Cult US restaurant chain Wingstop just opened its first Aussie store in Sydney and caused a stir. Can Australia's own burrito king follow in its footsteps on the ASX?
Long queues going around the block, chicken wings in hot demand, and that iconic green logo.
You might have been forgiven for thinking it was Houston or LA, but it was Kings Cross, Sydney, where crowds flocked for the opening of the first Aussie store for US restaurant chain Wingstop (NASDAQ: WING).
Chicken wings are tasty, but they are hardly a new invention, and so you might be surprised to learn that Wingstop has delivered returns in excess of 900% since its IPO on the NASDAQ in 2015.
Are there lessons from Wingstop that ASX investors can apply to our very own ASX-listed Guzman Y Gomez (ASX: GYG)?
Store growth is the secret sauce
At the time of its IPO in 2015, Wingstop had 712 restaurants. That number has increased by over 3.5x, and today, Wingstop has 2,689 restaurants.
That growth in store count is a powerful driver of a restaurant chain's performance. More stores lead to higher sales, and if the unit economics are strong (i.e. high average sales and profit per store), then store growth becomes a reliable and repeatable growth lever for the business.
Store growth also signals to investors that there is strong customer demand for the restaurant chain. This often leads to a higher multiple/valuation as investors get excited about the restaurant's future.
GYG currently has 241 stores (of which 211 are in Australia, 20 are in Singapore, 4 are in Japan, and 6 are in the USA). Management is targeting 31 new store openings in 2025 and an ongoing average rate of 40+ new store openings per year thereafter.
Management's long-term target for GYG is over 1,000 stores, a 4x increase from today's store count.
Is it possible? It certainly is, especially when you consider that Wingstop has 2,689 stores.
However, I think it won't be easy. Can Australia support 1,000 GYG stores? Or will much of that store count growth need to come from the US?
My base case assumption is that Australia will need to do the heavy lifting. The US is a giant restaurant market but also a very competitive one, where companies like Chipotle Mexican Grill (NYSE: CMG) will prove to be tough competitors.
Franchise model is underrated
Restaurants are generally a low-margin business, and so you may think Wingstop has razor-thin profit margins. But its net profit margin is actually pretty good and has consistently been around 15% over the last few years.
This is primarily because 98% of Wingstop stores in the US are operated by franchisees who pay Wingstop a high margin royalty and franchise fees.
GYG, on the other hand, recently reported a half-year profit margin of around 7%, partly because a lower portion of its restaurant network (70%) is franchised (compared to 98% for Wingstop).
Still, I think GYG can continue to expand its overall profit margin, given that its drive-thru locations can have margins as high as 20% and its overseas stores are still in the early stages of building traction.
It's worth noting that franchising is not the only road to success. Chipotle famously does not franchise its US stores (they are all corporate-owned), but it has been a phenomenal success nonetheless.
Valuation: Is extra guac really worth that much?
Here's where things get interesting.
Guzman y Gomez shares are down 24% from their recent peak in December, but they still trade at around 8x revenue, which is a punchy multiple. That's until you realise that Wingstop trades at over 15x revenue, despite being far larger and more mature. Investors are clearly pricing in rapid store growth for both companies!
I think if GYG executes well and grows its store count whilst keeping unit economics strong as it scales, then the stock could be headed much higher.
Its a big 'IF' though because execution matters. Food inflation and cost-of-living pressures depress demand. The success of GYG's international expansion is also a big unknown.
Overall, I think it's exciting that we get to see an Aussie brand take on the US quick-service restaurant (QSR) market.
The high valuation gives me some pause, so I'm not buying shares yet, but I am keeping an eye on GYG's store count growth. I think GYG has the right ingredients; now, it just needs to cook.
