Kase Capital (Whitney Tilson) – Largest Short Position: Wingstop

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My Largest Short Position: Wingstop – Whitney Tilson, April 7, 2017


  • Wingstop is in the chicken wing restaurant franchise business
  • Just over 1,000 restaurants in 40 States and 6 countries
  • 75% of revenues are take-away (vs. 16% at Buffalo Wild Wings)
  • Like most franchise businesses, high margins and low capex, thus generating healthy free cash flow
  • Market cap (at $27.78): $802 million; $4 million cash; $151 million debt; EV of $943 million
  • Growth:
    • Total units: 15.9% CAGR from 2012 to Q3 2016
    • System-wide sales: 20.7% CAGR from 2012 to TTM Q3 2016
    • Total revenue: 15% CAGR from 2012 to TTM Q3 2016
    • Adjusted EBITDA: 22.5% CAGR from 2012 to TTM Q3 2016
  • Stock is slightly down since IPO in June 2015

Why Am I Short the Stock?

  1. Valuation is absurd: 52x trailing EPS (43x NTM); 29x trailing EBITDA (24x NTM); 11x trailing revenues (10x NTM)
  2. Same store sales growth is decelerating
    • An estimated half of same store sales growth in recent years has been driven by price increases, which is likely unsustainable
  3. Little that is proprietary or unique about this business – these are chicken wing restaurants
    • Plenty of competitors, many much larger, with deeper pockets and better technology
  4. Doubt Wingstop can nearly triple the number of units in the US to management’s stated goal of 2,500
    • Market is much more competitive and may be becoming saturated (roughly half of all chicken wing restaurants in the US have been opened the last 5 years)
    • Nearly 2/3 of Wingstops today are in 2 states (Texas and California) so the business and brand are largely unproven elsewhere
  5. After 22 years and growth to over 1,000 units, company generated a mere $91 million in revenues and $15 million in net income in 2016

wingstop sales

  • Investor presentation boasts of phenomenal same store sales growth but note the slowing growth
  • In reality, Wingstop’s same store sales growth has decelerated significantly, despite increasing the pace of new unit growth
  • Gross margin of Wingstop’s company-owned stores has also declined significantly

Wingstop’s 2017 Guidance Indicates a Very Disappointing Year:

  • On the Q4 2016 call in March, management said Q1 2017 comps are negative 2.6% so far plus the cost of wings are 10% higher YoY – meaning Wingstop could report unexpectedly weak sales, margins and profits in Q1
  • Wingstop has issued the following guidance for 2017:
    • System wide unit growth of approximately 13% to 15%
    • Low single digit domestic same store sales growth
    • SG&A of between $34-35 million
    • Net income between $18.5-$18.8 million
    • Fully diluted EPS growth of 8-10%
    • Adjusted EBITDA growth of 13-15%
  • This guidance implies another 300bps of margin decline
  • Negative comps and plunging margins are totally inconsistent with a stock trading at such a rich valuation, so something has to give: either business metrics start to improve dramatically or the stock is likely to get cut in half (or more)
    • Betting on the latter (and so was Roark Capital)

Public shareholders are Wingstop’s 4th owners – and the Prior Owner has already cashed out entirely:

  • Founded in 1994; acquired by Gemini Group in 2003; acquired by Roark Capital in 2010; taken public in 2015
  • Roark specializes in franchise businesses and currently owns 16 quick/limited/full service restaurants chains – typically holds for a decade or more
  • In the case of Wingstop, rushed to dump its entire stake:
    • June 2015: IPO – 3.2 million shares sold at $19
    • March 2016: 6.3 million shares sold at $24
    • July 2016: special dividend of $2.90/share, bringing debt/EBITDA to 5.2x
    • August 2016: 6 million shares sold at $29.25
    • November 2016: all of remaining 6.8 million shares sold at $26.28
  • Why the rush? My guess is that Roark saw a possible fad, oversaturation, and the signs of slowing growth, so wisely took opportunity to cash out at an absurd valuation

Summary and Price Target:

  • Wingstop is an okay business at best and there are major signs of deterioration
  • Business is largely undifferentiated and faces ferocious competition from all sides
  • Only proved that its business and brand work in two states, yet its valuation assumes that it can scale rapidly across the US and abroad – a highly questionable proposition
  • Given the stock is currently priced for perfection, if I’m wrong, it has little upside – and if I’m right, look out below!
  • A DCF analysis, even assuming favorable growth and margin increases for the next decade, yields a share price roughly half today’s level
    • Even at that price, stock would still be priced at more than 25x trailing EPS
  • This is my largest position at 3.1%
  • There is plenty of borrow at negligible cost

Whitney Tilson is the founder and Managing Partner of Kase Capital Management, which manages three value-oriented hedge funds.

Further Reading: Lessons From a Dozen Years of Short Selling

Image Source: Memphis Flyer