Do You Think Wingstop Only Sells Chicken? Think Again.

Wingstop (NASDAQ: WING) locations sell chicken wings, as its name implies. It has been a very strong growth story, noting that revenue rose a massive 36% in 2024. However, a key driver of that growth was the opening of 349 restaurants during the year. That's nearly one new restaurant every day. And this is where Wingstop's story gets interesting.

What does Wingstop do?

The Wingstop food concept is chicken wings. That's a trendy dining option right now, and the company has clearly managed to catch the wave of popularity. Notably, its same-store sales in the United States, its largest market at roughly 85% of its restaurant base, rose an impressive 19.9% in 2024.

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Same-store sales represent the sales performance of stores that have been open for at least a year. A low-single-digit number is considered good, so Wingstop's nearly 20% figure in the United States is a pretty clear indication that the Wingstop concept is resonating with customers. The key word in this discussion is concept, because what Wingstop is really selling is that concept.

That is more important than it may seem. Roughly 98% of Wingstop's restaurants are owned and operated by franchisees. In fact, out of the 2,563 Wingstop locations, Wingstop itself only operates 50, and they are all located in the United States. It is important for a restaurant company built on the franchise model to own and operate some of its locations. That's how it tests products and new methods of preparation. McDonald's (NYSE: MCD), which has a very well-established food concept, still owns and operates 5% of its 41,822 locations. Note that Wingstop's franchising approach is even more aggressive than that of McDonald's.

What are the implications of Wingstop's model?

When you look at Wingstop's income statement, you see the numbers broken out pretty clearly. In 2024, company-owned restaurants generated sales of roughly $120 million. The rest of the company's nearly $626 million in revenue came from royalties and franchise fees (about $288 million) and advertising fees ($218 million). So, just 20% of the company's revenue is generated from its own stores.

The company's own stores have to pay for chicken and all of the other things that go along with operating a restaurant. Those costs eat up around 75% of store revenue. The advertising fees go entirely to advertising (the company's advertising expense was $233 million, larger than the fees it collected), so there's no earnings benefit there. That leaves royalties and franchise fees to do the heavy lifting when it comes to earnings. Net income in 2024 was roughly $109 million.

Royalty and franchise fee revenue increased by over 39% in 2024. That was basically driven by the opening of new franchised restaurant locations (it opened one new company-owned store in 2024). While Wingstop does sell chicken wings, what it really sells is Wingstop franchises. This makes same-store sales particularly important to monitor since Wingstop isn't really in control of its own future, given how few of its stores it actually operates. Its long-term success is in the hands of its franchisees.

The big issue for investors in Wingstop

Given that Wingstop's sales of additional franchises are the key driving force behind the company's growth, there is a risk that management overreaches. It is quite common to see this happen with fast-growing food concepts. The benefit of selling new franchises is so large that companies sometimes overlook the negative impact that poorly located locations can have on the brand concept and the financial results of the business.

Some of the risks investors need to worry about as they watch Wingstop's franchise-driven expansion include the cannibalization of existing locations, oversaturation of the brand, and the placement of locations in areas where they are likely to fail. Right now, strong same-store sales suggest that these aren't big issues. However, if you are going to own Wingstop, you'll want to make sure you understand what the company is really selling. You'll want to monitor same-store sales to ensure that management doesn't reach so hard for growth that it damages the food concept at the core of its current success.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool recommends Wingstop. The Motley Fool has a disclosure policy.