Wingstop Stock Plummets Despite Strong Growth

The stock of restaurant chain Wingstop (WING -21.40%) took a significant hit on Wednesday, plunging by about 20% following the release of the company’s financial results for the third quarter of 2024. By 3 p.m. ET, shares were down substantially.

Strong Growth Accompanied by Disappointing Profits

Wingstop's Q3 headline numbers were impressive. By the end of the second quarter, the chain had almost 2,400 locations and managed to add 106 new ones in Q3 alone. Additionally, the company reported a remarkable 20% growth in same-store sales in the United States, leading to an overall revenue increase of 39% year-over-year. Investors seeking strong growth were surely pleased with these results.

Net income for Q3 was up 32%, reaching $25.7 million. This is certainly a strong performance in isolation. However, this growth lagged behind revenue growth, which left some investors dissatisfied. This discrepancy is a key reason for the stock's drastic decline.

Solid Business Model, Yet Expected Pullback

Was Wingstop's stock drop justified? Additional context is critical to understanding this situation. Despite the current 20% decrease, Wingstop's stock has enjoyed a remarkable 65% increase over the past year, significantly outperforming the historic returns of the S&P 500 (^GSPC -0.33%).

Even if Wingstop had met profit expectations, its valuation appeared high, which makes the stock's adjustment understandable, despite the solid Q3 figures.

Wingstop’s stock remains priced on the higher side. Nonetheless, for investors focused solely on its operational strength, there seems to be little cause for concern. Although some investors are noting rising costs associated with chicken wings, this factor is mitigated by Wingstop’s primarily franchised business model. Unlike full ownership models, these rising costs do not impact Wingstop as severely.

Therefore, while Q3 margins have decreased, it is not expected that this trend will worsen in the upcoming quarters for Wingstop. Shareholders may find reassurance in the fact that the brand remains highly popular, with long-term growth prospects still promising.

Jon Quast has no position in any of the stocks mentioned. However, the Motley Fool holds positions in and recommends Wingstop.

Wingstop, Stock, Growth