Wingstop: Buy the Stock or its Franchise Opportunity?

I read an article yesterday about 11 franchises that each jumped more than 100 spots in Entrepreneur magazine's latest Franchise 500 ranking. I can’t say if any of the 11 are owned by public companies, but it got me thinking about franchise stocks. 

What’s a franchise stock? McDonald’s (MCD) is a franchise stock. So too, is Domino’s Pizza (DPZ), Planet Fitness (PLNT), and many other public companies that use franchising as a part of their business model. 

I then came across a second article from Entrepreneur about Wingstop (WING), the Texas-based operator of 1,898 franchise and company-owned fast-casual chicken wings-focused restaurant locations in the U.S. and internationally. It is the world’s largest operator of fast-casual chicken wings-focused restaurants.

So, with Wingstop in growth mode, and assuming you have the money to finance a Wingstop location, would it be a better investment to buy a franchise or the company’s stock?

Here’s a quick look at both sides of the argument. 

Wingstop Is an Excellent Stock to Buy

Wingstop went public in June 2015, selling 5.8 million shares at $19. That was well above the pre-IPO pricing range of $12 to $14. The shares opened the first day of trading up 60%. After that, they haven’t looked back.

A $10,000 investment in 2015 is worth $77,800 today, with a compound annual growth rate of 31.5%. There aren’t many IPOs from 2015 that have delivered these outsized returns. But, of course, past performance isn’t a guarantee of future returns. 

What’s the secret sauce that keeps WING moving higher? But, more importantly, can it keep it going?

One only needs to look at Wingstop's May 2022 investor presentation to answer the first question. It wants to become a top 10 global restaurant brand that gives the Golden Arches a run for its money. 

Other highlights from the presentation include the following:

• 62% of its sales are from online and mobile orders. 
• Its nearly 1,900 restaurants are in seven markets with plenty of expansion possibilities outside the U.S., which accounts for 88% of Wingstop’s total locations.
• In 2022, it opened between 225 and 235 net system-wide locations. That’s on top of the 193 that opened in 2021. So it’s on track to have nearly 3,400 restaurants by 2027. 
• The company believes it has the potential to open more than 7,000 worldwide. At current growth rates (12% annually), it could get there in approximately 11.5 years. 
• To grow revenues, it is utilizing several initiatives to increase its annual unit volume (AUV) from $1.6 million to $2.0 million in the future. That’s good for both Wingstop’s franchisees and shareholders. 
• It’s grown same-store sales for 19 consecutive years. There’s no way to describe this performance except to say it’s otherworldly. 
• In 2019, it launched delivery. In the past three years since launching, delivery sales grew by 14 percentage points and now account for 27% of overall sales. It hopes to hit 50%.

I could go on and on. But it’s easy to see why its stock’s done so well since going public in 2015. 

To continue growing, Wingstop is leaning in on technology. It uses more than 500 data points per customer to improve the customer experience, leading to accelerated customer acquisition and spending per customer. 

As a result, the average check from digital orders is $5 higher than non-digital orders. In addition, the chain's 62% digital sales mix is higher than Starbucks (SBUX) at 54%. That’s no small feat because Starbucks is one of the best restaurant chains when it comes to digitization. 

Lastly, in the third quarter ended Sept. 24, 2022, it grew its adjusted earnings per share by 55% to $0.45. Growing and immensely profitable. What’s not to like?

Its Franchise Opportunity Ranks Pretty High Too

If you’re considering a franchise, all the information I’ve just mentioned should make you more confident about your decision. It’s worthy of its top 10 ranking in the Franchise 500.

For those considering buying a franchise, it’s essential to keep in mind that in addition to the financial requirements -- $1.2 million total net worth, $600,000 in total liquid assets -- Wingstop’s ideal candidate should have multi-unit restaurant experience, is willing to commit to the opening at least three locations, and will be actively involved in the day-to-day operations of the locations. 

Assuming you have restaurant experience, an average location costs between $315,000 and $950,000 to open. According to Wingstop’s franchising section on its website, this includes a $10,000 development fee and a $20,000 franchise fee. 

So, let’s go with a midpoint of $633,000. That’s a commitment of $1.9 million in cash and financing for a minimum of three units. So, based on a cash-on-cash basis, taking into account a 22% profit margin for Wingstop’s company-owned locations in Q3 2022, a franchisee is looking at a 4.5-year payback on their investment.

Of course, the payback period would increase or decrease based on financing arrangements, store profitability, etc. However, according to VettedBiz.com, that’s about 3x faster than if you bought a KFC franchise.  

Assuming everything goes as planned, five years later, you could generate close to $500,000 in annual net income from your investment with zero outstanding financial obligations other than paying your 6% royalty on gross sales and 5% for the ad fund. 

Given WING’s dividend yield is just 0.51%, its shares would have to appreciate by nearly 30% a year to equal the profits from the three franchise locations. 

Stock or Franchise?

If I had multi-unit restaurant experience and $1.9 million in cash for the three-unit development deal, I’d be tempted to take 25% of that cash and invest it in WING stock, finance 25% of the cost, and go to work.

As for the risk-to-reward proposition, WING stock can be sold quickly if the you-know-what hits the fan. The franchises are much less liquid and will take time to unload should you need the cash for some other outstanding obligation.

It comes down to your business experience, comfort level with risk, and goals for active and passive income. 

From where I sit and depending on your circumstances, both are excellent investment opportunities. 

As always, caveat emptor. Do your due diligence.    

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