Whirly lollipop on orange background.

Chicken is a versatile food. We can enjoy flame grilled at El Pollo Loco (LOCO), fried at KFC (YUM), Popeye’s (PLKI), at bars like Buffalo Wild Wings (BWLD) and even with scantily-clad waitresses at Hooters (HOTR).

Wingstop (WING) is another player specializing in just what it sounds like – chicken wings. Wingstop has impressive growth and profit numbers – mainly stemming from their franchise-heavy approach. Of course they also make a fine chicken wing with many fresh recipes added to the menu to drive return visits and new customer interest.

[Investors may want to compare the El Pollo Loco IPO Roadshow slides to the Wingstop IPO deck or view the Wingstop IPO roadshow transcription.]

Chicken wings in general and Wingstop in particular appeal to a broader demographic than fried chicken. Why this is the case is hard to pin down. It may stem from their origin as a bar food and a football game accompaniment. It’s spread onto menus at most casual restaurants and nearly all bars and pubs.

Buffalo Wild Wings (BWLD) is the big player in the space closing in on $4B in system-wide sales at 1,100 restaurants. Their positioning however is a mix of sports destination, bar and wing-maker.

Wingstop doesn’t offer much ambience or a deluxe dining experience – just plates of wings or bags for take-out. Most customers also cite their french fries as a big draw. By using the franchise model Wingstop has been able to consistently expand their net income margins which reached 13.3% in 2014.

Wingstop WING Growth

Wingstop WING Growth

Wingstop suggests that they can grow from their current 745 units to 2500 eventually. Their specific goals are to grow stores by 10%+ each year while increasing adjusted EBITDA and net income by 13-15% and 18-20% respectively.

Valuation & Stock Considerations

At the $13 mid-point and about 29 million shares outstanding post-IPO WING would have a market capitalization of $377M. Adding in the pro-forma $113M in debt we arrive at a TEV of $490M.

That puts WING in fairly rarified valuation territory of 7.2x trailing revenues. This compares to an average of 2.9x for recently-public names. The only two richer valuations are 7.4x for Shake Shack (SHAK) and 9.4x for Dunkin’ Brands (DNKN).

We figure that WING will generate about $11M in net income in 2015 which puts the market cap to earnings at 34x. This compares to an average for the established group of 26x and 31x for the newer more growthy names. BWLD trades at 25x.

Restaurant IPO Peers

Restaurant IPO Peers

Simply put WING is pretty fully priced at the mid-point. The downside of the heavy franchise model are big differences in quality from one restaurant to another. Reviews of Wingstop often suggest avoiding some locations in favor of others.

We’re talking some horrendous reviews here in terms of surly service, long wait times, burnt food, wrong orders, mushy fries, greasy servings and mixed up orders seem to be a very common problem which is puzzling. These are the bad examples – there are also many well-run Wingstop franchises with nothing but positive reviews. Long term investors should be concerned about the potential damage these poor franchises might do to the overall brand if they are allowed to exist in too many places.

Finally the deal is being done to pay down debt rather than for cash to be invested in the business. It will give them some additional financing headroom but they have little to no cushion if they encounter operational challenges or financing terms and rates get less favorable.

That said during the past few years nearly every single restaurant IPO has seen a large first-day increase and on average are trading 74% higher than their IPO price. We’d be inclined to sell if there is a major jump. Memories of Potbelly (PBPB) are still fresh in our mind – the shares doubled off the IPO price amidst great enthusiasm only to drop just as quickly back to the original IPO price where they trade today.



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