Wingstop’s Record Year and Q4 Results

Wingstop (WING) CEO Michael Skipworth hailed 2023 as the company’s strongest year to date, culminating in impressive Q4 results that surpassed expectations, particularly with a remarkable domestic same-store sales growth of 21.2%. However, despite delivering its sixth consecutive top and bottom-line beat, Wingstop’s stock witnessed a moderate decline as investors sought to lock in gains following a substantial 75% surge since early November.

Q4 Performance Metrics

Wingstop reported Q4 adjusted EPS of 64 cents, surpassing the consensus estimate of 57 cents, alongside Q4 revenue of $127.6 million, exceeding the consensus forecast of $119.9 million. Notably, Q4 domestic same-store sales surged by 21.2%, while domestic restaurant AUV (Average Unit Volume) increased to $1.8 million.

Valuation Concerns and Profit-Taking

The extraordinary rally propelled Wingstop’s shares to all-time highs, resulting in an exorbitant valuation with the stock trading at approximately 110 times next year’s earnings. Consequently, investors were inclined towards profit-taking as the stock was priced to perfection ahead of the earnings announcement.

Slowing Earnings Growth and Expense Surge

A notable factor contributing to investor apprehension is the appreciable slowdown in Wingstop’s earnings growth. While adjusted EPS jumped by 53% in the preceding quarter, it saw a more modest 7% increase in Q4. This deceleration is partly attributed to a 23% year-over-year rise in advertising expenses and a 54% surge in SG&A (Selling, General, and Administrative) expenses, primarily driven by aggressive restaurant development activities.

Aggressive Restaurant Expansion and Future Outlook

Wingstop witnessed a significant increase in net new openings, with 115 additions in Q4, surpassing the previous quarter’s net additions. Despite surpassing its FY23 guidance for global net new units, the company’s FY24 domestic same-store sales guidance of mid-single digits may have left some investors disappointed.

Cost Dynamics and Business Resilience

As chicken prices eased, Wingstop’s cost of sales improved, albeit with reduced capacity to benefit from menu price increases. Consequently, the company is increasingly reliant on transaction increases to drive same-store sales growth, a trend that may moderate following a robust year.

In conclusion, Despite robust business performance, Wingstop’s stock witnessed weakness, likely driven by profit-taking in a high-priced stock due for consolidation. Wingstop continues to outperform its peers, exemplified by its substantial lead over Restaurant Brands International’s Popeyes in terms of comp growth. Today’s market reaction underscores a “sell-the-news” sentiment in response to Wingstop’s stellar performance amidst elevated valuation concerns.