Wingstop: Rising Wing Costs May Hamper Medium-Term Growth, Analyst Downgrades Rating

Wedbush analyst Nick Setyan downgraded the rating on Wingstop Inc. WING to Neutral from Outperform, lowering the price target to $185 from $240.

Setyan believes an inflated wing cost environment could cap WING'S medium-term unit growth and valuation. 

The analyst particularly cautioned that the wing cost outlook has turned unfavorable. After an $0.82/lb trough from 5/1-6/21, wing costs have gradually moved up >30% to $1.10/lb as of 7/27.

As wing costs increase, the risk to medium-term SSS growth expectations also increases, Setyan adds. 

While still favorable vs. historical levels, wing costs are at a level that puts 2H:23 and 2024 COGS estimates at risk, mainly should the seasonal strength into football season through March Madness occur. 

Setyan raised the 2H:23 COGS estimate to 33.7% from 32.8% and the 2024 estimate to 34.5% from 33.3%.

Based on the above, the analyst slightly lowered the 2023 EPS estimate to $2.18 from $2.19. 

Setyan also reduced the 2024 EPS estimate to $2.39 from $2.42. The consensus 2024 EPS estimate is $2.50.

Given the increasing risk of a higher wing cost environment out of 2023 and into 2024, the analyst believes that WING's medium-term growth rates may be muted vs. longer-term growth expectations.

For unit growth, the analyst continues to model 53 net domestic restaurant openings in Q2 and 192 net domestic openings in 2023. 

Setyan also maintains 2024 net domestic openings estimate of 200.

Price Action: WING shares are trading lower by 7.79% to $165.07 on the last check Friday.

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