role that delivery can play in our core markets. We are proud to partner with DoorDash in both of these markets, as we believe that they have the resources to serve our guests in a first-class, convenient manner while respecting the quality of our food and the guest experience.”
Digital ordering is carrying a nearly $5 higher average check. During the quarter, digital orders rose to 21.5 percent of Wingstop’s total sales, representing a 390-basis point increase from the prior year period. And the company is doing so without offering discounts to lure guests, Morrison said.
More than 60 percent of Wingstop’s domestic restaurants are generating 20 percent or more of their sales online, up from 32 percent in last year’s third quarter. That significant jump is showing the brand clear runway for additional sales, all built organically without having to changing its pricing structure, Morrison added.
Wingstop launched a national advertising campaign earlier in the year. Morrison said it is “increasing brand awareness in all markets and continues to drive top line momentum, which accelerated in Q3 relative to Q2 against the tough industry backdrop.”
“The success of our national advertising campaign puts us on track to achieve our 14th consecutive year of positive same-store sales growth,” he added.
Despite challenges in areas affected by the natural disasters, Morrison said Wingstop’s pipeline remains strong, although some expected 2017 openings might push back into 2018.
Entering the year, Wingstop had more than 500 restaurants in development in the U.S. and an international pipeline of roughly 600 restaurants. During the quarter, Wingstop announced two new international development deals for 110 restaurants across Australia and New Zealand over the next 10 years, and more than 70 restaurants in France in the next 12. There are now restaurants in, or commitments for, locations in 13 countries overseas. There are currently 94 operating units in seven countries outside of the U.S.
Wingstop also officially announced during the call that David Goebel, the former CEO of Applebee’s, joined the company’s seven-member board.
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