Wingstop (WING)

Fast-food chain Wingstop (NASDAQ:WING) met Wall Street’s revenue expectations in Q1 CY2025, with sales up 17.4% year on year to $171.1 million. Its non-GAAP profit of $0.99 per share was 14.4% above analysts’ consensus estimates.

Company Overview

The passion project of two chicken wing aficionados in Texas, Wingstop (NASDAQ:WING) is a popular fast-food chain known for its flavorful and crispy chicken wings offered in a variety of sauces and seasonings.

Modern fast food is a relatively newer category representing a middle ground between traditional fast food and sit-down restaurants. These establishments feature an expanded menu selection priced above traditional fast food options, often incorporating fresher and cleaner ingredients to serve customers prioritizing quality. These eateries are capitalizing on the perception that your drive-through burger and fries joint is detrimental to your health because of inferior ingredients.

Some competitors with counter service concepts include Noodles & Company (NASDAQ:NDLS), Potbelly (NASDAQ:PBPB), Shake Shack (NYSE:SHAK), and The Habit Burger Grill (owned by YUM! Brands, NYSE:YUM).

A company’s long-term performance is an indicator of its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years.

With $651.1 million in revenue over the past 12 months, Wingstop is a small restaurant chain, which sometimes brings disadvantages compared to larger competitors benefiting from better brand awareness and economies of scale. On the bright side, it can grow faster because it has more white space to build new restaurants.

As you can see below, Wingstop’s sales grew at an incredible 25.9% compounded annual growth rate over the last six years (we compare to 2019 to normalize for COVID-19 impacts) as it opened new restaurants and increased sales at existing, established dining locations.

This quarter, Wingstop’s year-on-year revenue growth was 17.4%, and its $171.1 million of revenue was in line with Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 16.8% over the next 12 months, a deceleration versus the last six years. Still, this projection is noteworthy and implies the market sees success for its menu offerings.

Number of Restaurants

A restaurant chain’s total number of dining locations influences how much it can sell and how quickly revenue can grow.

Wingstop sported 2,689 locations in the latest quarter. Over the last two years, it has opened new restaurants at a rapid clip by averaging 14.2% annual growth, among the fastest in the restaurant sector. This gives it a chance to scale into a mid-sized business over time. Additionally, one dynamic making expansion more seamless is the company’s franchise model, where franchisees are primarily responsible for opening new restaurants while Wingstop provides support.

When a chain opens new restaurants, it usually means it’s investing for growth because there’s healthy demand for its meals and there are markets where its concepts have few or no locations.

Same-Store Sales

The change in a company's restaurant base only tells one side of the story. The other is the performance of its existing locations, which informs management teams whether they should expand or downsize their physical footprints. Same-store sales provides a deeper understanding of this issue because it measures organic growth at restaurants open for at least a year.

Wingstop has been one of the most successful restaurant chains over the last two years thanks to skyrocketing demand within its existing dining locations. On average, the company has posted exceptional year-on-year same-store sales growth of 16.9%. This performance along with its meaningful buildout of new restaurants suggest it’s playing some aggressive offense.

In the latest quarter, Wingstop’s year on year same-store sales were flat. This was a meaningful deceleration from its historical levels. We’ll be watching closely to see if Wingstop can reaccelerate growth.

Gross profit margins are an important measure of a restaurant’s pricing power and differentiation, whether it be the dining experience or quality and taste of food.

Wingstop has best-in-class unit economics for a restaurant company, enabling it to invest in areas such as marketing and talent. As you can see below, it averaged an elite 48.2% gross margin over the last two years. That means Wingstop only paid its suppliers $51.77 for every $100 in revenue.

This quarter, Wingstop’s gross profit margin was 48.2%, in line with the same quarter last year. Zooming out, the company’s full-year margin has remained steady over the past 12 months, suggesting its input costs (such as ingredients and transportation expenses) have been stable and it isn’t under pressure to lower prices.

Operating margin is a key profitability metric because it accounts for all expenses keeping the business in motion, including food costs, wages, rent, advertising, and other administrative costs.

Wingstop has been a well-oiled machine over the last two years. It demonstrated elite profitability for a restaurant business, boasting an average operating margin of 25.3%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Analyzing the trend in its profitability, Wingstop’s operating margin decreased by 1.3 percentage points over the last year. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

In Q1, Wingstop generated an operating profit margin of 22.4%, down 7 percentage points year on year. Since Wingstop’s operating margin decreased more than its gross margin, we can assume it was less efficient because expenses such as marketing, and administrative overhead increased.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Wingstop has shown terrific cash profitability, driven by its lucrative business model that enables it to reinvest, return capital to investors, and stay ahead of the competition. The company’s free cash flow margin was among the best in the restaurant sector, averaging 15.9% over the last two years.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Wingstop’s five-year average ROIC was 56.8%, placing it among the best restaurant companies. This illustrates its management team’s ability to invest in highly profitable ventures and produce tangible results for shareholders.

Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.

Wingstop’s $1.27 billion of debt exceeds the $251.4 million of cash on its balance sheet. Furthermore, its 5× net-debt-to-EBITDA ratio (based on its EBITDA of $203 million over the last 12 months) shows the company is overleveraged.

At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Wingstop could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.

We hope Wingstop can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.

We enjoyed seeing Wingstop beat analysts’ EPS and EBITDA expectations this quarter. On the other hand, its flat same-store sales slightly missed. Overall, this quarter had some key positives, but the market seemed to focus on the same-store sales growth. The stock traded down 2.8% to $224.00 immediately following the results.

Updated: May 22, 2025 at 10:37 PM EDT

Before investing in or passing on Wingstop, we urge you to understand the company’s business quality (or lack thereof), valuation, and the latest quarterly results - in that order.

There is a lot to like about Wingstop. For starters, its revenue growth was exceptional over the last six years. And while its projected EPS for the next year is lacking, its marvelous same-store sales growth is on another level. On top of that, Wingstop’s new restaurant openings have increased its brand equity.

Wingstop’s P/E ratio based on the next 12 months is 80.7x. There’s no doubt it’s a bit of a market darling given the lofty multiple, but we don’t mind owning a high-quality business, even if it’s expensive. We’re in the camp that investments like this should be held for at least three to five years to negate the short-term price volatility that can come with high valuations.

Wall Street analysts have a consensus one-year price target of $313.08 on the company (compared to the current share price of $321.14).

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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