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
Because of the underlying unit economics, WING’s US royalty rate is 6% versus 5.5% for Domino’s. If the unit returns are sustainable, it’s possible WING’s US long-term royalty rate could be closer to 7%. At 3,000 US stores, a 1% increase in the US royalty rate would generate ~$60m in incremental cash flow. At a 3% yield, this could be worth an additional $2bn in market value to WING, the equivalent of 40% of its current market cap.
The unit economics may well be great but the real question is how can Wingstop’s formula be scaled like Domino’s?
As of Q3 21, WING has 1,673 stores including 180 internationally. Domino’s has over 10x the stores globally and treble WING's US store base. Wingstop's store count is focused in three territories; Texas, California, and Illinois. There is a stark difference in WING AUV’s across the US with West and Southwestern stores generating ~$1.5m but North and Southeastern stores only ~$880k. Management claim the reason is a lower density and younger store base but maybe competition is a factor:
"The Southeastern United States had a wing presence with a lot of mom-and-pop wing places. The Southeast was a tougher market to crack. The Northeast is a different animal too, because of the population densities. It’s very expensive to do business in New York City. The people that are used to going and renting a space in Texas, for $2,000, $3,000 or $4,000 a month might find that, in New York City, it’s $12,000 a month. Some of those numbers are very scary to potential investors. Wingstop is making inroads in the Northeast, but it’s still a lagging part of the country." - Former VP, Wingstop
There is no other scaled QSR brand solely focused on chicken wings; Buffalo Wild Wings is a full-scale restaurant offering and the large QSR brands mainly use wings as a side dish. The competition for pizza is far more intense. In 1991, Domino’s posted its first loss after years of losing market share to Pizza Hut and Little Caesar’s. Wingstop doesn’t have a direct competitor like Pizza Hut or Papa John’s; the major competitors seem to be smaller mom-and-pop wing shops or sports bars rather than well-capitalised QSR brands.
It’s interesting to contrast WING’s opportunity with Domino's growth trajectory in the early 80’s. In 1985, only 25 years after founding, Domino’s had 2,500US and 250 international stores. For the next 13 years, the US store count grew 4.3% per year to 4,500 stores. If WING grows US stores by 4.3% per year it will reach 3,000 units in 2036.; an 8% CAGR would reach 3,000 US stores by 2030.
Wingstop today could be the equivalent of an early 1980’s Domino’s.
US store growth seems relatively simple to forecast. The average US WING franchisee runs 6 restaurants with an average tenure of 7 years. If we assume $1.5m AUV, each franchisee has over $1.8m in cash EBITDA to reinvest into new stores each year before paying off any interest. WING can grow the US store count by adding new stores with existing franchisees and finding professionals to open up new regions on multi-unit development deals. Although ~15% of DPZ US stores were company owned whereas WING only operates 2% of US stores today, WING’s US store count can compound at high-single digits for the next decade.
When studying Domino’s history, it's clear that international store openings were the major driver of growth. From 1985-98, DPZ grew international units 16% per year to 1,730 stores which then doubled again in the next decade. Today, WING has 180 stores in Mexico, UK, Singapore, Indonesia, and recently signed a 100-unit development program for Canada.
Cracking the international markets is crucial for WING to grow into the 75x FCF multiple it currently trades at.
It’s not as easy to forecast WING’s international growth. From the beginning, DPZ has run a fully vertically integrated model; it owns dough manufacturing facilities, multiple commissaries, equipment and ingredient distribution assets, and, most importantly, the last mile to the customer.
WING isn’t integrated on either end: it doesn’t any part of the supply chain or the final delivery. In the US, the company has stitched together Olo’s Rails module with an exclusive partnership with DoorDash. However, to our knowledge, Olo doesn’t currently offer the Rails module outside the US. This means WING has to effectively build a new tech stack for international stores to serve digital orders efficiently.