WING WINGSTOP INC.
Sector financial performance:
This company, who is primarily franchiser (primary) and operator of chicken wings fast-casual restaurant chain, has been grouped into fast-casual restaurants sector in food service industry.
It seems that significantly slowing down traffic is the major reason contributing to downturn in comparable sales of fast-casual restaurants between 2015 and 2017. Data indicates the average increase in comparable sales all across this sector went down from around 3% of 2015 to around -2% of 2017 and that all sub sectors have experienced decrease in growth in their traffic and comparable sales during this period and the growth turned into negative number in 2017. (Hamburger-sub sector went down from 3.3% to -0.2%; chicken-sub sector down from 4.3% to -0.6%; Mediterranean sub sector down from 6% to -2%; pizza sub sector down from -5 to -13% ;Mexican down from 3% to -4.5%; pasta/noodle sub sector down from 0%-2.5%). Correspondingly, accompanied with declining sales, the traffic has been down for most of companies in this sector since 2015 (average growth in transactions down from 0% of 2015 to -3.5% of 2017). For example, our data indicates that the average decrease in traffic of hamburger sub sector restaurants was 1.2% and 2.1%, chicken wings sub sector restaurants was 1% and 0.9%, in Mediterranean sub sector 1.3% and 3.5%, in Mexican sub sector 3% and 9%, for 2016 and 2017 respectively.
Since 2017, it seems the decrease in comparable sales (down by average 1% in first half of 2018 as compared with 2% of 2017) has been slowing down. Because the traffic/transaction of most companies continued to go down (average -5% in first half of 2018 as compared with -3.5% of 2017) in 2018, the slower decrease in comparable sales has been driven by aggressively rising price. For example, in chicken –wings sector, the average growth in comparable sales rebounded back to about 0% in 2018 from -0.6% of 2017; in Pasta sector, the average growth in comparable sales rebounded back to about 3% in 2018 from -2.5% of 2017; in Mexican food sector, the average growth in comparable sales rebounded back to about 1% in 2018 from -4.5% of 2017; in Pizza sector, the average growth in comparable sales rebounded back to about -13% in 2018 from -16% of 2017 in Mediterranean sub sector, average growth in comparable sales down slightly to -2.5% in 2018 from -2% of 2017; in burger sub sector, average growth in comparable sales down slightly to -0.35% in 2018 from -0.2% of 2017;
Generally, impacts of unfavourable climate of restaurants industry and thus the impact of decreasing traffic seem to be more significant to fast-casual restaurants than to quick service restaurants as indicated by their growth in traffic (not including all sub sectors). Comparable sales followed the same trend as it is in traffic/transaction before 2017. However, due to more aggressively rising price, fast-casual restaurants have been seen a slower decrease in their comparable sales in 2018. The most obvious contrast is from Mexican sector, whose average increase in comparable sales among QSRs and among fast-casual restaurants in 2018, 2017, 2016, and 2015 are about 2%, 4%, 3.3%, and 6% and 1%, -4.5%, -1.4%, and 3% respectively.
It seems, unlike in QSR the difference in performance in terms of comparable sales and thus the traffic are larger among different sub sectors of fast casual sector. For example, our data indicates that chicken/wings and hamburger sub sectors have experienced the least impacts and present the least decrease in their comparable sales (average down 0.2-0.6% in 2017 and 0.1-0.3% in 2018). On contrast, pizza and Mexican restaurants present the largest decrease in comparable sales (average down by 8-15% in 2017 and 1-13% in 2018).
It seems that the impacts from decrease in traffic have been partially offset by companies’ general ability to raise menu price/products mix. However, unlike in QSR sector, the raised price/product mix was not able to bring the growth in sales of those companies in this sector back above zero due to generally weak demand (much larger decrease in transactions).
For companies in this industry, franchising seems not to be popularly accepted as compared with
QSRs. Except for some chicken wings chains, which are consistent with chicken QSRs and re-confirm the current main trend of chicken as favorite, most of companies are operating their own restaurants. Their gross margin vary in smaller range than QSR, which depends on the extent of franchising, and have declined due to increasing labor and occupancy costs and deleverage of those costs as a result of decreasing sales. The rising menu price did not help improve margin due to the immediate promotion after rising menu price. Typical gross margins for different sub sectors are: chicken/wings-down to 15% from 17% of 2014, Hamburger – down to 12% from 13% of 2017, Mexican-down to 15% from 23% of 2014, pizza – up to 52% due to closure of company owned restaurants, pasta- up to 10.5% from 9%, and Mediterranean-down to 10% from 13% of 2015.Correspondingly, most of operating margins are shrinking: chicken/wings - 6% with a SG&A as percentage of sales of 8%, Hamburger - 1% with a SG&A as percentage of sales of 10%, Mexican - 5% with a SG&A as percentage of sales of 9%, pizza - 1% with a SG&A as percentage of sales of 51%, pasta – 0.5% with a SG&A as percentage of sales of 10%, and Mediterranean - (-0.5%) with a SG&A as percentage of sales of 11%.
Unlike in QSR where companies use franchise as buffer, in fast-casual sector companies’ margins declined as traffic and thus sales slowing down. The typical average gross margin decreased by about 300 basis points since 2015. Relatively, chicken/wings restaurants have been the only sector that generated an improved margin.
It seems that the growth in demand for service/products of this company has been slowing down between 2015 and 2017 as indicated by generally decreasing growth rate of same-store sales. However, the same store number jumped in the first half of 2018 driven by increasing traffic and probably price. Company demonstrated strong ability to expand its franchise restaurants.
For the first six months of The Fiscal 2018 compared with same period of 2017(ended 20180630)
System-wide comparable sales increased by 6.8% (4.3 for 2Q).
Company-owned comparable sales increased by 7.7% (3.5% for 2Q) due to increase in traffic and transaction size.
The Fiscal 2017 compared with 2016
System-wide comparable sales increased by 2.6%.
Company-owned comparable sales increased by 1.6% due to increase in traffic.
The first nine months in Fiscal 2017 compared with the same period of 2016
System-wide comparable sales increased by 1.7%.
Company-owned comparable sales increased by 0.5% due to increase in traffic.
Fiscal 2016 compared with 2015
System-wide comparable sales increased by 3.2%.
Company-owned comparable sales increased by 5.4%
Fiscal 2015 compared with 2014
System-wide comparable sales increased by 7.9%.
Company-owned comparable sales increased by 9.4%
Its gross margin (including company-operated expenses and franchise expenses) went up from 65%of 2014 to 69% of 2017 primarily due to increased numbers of franchised restaurants offset by the increased commodity costs. Its SG&A as percentage of sales has been down to about 34% in 2017 from about 38% of 2014 as a result of increased revenue, its operating margin went up significantly to about 35% in 2017 from about 27% of 2014. Gross margin was improved to about 70% in 2018 due to increasing franchising revenue (higher margin) and decreased commodity costs (bone in chicken in 2018). However, due to rebounding SG&A% its operating margin went down by about 100 basis points to about 34%.
This stock currently has an enterprise price/EBI ratio of 84. We think that its stock is being relatively fairly valued considering that, when it demonstrates strong demand for its product/service and ability to franchise, the slowing down comparable sales is making turning around.
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