Why Wingstop (NASDAQ: WING) May Stay Hot After Q2 Earnings

It seems no one has told Wingstop (NASDAQ: WING) that we are in a recessionary economy. The coronavirus pandemic has not stopped the chicken wing-themed restaurant operator and franchisor from delivering strong performance. In fact, its has only become stronger.

Wingstop shares jumped to a fresh all-time high after another stellar quarterly report. Revenue increased 36% to $66.1 million as systemwide sales grew 37% to $509 million in the second quarter. Domestic same-store sales were up 32% driven by an increase in both transaction volume and size.

The most sizzling result was the 135% leap in net income to $11.5 million. Bottom-line performance was aided by a 23% decline in the cost of bone-in chicken wings compared to the prior-year period. The quarterly EPS figure of $0.39 fried the $0.29 Zacks consensus EPS estimate.

Investors are also cheering the company's increased dividend backed by its strong cash flow generation. Wingstop increased its quarterly dividend by 27% to $0.14. This marked the third consecutive year that the dividend has been hiked. Although the implied forward dividend yield remains a modest 0.4%, this is likely to get the attention of dividend growth investors.

Why is Wingstop Doing so Well?

Like other restaurants, Wingstop has heavily leaned on its digital sales channels from the onset of the COVID-19 crisis. Unlike most competitors, however, it has executed at a very high level.

Digital sales rose 64% in the second quarter. Its mobile app, social channels, and the Wingstop.com website are driving increased accessibility. Through partnerships with DoorDash, Deliveroo, Just Eat, and others, it is effectively leveraging its delivery channel to satisfy customer cravings for its 11-flavor cook-to-order wings, fries, and salads. The average check for a digital transaction is $5 higher than in-store and phone orders.

It has also formed strong partnerships with companies like salesforce.com (NYSE: CRM) to drive personalized consumer experience. Social media and digital advertising are being effectively ramped.

Digital sales were already becoming a major part of the business prior to the pandemic. Last year they accounted for 39% of the overall sales mix. As of the end of 2019, 94% of Wingstop's restaurant footprint had a delivery service.

Looking down the road, the Wingstop of the future aims to digitize every transaction including in-store purchases. The company plans to accomplish this through innovations like pre-order pickup lockers, ordering kiosks, and Alexa voice-activated ordering.

It's not just digital growth that is behind the success. Amid the pandemic, Wingstop boldly opened 23 new locations in the recent quarter. This shows how strong the Wingstop brand currently is and how much confidence management has in the business.

Surprisingly, the absence of major sports leagues has not been a problem. The company has a growth catalyst waiting in the wings as represented by its sports viewing loyalists. As professional sports leagues resume and consumers become more comfortable with returning to restaurants, expect Wingstop's sales to be even stronger.

There are now 1,436 Wingstop locations around the world, 10% more than a year ago. Wingstop has a development pipeline of about 400 restaurants across 25 key U.S. markets in addition to international expansion plans, so it will continue to spread its wings over the next several years. It sees the potential for over 6,000 restaurants globally over the long haul.

Is Wingstop Overheated?

With Wingstop having tripled to above $150 per share since March 2020, it makes you wonder if the stock is too hot. In the near-term this is likely the case. Investors considering a new position In Wingstop would be better served waiting for a pullback to place their orders.

In the meantime, we are likely to see the Street's price targets boosted in the coming days. Wingstop has blown past all but one analyst target and it is not far from that. The analyst at Piper Sandler currently has a buy rating and a Street-high $158 price target.

Of the 17 analysts covering the stock, 10 have assigned buys and seven have hold ratings. Based on the momentum in the business, it is difficult to see anyone downgrading Wingstop to a sell. A downward move to hold is conceivable given the stock's 80% year-to-date ascent.

Despite having been around since 1994, Wingstop is nowhere near a mature business. After posting a 20% jump in systemwide sales last year, growth is now accelerating. It is well on its way to producing a 17^th straight year of domestic same-store sales growth.

The valuation is lofty, and this is clearly a growth-oriented investment. However, Wingstop's profit margins are among the best in the restaurant industry and support its premium valuation.

The company's vision is to become a top 10 global restaurant brand. If it can continue to leverage its surging brand and digital platform and expand globally this goal looks reachable. With a new "Where Flavor Gets Its Wings" slogan and the wind at its back, expect Wingstop to continue soaring higher as it heads into 2021.