Wingstop has a plan to keep soaring chicken wing prices from grounding its sales momentum. Originally tested in Las Vegas and rolling out nationwide, the chain is deploying split-menu pricing with its boneless and bone-in offerings.
Wingstop hopes the menu will shift customer preference and soften the blow of bone-in inflation on its bottom line. Chairman and CEO Charlie Morrison said in a conference call that company-owned restaurant margins were affected by 11 percent bone-in inflation during the first and second quarters. “As we look to the balance of the year, it does not appear as though there are any leading indicators that suggest that bone-in wing prices will decline from their current levels,” he said.
This split menu will allow modest price increases on bone-in wings while boosting boneless orders, “all of which is designed to mitigate the impact of the current bone-in inflationary wing environment,” Morrison said.
READ MORE: Why Wingstop is one of the industry's best franchise deals.
Wingstop’s sales are doing just fine, however, as shares rallied Thursday following the release of the brand’s second-quarter results.
System-wide sales boosted 14.1 percent, while domestic same-store sales increased 2 percent, year-over-year, and total revenue grew 8.6 percent to $24.7 million. Net income increased to $5.3 million, or 18 cents per diluted share. This beat Wall Street estimates of 15 cents per share.
Wingstop also increased its outlook to earnings growth of 23—25 percent, up from 19—21 percent (71—73 cents per share).
But the conversation of bone-in wing prices threaded its way throughout the call. This is a quandary facing brands around the industry—in all sectors. Buffalo Wild Wings’ same-store sales fell 1.2 percent and 2.1 percent at company-owned and franchised locations, respectively, in the second quarter. The chain reported that traditional wings were $2.05 per pound in the second quarter, representing an 11-cent increase, or 5.7 percent, from the prior year period average of $1.94. Traditional wings as a percentage of cost of sales was 30.7 percent in the quarter, the company said.
Wingstop dealt with similar headwinds. The chain, which has 1,056 units (967 in the U.S.), said cost of sales increased to $6.9 million from $6.2 million year-over-year. As a percentage of company-owned restaurant sales, cost of sales grew 410 basis points to 77.6 percent from $73.5 percent. Driving the change: a 10.9 percent increase in commodity rates for bone-in chicken wings, as well as an increase in wage rates and labor costs.
Morrison said, in tests so far, the split-menu pricing hasn’t had a negative impact on check averages. As the menu moves across the country, Wingstop will determine the appropriate price differentiation between boneless and bone-in.
“The benefit of the menu strategy we're working against is to separate the pricing of the two products, so that if we need to take some price on the bone-in wings associated with this extraordinarily high wing market right now, it gives us the opportunity to still then present a great value back to our guests,” he said. “One of the risks of taking too much price is that you value scores will go down. We don't want to risk that and hence why we're doing this. So I think both can happen with this new strategy. And as I mentioned before, market-to-market, we will decide what is the best solution for each of those markets, not only in terms of the gap between the bone-in and the boneless but also relative to bone-in wing prices that we feel like we need to take to offset some of the inflation that we're seeing.”
Morrison said 2017’s wing inflation compares only to 2012. “We've seen this before. We would expect, ultimately over time that this would subside. But [franchisees] are concerned about the pricing. There's no doubt about it. I'm concerned. This market is very unusual. There aren't a lot of good reasons at this point in the game why those wing prices should be this high.”
Morrison added that Wingstop continues to grow around the brand’s very efficient operating model. The chain remains on track to deliver its 14th consecutive year of positive same-store sales growth. Twenty-five net new restaurants opened in the quarter and 11 debuted in June.
Wingstop also opened its first restaurant in Malaysia and now has 89 restaurants outside the U.S. in six countries. The brand also has an agreement in place to develop 100 locations in the U.K. over the next 12 years. Wingstop has 23 company-owned stores, 16 of which are in Dallas.
A driving factor in the chain’s growth is advertising, Morrison said. “We are very pleased with the results of our national TV and digital advertising. Both bring greater awareness of our highly differentiated brand to our target audiences. In fact, the effective reach of our TV campaign with adults 18 to 49 has exceeded our projections, and we're seeing traction across all geographies. Improvement is more pronounced in our non-coop markets, which previously had no TV exposure,” he said.
Digitally, 20.7 percent of total sales for Wingstop came through the medium. More than 54 percent of domestic restaurants are generating 20 percent or more of their sales online, up from 27 percent in the second quarter 2016.
Wingstop tested delivery in 10 Las Vegas locations (five company owned) and produced a 10-percentage point increase in same-store sales growth, primarily driven by an increase in transactions, Morrison said.
“Early indications suggest that there was minimal cannibalization of our existing takeout business. We also saw an average check for delivery that was $1 higher than the average digital check prior to the test. The results from our Las Vegas test are very encouraging,” Morrison said.
Wingstop also announced that interim chief financial officer Michael J. Skipworth was appointed to the role, effective immediately.