Elevated costs for bone-in chicken wings are expected to prevail throughout the rest of 2021, but could begin to abate next year, executives from Wingstop said during the company’s second-quarter earnings call on Wednesday.
Poultry suppliers are taking steps to increase production to meet strong demand, said Michael Skipworth, executive VP and CFO of the Dallas-based company, but the effects will likely not be felt until 2022. He said cost inflation for the company’s core product, which was up 64.8% over year-ago levels in the second quarter, will continue to pressure the company’s food costs through the rest of 2021.
As a result, the company will look at the possibility of larger and more frequent menu price increases in the second half, compared with one or two 1–2% adjustments the company traditionally makes each year, said Charlie Morrison, chairman and CEO. He said price increases will be “surgical” rather than across the board, and will be accompanied by ongoing efforts to contain costs.
“We want to make sure that with our size and scale, we don’t let an inefficient market influence our margin structure,” he said.
He attributed the ongoing supply chain challenges to labor shortages in the poultry processing industry.
Wingstop is forecasting overall food and packaging costs to be 45% of sales in the second half of 2021. Food, beverage and packaging costs increased by 11.4 percentage points as a percent of sales in the second quarter, Skipworth said.
Overall, Wingstop reported a 1.7% decline in net income for the 13-week second quarter, which ended June 26, to $11.3 million, after a one-time gain in the second quarter of 2020. Adjusted net income, which excludes $2 million from the sale of company-owned restaurants to a franchisee in last year’s second quarter, was up 13.1%.
Wingstop’s cost of sales increased 6% to $14.2 million, compared with a year ago, and accounted for 77.7% of company-owned restaurant sales, compared with 73.1% in the second quarter of 2020.
Ongoing sales gains are expected to help compensate for the increased commodity costs, the company said.
Revenue for the second quarter increased 12%, to $74 million, as domestic same-store sales increased 2.1%. That’s building off record same-store sales of 39.1% in Q2 of 2020. Franchisees opened 184 net new locations since the end of the year-ago second quarter.
Total sales at company-owned restaurants were comparable to the year-ago period, the company said, reflecting same-store sales declines of 3.1%, offset by four net new locations.
Digital sales also continued to grow, accounting for 64.5% of sales versus 63.7% in 2020’s second quarter. Delivery accounted for 27% of sales.
The company discussed several initiatives in the call geared toward driving increased sales and profitability, including the addition of its new Thighstop brand and its expanded use of ghost kitchens.
The latter will be significant element of the company’s plans to expand in New York City, specifically Manhattan, with 25 planned company-owned restaurants, which Morrison projected would be about a 60/40 mix of street-side and ghost-kitchen locations. Ghost kitchen Wingstops — which are already in place in 15 locations worldwide, including San Francisco and Los Angeles — generate sales that are comparable to traditional street-side locations, he said, but can generate sales-to-investment ratios three to four times those of traditional locations.
Wingstop already has restaurants in New York City’s outer boroughs, but the high cost of real estate in Manhattan has been a barrier to entry, Morrison said, noting that costs for attractive sites have recently become more reasonable.
The company will model its Manhattan expansion on the way it has grown in London, he said, with a combination of both ghost kitchens and a strong on-street presence that helps generate brand awareness. It plans to work with existing ghost-kitchen operators to secure locations in their facilities.
Plans call for the Thighstop concept, which is available as a virtual brand through DoorDash and the company’s Wingstop.com and Thighstop.com websites, to be rolled into the Wingstop menu and made available to all customers both on-site and digitally in the second half of this year.
The concept has met initial sales expectations in the first month, and Morrison said Wingstop is bullish on its ongoing success. It serves the company’s longstanding goal to drive better pricing overall by using more of the chicken, he said.
“The key to Thighstop is, every order is beneficial to our supply chain strategy,” he said.