Yahoo Finance Wingstop downgraded to Underperform by Jefferies, shares up nearly 33% YTD
Shares of Wingstop (WING) dropped nearly 3% at market open, following a downgrade to Underperform from Hold by Jefferies.
Jefferies analyst Andy Barish said the downgrade was made as "valuations seem to reflect an overly optimistic view of near-term same-store sales (SSS) momentum" as it lapses the company's "strategic shift in national advertising," the addition its chicken sandwich, and partnership with UberEats. He posed the question, "Can recent momentum sustain as drivers begin to be lapped?"
Barish, one of the only analysts on the Street with an Underperform rating on the stock, said, "While our analysis of recent drivers suggest Street estimates are fair, upside appears limited, including in the second half of the year where the setup/optics around decelerating trends also adds risk to the multiple."
The chicken sandwich debuted at the end of August 2022 with 12 flavors, ranging from lemon pepper to mango habanero. Barish said, "Although management has yet to parse out the same-store sale contribution from Chicken Sandwich (now approximately high single-digit percentage mix), it is encouraging that both traffic and check dynamics have been positive (driving guest acquisition & trial, particularly at lunch and seeing strong attach rates, partially offset by negative mix)."
Jefferies expects the menu addition to be a mid- to high single-digit contributor in the first half of 2023 and low single-digit in the second half of 2023.
While there is "room to run" in 2024 and beyond, Barish said with more than 160 million chicken sandwich consumers in the U.S., he remains cautious on his expectations. "We reserve this view pending the lapping of the full launch in 4Q."
The cost of bone-in wings is top of mind too, as they "remain deflationary" in Q1, down 60% year-over-year, costs are up 20% year-to-date.
Barish said "as wing costs potentially normalize in '24 and beyond, investor focus could once again shift towards the longer-term opportunity as it relates to boneless mix (50%-plus vs. ~40% currently), whole bird strategy, and the potential supply chain integration."
The lap of the "always-on" national marketing message at the end of the Q1 is another item on Barish's radar.
He said, "Although difficult to quantify, we suspect the benefit may prove more moderate as compared to the initial launch of national marketing in early 2017, and the step-up in advertising fund contributions in 2017 and 2019 (both +100bps in each instance)."
Last November, CEO & President Michael Skipworth told Yahoo Finance, the "meaningful increase in our investment in advertising" of over 35% allows the company to "show up in a big way," while helping to "close the gap that we have in brand awareness [compared] to other national brands that are out there" and drives sales. In fiscal year 2022, the chain saw its 19th consecutive year of domestic same-store sales growth.
Delivery is also on Barish's radar. He said momentum may be slowing down. "While the shift towards off-premise during the pandemic drove an acceleration in delivery mix to ~25-30% through '21, [it is] now settling in the high-20 percents."
The recent addition of UberEats (UBER) may not see as much adoption as the initial addition of DoorDash (DASH) did.
"We note that during the previous rollout of DoorDash, delivery mix increased from low single-digit percentage to 10-15% between 2018-2019, but believe UberEats may not see a similar level of incremental penetration (our scenario assumes mix growth at less than half that pace between '22-24, or 5%)."
Compared to this time last year, shares of Wingstop are up more than 68%, while-year to date shares are up nearly 33%. As of Monday, there are eight Buys, 13 Holds and one Sell on shares of the stock by Wall Street analysts.
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Brooke DiPalma is a reporter for Yahoo Finance. Follow her on Twitter at @BrookeDiPalma or email her at bdipalma@yahoofinance.com.
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