The popular American eatery chain Wingstop has recently launched its inaugural Australian location in Sydney, causing quite a commotion. Could Australia’s leading burrito contender replicate this success by listing on the ASX?
Lengthy lines snaking down the street, chicken wings highly sought after, and that recognizable emerald emblem.
One could be excused for mistaking it for Houston or Los Angeles, but it was actually Kings Cross in Sydney where throngs gathered for the inauguration of the inaugural Australian outlet for the American eatery chain. Wingstop ( NASDAQ: WING ).
Chicken wings may be delicious, yet they aren’t exactly groundbreaking. You might find it surprising then that Wingstop has provided returns exceeding 900% since its initial public offering on the NASDAQ back in 2015.
Could there be takeaways from Wingstop for ASX investors that could potentially benefit our locally listed ASX companies? Guzman y Gomez ( ASX: GYG )?
The key ingredient for store expansion is the hidden factor.
When Wingstop went public in 2015, it operated 712 outlets. Since then, this figure has grown more than 3.5 times, bringing the current total to 2,689 locations.
The expansion in the number of outlets significantly boosts a restaurant franchise’s overall performance. With more locations, total revenue tends to increase. Furthermore, should each site demonstrate robust financials—characterized by substantial average revenues and profits per outlet—this proliferation of stores serves as a consistent and reproducible means for driving corporate growth.
The expansion of stores also indicates to investors that there is significant customer interest in the restaurant chain. This typically results in a elevated valuation/multiple since investors become enthusiastic about the eatery’s prospects.
Currently, GYG operates 241 outlets, with 211 located within Australia, 20 in Singapore, 4 in Japan, and 6 in the United States. The management aims for 31 additional store launches in 2025, followed by at least 40 new locations opening each year moving forward.
The management has set a long-term objective of more than 1,000 outlets for GYG, which represents a fourfold expansion compared to their current number of locations.
Is this feasible? Absolutely, particularly when you take into account that Wingstop boasts 2,689 outlets.
Nonetheless, I believe it might not be simple. Could Australia sustain 1,000 GYG outlets? Alternatively, would a significant portion of this expansion in store numbers likely have to originate from the US?
My primary expectation is that Australia will have to take on the bulk of the work. Although the United States represents a substantial dining sector, it is simultaneously a highly competitive arena, with businesses such as Chipotle Mexican Grill ( NYSE: CMG ) will turn out to be strong rivals.
Franchise model is underrated
Restaurants typically operate with slim profit margins, leading you to believe Wingstop might have extremely narrow profitability. However, its net profit margin is quite healthy and has regularly stood at approximately 15% over recent years.
This largely stems from the fact that 98% of Wingstop outlets in the United States are managed by franchisees, who in turn pay Wingstop substantial royalties and franchise charges.
GYG, conversely, recently announced a semi-annual profit margin of approximately 7%. This can be attributed partially to having a smaller percentage of its restaurant chain (70%) operated through franchises, as opposed to Wingstop’s 98%.
Nevertheless, I believe GYG has the potential to increase its overall profit margin, considering that drive-through locations could achieve margins up to 20%, and its international outlets remain at an initial phase where they're starting to gain momentum.
It’s important to remember that franchising isn’t the sole path to success. Chipotle notably owns all of its U.S. stores directly rather than through franchises, yet it has still achieved remarkable success.
valuation: Is additional guacamole truly worth such a high cost?
This is where things start to get exciting.
Shares of Guzman y Gomez have dropped by 24% since reaching their high point last December, yet they continue to be valued at approximately 8 times their revenue—a significant multiplier. However, this figure pales compared to Wingstop’s valuation, which stands above 15 times its revenue even though it is considerably bigger and more established. It appears investors expect robust expansion through new stores for these businesses!
If GYG manages to execute effectively and increase its number of stores while maintaining robust unit economics during expansion, the stock might see significant gains.
It’s a significant ‘IF’ nonetheless since execution is crucial. Inflation in food prices and rising living costs dampen consumer demand. Additionally, the success of GYG's global growth remains an uncertain factor.
All in all, it's thrilling to witness an Australian brand venture into the American quick-service restaurant (QSR) scene.
The high price makes me hesitant, so I’m not purchasing stocks at this moment, but I am closely monitoring the increase in GYG’s number of stores. I believe GYG possesses all the necessary elements; they simply need time to come together.
The post Wingstop fever sweeps into Sydney — could Guzman y Gomez be next to take flight? appeared first on The Motley Fool Australia .
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Motley Fool Contributor Kevin Gandiya does not hold any shares in the companies mentioned. The Motley Fool Australia’s parent company, Motley Fool Holdings Inc., holds stakes in and recommends Chipotle Mexican Grill. Additionally, Motley Fool Holdings Inc. endorses Wingstop and suggests holding short June 2025 $55 call options for Chipotle Mexican Grill. The Motley Fool Australia also supports investing in both Chipotle Mexican Grill and Wingstop. The Motley Fool operates with these recommendations. disclosure policy This article includes solely general investment guidance (covered under AFSL 400691). Authorized by Scott Phillips.
