Last summer, I explained why “I have a Bone to Pick with Wingstop.” At that time, the restaurant chain that specializes in selling chicken wings to young adults was trading above $360 a share after jumping 20 percent when it released its fiscal 2025 Q2 results.
I said then, “I’m surprised Wall Street reacted as positively as it did to that news. True, the company did exceed its guidance for adjusted earnings per diluted share. However, its net income per diluted share fell by 2.6 percent at the same time.”
I further opined, “Presumably, Wall Street believes that Wingstop will be able to improve its same store sales once it slows down the rate at which it is opening new locations. That is why the stock is currently valued at nearly 50 times trailing earnings compared to a multiple of roughly half that for the S&P 500 Index.”
I closed that article by warning that Wingstop (NSDQ: WING) could suffer a similar fate as Chipotle (NYSE: CMG), which tanked a few weeks earlier after failing to live up Wall Street’s high expectations: “I have a bad feeling that something similar may happen to Wingstop when it releases its Q3 results in three months.”
That day (August 7), WING closed around $330. By the time the company released its Q3 results on November 4, it was below $240. That works out to a decline of 27 percent.
It gets worse. After releasing its fiscal 2026 Q1 results last week, its share price dropped below $170. In just nine months, WING was down nearly 50 percent.
Of course, the company’s management team tried to put a positive spin on those results by emphasizing its 5.9 percent year-over-year increase in system-wide sales. However, it acknowledged that the gain was attributable to the 97 new store openings during the quarter.
During the first quarter, “domestic same store sales decreased 8.7 percent vs. Q1 2025.” In other words, the company was opening new stores at a faster pace than sales from its existing stores were slowing down.
To add insult to injury, Wingstop’s financial outlook for this year wasn’t much better. It includes a “low-single digit decline in domestic same store sales growth,” which will put further pressure on the company’s operating margin.
The reason I bring this up is that I believe there are many companies in the same precarious position now that Wingstop was in then. Despite rising fuel prices due to the war in Iran, Wall Street is bidding up stocks to record highs.
That is precisely the issue that Wingstop’s CEO, Michael Skipworth, identified as the culprit for the company’s declining same store sales: “Rapidly rising gas prices stressed the balance sheet of the lower-income consumer that our business over-indexes to.”
The implications of that statement go far beyond Wingstop. There are many businesses that cater to the same demographic, which consists primarily of the “working poor” that live paycheck to paycheck.
One of them is deep discount retailer Dollar General (NYSE: DG), which closed above $155 the day before the war in Iran began. Last week, it fell below $114 to give back all its gain over the past five months.
The list goes on. What it suggests is that we are now in a two-tier stock market, with the dividing line being household disposable income.
Businesses that sell to high income consumers can withstand higher gasoline and energy prices than those with a less prosperous customer base. That is why Wingstop is now targeting higher income consumers in its ads, which it defines as households with at least $50,000 of annual income.
Hopefully, the Strait of Hormuz will soon reopen, thereby driving down gasoline prices as the global oil supply is replenished. But until that happens, companies that rely on working class Americans for most of their revenue will be hard pressed to increase sales.
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