On March 31, after the bell, Wingstop (NASDAQ: WING) pre-released its first-quarter results; sales blew away expectations and shares soared 6.8% in the April 1 session. Over the 11 sessions since then, Wingstop shares have traded in a very tight range.
The lack of volatility is unlikely to continue based on recent history; Wingstop shares have made 20-point swings feel routine over the last eight months.
So, how should investors trade Wingstop amid the uncertainty?
To answer that question, let’s start by drilling down on the preliminary first-quarter numbers.
Wingstop’s First Quarter Sales Numbers Were Spectacular
The pandemic has forced countless restaurants to shudder their doors, but business has been booming for Wingstop. There was never much doubt that Wingstop would produce its 17th straight year of domestic same-store sales growth, but some feared that the wing chain’s rate of growth would slow down. Those fears were unrealized, however, as Wingstop nearly doubled its same-store sales growth rate – it was 11.1% for full-year 2019 and 21.4% for full-year 2020.
Wingstop carried this momentum into the first quarter, with domestic same-store sales rising 20.7% yoy – well above consensus estimates of 13.7% growth.
Once again, Wingstop’s strong online presence paid off; digital sales increased 63.6% yoy in the first quarter. The wing chain’s online presence was nothing to sneeze at before the pandemic – digital sales accounted for around 40% of overall sales before the outbreak started – but digital sales now comprise more than 60% of Wingstop’s revenue.
That percentage will go down as more people get vaccinated and coronavirus restrictions are lifted, but Wingstop’s customers are clearly happy with the company’s digital service. So, the percentage is unlikely to go all the way back to 40%. Somewhere in the 50-55% range seems like a reasonable expectation. And at the same time, Wingstop’s dine-in sales – along with those of every other restaurant – will recover.
But getting back to the first quarter, the question is why did Wingstop beat? And what does it mean moving forward?
Some have pointed to the Super Bowl and NCAA tournament. The thinking is that with people stuck at home, they opted to order wings from companies with excellent delivery infrastructures, such as Wingstop, instead of their local shops. There is some merit to that argument, but it was pretty obvious ahead of time, and was likely baked into expectations.
Wingstop’s Valentine’s Day promotion, on the other hand, may have been overlooked. The wing chain has turned to modern trust-building forms of advertising to build its brand. Wall Street doesn’t always appreciate the efficacy of those types of marketing tactics because of their hard-to-quantify benefits, but they often work quite well nevertheless.
That promotion probably didn’t account for the entire beat though. Or even most of it. Wingstop likely exceeded expectations primarily due to the hesitance of people to eat outside their homes. Yes, millions of Americans have been vaccinated, but everyone is still being told to wear masks and socially distance. Even if some restaurants are increasing capacity, people are still likely to opt for delivery (Wingstop).
We will eventually return to pre-pandemic life, but at the same time, the longer we live with restrictions (self-imposed or government-imposed), the easier it will be for Wingstop to establish long-term dominance.
How Should You Play Wingstop?
Wingstop is scheduled to release its full first-quarter numbers on May 6. But don’t we already know what to expect?
While we have the sales numbers, Wingstop didn’t even offer a profitability range for earnings in its preliminary release. The sales numbers will obviously boost earnings expectations, but there’s still a lot of mystery around margins. Anything is possible, but there’s no reason to expect much a surprise – one way or the other.
Wingstop has an excellent long-term outlook, but with such a volatile stock, it’s important to consider short-term entry points. As stated earlier, shares have traded in a very tight range recently. Well, they’ve done that while riding both the 50-day and 200-day moving averages.
This looks like a “next move wins” situation. Look for a powerful breakout above $140 before you consider picking up WING shares.
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