There are at least three ingredients to a winning restaurant investment recipe. It should be a company that is expanding rapidly (known as unit growth), is profitable early on in the journey, and is consistently increasing sales per location (known as same-store sales, or comps). The pandemic disrupted the restaurant industry, but chicken-wing chain Wingstop (NASDAQ:WING) stood out as a resilient outperformer in 2020, continuing to exhibit all three of these winning traits.
For 2020, Wingstop opened 153 net new restaurant locations, good for 11% year-over-year unit growth. The company recorded a net profit of $23.3 million, up from $20.5 million in 2019. And its domestic comps increased a stunning 21.4%. This last number on its own was impressive. But here’s why this stat is particularly noteworthy: This past year marked Wingstop’s 17th consecutive year of comps growth.
Entering fiscal year 2021, there was plenty of reason to believe this streak was doomed to end. But against all odds, Wingstop is officially on pace for its 18th consecutive year of comps growth.
Why the streak could end for Wingstop
First, consider why Wingstop performed so well in 2020 despite the challenging operating environment. In 2019 (before the pandemic), dine-in sales accounted for less than 20% of total sales — over 80% of sales were already off-premise. As dining rooms were forced to close in the spring of 2020, most restaurants struggled. But Wingstop was already primarily operating as a delivery and takeout business.
Furthermore, in January 2020, around 40% of Wingstop’s sales were digital. That’s high for a restaurant company. The pandemic forced consumers to transact more digitally to slow the spread of the coronavirus, and not all companies were prepared with adequate technology. But this was already another strength for Wingstop.
Therefore, the chain didn’t need to adapt much. It just leaned into what it was already doing well. And since it had the jump on its peers, it was a primary beneficiary of a suddenly changed restaurant landscape. As a result, its comps flew through the roof. Most restaurant companies are pleased with a single-digit percentage increase for comps in a given year; growth of 21.4% is rare.
But Wingstop’s outstanding performance last year means a tough year-over-year comparison this year. It probably wasn’t reasonable to hope that 2021 was going to be better than 2020. It seemed logical that sales would take a step back before returning to more modest growth in coming years.
These assumptions are proving to be very wrong so far.
Why it’s not ending yet for Wingstop
So far, Wingstop just keeps growing sales. On April 28, management provided financial results for the first quarter of 2021. Comps in the U.S. were up a whopping 20.7% from the first quarter of 2020. And for a little added perspective, the first quarter of 2020 wasn’t bad: Those comps were up almost 10% year over year.
Now Wingstop is already about a month into the second quarter, and management says that comps are still positive. To reiterate, the company is facing an extremely challenging year-over-year comparison in 2021 given how successful it was in 2020. But so far, it’s on pace to deliver its 18th consecutive year of comps growth.
There are a couple of reasons to believe Wingstop could continue growing for the remainder of the year. First, the company cut back on marketing expenses in 2020. But it still collected money from its franchisees for its advertising fund. It currently has over $22 million that management intends to start putting to work. Therefore, sales could continue to come in hot as it ratchets up its marketing spend.
Additionally, Wingstop’s digital sales have grown significantly. As already noted, digital sales accounted for around 40% of total sales in January 2020. But right now, over 60% of sales are digital. Management believes strongly in its customer retention capabilities for digital customers. It considers customer retention as a first-time digital customer who makes another purchase within 90 days. Right now, customer retention is at a 12-month high, demonstrating its digital-first strategy is paying off.
Wingstop is a restaurant stock that investors hardly talk about and that’s a shame. Its continued comps growth clearly demonstrates it’s a great restaurant operator whether there’s a pandemic or whether things are returning to normal.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
View more information: https://www.fool.com/investing/2021/05/01/q1-results-wingstop-extend-earnings-streak/