Whitney Tilson’s slides from the 2016 Robin Hood Investors Conference, sharing his short position in Wingstop Inc (WING) as ValueWalk first reported

Also see more Robin Hood Notes here

And

Q3 2016 hedge fund letters

Overview

  • Wingstop is in the chicken wing restaurant franchise business
  • Founded in 1994, it began franchising in 1997
  • There are 949 Wingstop restaurants in 40 states (93% of units) and 6 countries, of which 98% are franchised
  • 75% of revenues are take-away (vs. 16% at Buffalo Wild Wings)
  • Like most franchise businesses, Wingstop has high margins and low capex, thus generating healthy free cash flow
  • Market cap (at $31.19): $897m; cash: $4m; debt: $157m; EV: $1.05b

Wingstop Is Growing Rapidly

Wingstop

Wingstop’s Stock Is Flat Since Its First Day Close After Its IPO in June 2015

wingstop

Why Am I Short the Stock?

1) The valuation is absurd: 62x trailing EPS (47x NTM), 35x trailing EBITDA (28x NTM), and 12x trailing revenues (11x 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) There is little that is proprietary or unique about this business – these are chicken wing restaurants!

  • There are plenty of competitors, many much larger, with deeper pockets and better technology: head-to-head (BWW, Wing Street), other fast food chains (KFC, Domino’s, Pizza Hut, Popeyes, Papa John’s), and indirect (supermarkets selling ready-to-eat wings)

4) I doubt whether Wingstop can nearly triple the number of units in the U.S. to management’s stated goal of 2,500

  • The market is much more competitive and may be becoming saturated
    • Roughly half of all chicken wing restaurants in the U.S. have been opened the last five years, a quarter in the last two years
  • Nearly 2/3 of Wingstops today are in two states, Texas (nearly 10% in Dallas alone) and California, so the business and brand are largely unproven elsewhere

5) After 22 years (including a dozen owned by two respected private equity firms) and growth to nearly 1,000 units, the company generated a mere $87 million in revenues and $15 million in net income in the last 12 months

Wingstop’s Investor Presentation Boasts of Phenomenal Same Store Sales Growth

But Note That 2016 Data Is Missing

wingstop

In Reality, Wingstop’s Same Store Sales Growth Has Decelerated Significantly

Despite Increasing the Pace of New Unit Growth

wingstop

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 Capital specializes in franchise businesses and currently owns 16 quick/limited/full service restaurants chains. It typically holds for a decade or more.

But in the case of Wingstop, it rushed to dump its entire stake:

  • Jun 2015 – IPO – 3.2m shares sold at $19;
  • Mar 2016 – Secondary – 6.3m shares sold at $24;
  • July 2016 – Special dividend of $2.90/share, bringing debt to EBITDA to 5.2x;
  • Aug 2016 – Secondary – 6m shares sold at $29.25;
  • Nov 2016 – Secondary – all of remaining 6.8m 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 the opportunity to cash out at an absurd valuation

See the full slides below.