Wingstop: The Domino's of Chicken Wings?

There are many similarities between Domino’s (DPZ) and Wingstop’s (WING) franchise models; simple menus, 75%+ takeout mix, consistent quarterly same-store-sales growth, and low initial capex per store with great unit economics. What specifically caught our attention was Wingstop’s ~50% two-year unlevered cash return on franchise stores. This is one of the highest returns we’ve seen of any publicly listed fast-casual franchise operator. WING's underlying store economics combined with the potential for Wingstop to become the Domino’s of chicken wings led us to interview a Former VP with over 15 years experience at WING to discuss how WING restaurants operate and the future growth opportunity.

Founded in 1994, Wingstop’s original concept was a simple menu of chicken wings and fries served in various homemade flavors. Stores locations had maximum rents of ~$1,500 pm and opening times were limited from 4pm till late. It was the ideal retirement business. As the business has grown, opening times have extended and franchisees now operate from prime locations but the menu largely remains the same: wings, fries, and a drink.

A strikingly simple and disciplined menu is Wingstop’s secret. The company has resisted temptations to extend the menu and has maintained a relentless focus on selling the best chicken wings globally. Store operations are also optimised for the best wing eating experience; there are no heat lamps and all food is cooked to order. Every customer must wait the 14 minutes it takes to cook fresh chicken and fries. This creates a superior customer experience and is a core driver of WING's 14 years of consistent same-store-sales growth:

“If you come in, every time, and we cook your wings just for you, with the flavor you want, you get it and it’s hot. It’s not as if we left them under the heat lamps a bit too long. If you do it properly, there’s no room for error. The fries are also cooked to order, so there is no bin holding a bunch of French fries. Sometimes, when you go out, you get great hot, crispy French fries; other times, you get soggy, limp ones. That didn’t happen at Wingstop; there were no heat lamps or places to hold food. I think you got consistently good food; you had small, family-run businesses, so you always had good service” - Former VP, Wingstop

It’s often the simple but subtle factors that drive durable competitive advantages. Simplicity was also Domino's secret. For over 30 years, Domino’s had a simple menu with only two sizes of pizza, 11 toppings, and one beverage option, Coca Cola. These small but focused decisions compound to offer an unbeatable customer experience and consistent sales growth.

On average, a new Wingstop store requires ~$400k in initial capex which is ~$50k higher than an avergae Domino’s unit. Over the last nine years, the average revenue per WING store (AUV) has grown from $900k to over $1.6m. By the second year of operation, a typical WING store has over $1m in sales and nearly $200k in cash EBITDA. This produces a 50% unlevered 2-year cash return for franchisees. Given most franchisees will finance ~75% of the initial capex, the 2-year levered return is closer to 200%. By comparison, a typical Domino’s store generates a 3-year cash-on-cash payback with AUV’s closer to $1m and 15% EBITDA margins.

As management state, the superior economics is driven WING's Starbucks-like price point with a cost structure similar to Domino's:

“I mentioned our premium product offering, made to order product. We believe this allows us to charge a premium price. We are much closer, we believe, to a Starbucks, we are not KFC... our costs to operate, this includes rent and labor costs, and we believe we're similar to a Domino's in this regard.” - VP of Strategy, WING, Investor day 2020