Key Points
Wingstop reported what appeared to be a lackluster quarter.
However, the stock was already down significantly for the year, and a market rotation helped lift most restaurant stocks higher.
However, Wingstop still appears expensive after October's bounce.
Shares of Wingstop (NASDAQ:WING) rallied a whopping 42.2% in October, according to data from S&P Global Market Intelligence.
Wingstop reported earnings toward the end of the month. While the results were lackluster, to say the least, they appear to have been enough to clear a very low bar. Shares were already down about 56% on the year heading into the month.
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Meanwhile, it appears investors dumped AI-related stocks and pivoted to other sectors in October, so Wingstop also benefited from that rotation.
Wingstop: good enough but not great
In the third quarter, Wingstop grew revenue by 5.4% to $185.1 million, missing analyst expectations, while adjusted (non-GAAP) EPS fell by less than 1% to $1.08. That slightly beat expectations, but wasn't a terrific result. In fact, same-store sales, a critical measure in any retail business, were down 5.4%, and management forecast full-year same-store sales to decline between 6.5% and 7%. While Wingstop is still opening new units at a rate of 14.4%-14.7%, lower same-store sales mean lower margins, as investors saw in the third quarter.
Consumers have been squeezed by inflation this year, making comparisons for restaurant stocks difficult. However, it appears investors are buying into Wingstop's longer-term unit growth story and brand power, while betting that same-store traffic will eventually bounce back. However, there hasn't been any evidence of that bounce-back yet.
Image source: Getty Images.
Wingstop is still expensive
Even after October's bounce, Wingstop is still down about 30% for the year. Still, the stock doesn't appear "cheap," trading around 40 times this year's earnings estimates.
While Wingstop operates largely on a franchise model and therefore likely doesn't face severe bankruptcy risk, it still faces risks related to consumers' willingness to spend on eating out and faces the same competitive pressures as any restaurant. Therefore, the stock looks a bit expensive after its October bounce, as it's unclear whether traffic will return to positive territory soon.
Billy Duberstein and/or his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Wingstop. The Motley Fool has a disclosure policy.