Wingstop Inc. (WING Quick QuoteWING - Free Report) is likely to benefit from unit expansion, franchise model and technological initiatives. The company’s focus on enhancing shareholder value bodes well. However, a challenging macroeconomic environment and elevated costs are concerns.

Growth Catalysts for Wingstop Stock

Wingstop focuses on unit expansion to drive growth. Over the last 12 months, the company has opened more than 300 net new restaurants, demonstrating its ability to grow both domestically and internationally at a rapid pace. In the second quarter of 2024, WING opened 73 new restaurants. The company has revised its outlook for 2024, projecting the opening of between 285 and 300 new restaurants, up from the previous guidance of 275 to 295. These expansion efforts signal strong future revenue potential, as Wingstop continues to penetrate new markets and grow its global footprint.

Wingstop’s franchise model continues to generate strong returns. The company’s average unit volume has grown from $1.5 million (two years ago) to over $2 million. This growth is fueling record demand for new restaurants. Wingstop's franchisees are reporting unlevered cash-on-cash returns of over 70%, making it an attractive investment for current and potential brand partners.

Increased focus on digitalization bode well. During the second quarter, digital sales accounted for 68.3% of Wingstop's total sales, thereby showcasing strength in leveraging technology to enhance the customer experience. With over 45 million digital users, Wingstop is capitalizing on its proprietary MyWingstop platform to improve engagement and conversion rates through hyper-personalization. The company's investment in data-driven marketing and digital transformation is setting the stage for sustained long-term growth. As more transactions shift to digital platforms, Wingstop is well-positioned to capture a larger market share while enhancing operational efficiency.

Wingstop's focus on enhancing shareholder value is evident through its stock repurchase program and dividend policy. In the second quarter, the company repurchased 75,862 shares at an average price of $381.29. As of the end of the second quarter, WING reported $96.1 million remaining under the current repurchase authorization. Additionally, Wingstop increased its quarterly dividend by 23%, further underscoring its commitment to returning capital to shareholders. The combination of repurchase programs and dividend payouts makes it an attractive option for investors seeking both growth and income.

Concerns for WING Stock

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In the past three months, Wingstop’s shares have lost 0.8% against the industry’s 4.8% growth. The downside was driven by macroeconomic headwinds.

WING has been grappling with rising costs. Its selling, general and administrative (SG&A) expenses have been rising significantly, increasing by $6 million year over year to a total of $28.1 million in the second quarter. While some of this increase can be attributed to long-term investments in digital platforms like MyWingstop, the rapid rise in short-term incentive compensation and stock-based compensation is concerning. With the company’s total SG&A expenses projected to reach up to $116 million by 2024-end, up from $111 million, cost control could become an issue. If growth stalls, Wingstop may find itself burdened by these escalating expenses.

Conclusion

Wingstop’s ability to open new restaurants at a record pace, combined with its high franchisee returns and increasing digital sales, underscores its long-term growth potential. Moreover, its focus on shareholder value through stock buybacks and dividend increases enhances its appeal for investors seeking both capital appreciation and income.

However, investors should be mindful of the challenges posed by rising operational costs and a challenging macroeconomic environment. As the company continues to invest heavily in technology and expansion, cost management will be crucial to sustaining profitability. The company’s growth drivers and strategic initiatives make it a compelling stock to retain for now, as it navigates the headwinds and capitalizes on future opportunities.

Zacks Rank & Key Picks

Wingstop currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the Zacks Retail-Wholesale sector include Texas Roadhouse, Inc. (TXRH Quick QuoteTXRH - Free Report) , Potbelly Corporation (PBPB Quick QuotePBPB - Free Report) and El Pollo Loco Holdings, Inc. (LOCO Quick QuoteLOCO - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Texas Roadhouse has a trailing four-quarter earnings surprise of 0.4%, on average. TXRH shares have gained 58.7% in the past year. The Zacks Consensus Estimate for TXRH’s 2024 sales and EPS indicates 15.6% and 39.2% growth, respectively, from the year-earlier actuals.

Potbelly Corporation has a trailing four-quarter earnings surprise of 77.5%, on average. The stock has dropped 3.6% in the past year. The Zacks Consensus Estimate for PBPB’s fiscal 2024 EPS implies 33.3% growth on 6.5% lower revenues from the year-ago levels.

El Pollo Loco Holdings has a trailing four-quarter earnings surprise of 21.6%, on average. LOCO shares have gained 44.3% in the past year. The Zacks Consensus Estimate for LOCO’s fiscal 2024 sales and EPS indicates 2% and 12.7% growth, respectively, from the prior-year figures.