Wingstop Inc. (NASDAQ:WING) - Sell or Short Recommendation - $19.75

December 9, 2015 concludes the 180-day lockup period on Wingstop Incorporated.

When the lockup period ends for WING, its pre-IPO shareholders, directors and executives will have the chance to sell their ~22 million shares.

We previewed WING's June 11th IPO on our IPO Insights platform.

The potential for a sudden increase in stock available in the open market may cause a significant decrease in share price and opening a short opportunity for experienced investors.

Business Summary: Operator and Franchisor of Restaurants that Specialize in Made-to-order, Hand-tossed Chicken Wings

Wingstop Restaurants is a chain of fast casual restaurants that serve buffalo-style chicken wings as the main menu item. Wingstop restaurants are located in the United States, Mexico, Singapore, Indonesia, the Philippines and the Russian Federation. Its menu features chicken wings, both bone-in and boneless, and strips as meals, sides and individual combos. Generally, Wingstop is credited with initiating the trend towards fast casual restaurant shops offering chicken wings as the main menu, versus the popular fare offered as appetizers in bars, pubs and full-service restaurants.

After opening the first Wingstop restaurant in 1994, the company incorporated in 1996. Wingstop has been selling franchises since 1998. Earlier this year, the company had 726 outlets, of which 97 percent are franchises. Customers can place orders online for take-out meals, and the average transaction in 2014 equaled $15.61.

Wingstop has opened a total of 95 net new franchises in 2015 through the end of the third quarter, and the company expects to reach a total of 125 to 130 net new restaurants this year for an increase of 18 percent in unit growth. Same store sales have been positive for 12 consecutive year, and the company celebrated its 800th store in the third quarter. Wingstop noted in its financial highlights for the third quarter that its overall strategy is to open approximately 2,500 units domestically.

Strong Financial Overview: Q3, 2015

For the third quarter ended September 26, Wingstop reported the following financial results:

• An increase in domestic same store sales of 6.3%
• Total revenue increase of 16.5% to $19.1 million
• System-wide restaurant count increased 19.0% to 807 worldwide locations
• Adjusted EBITDA increased 14.1% to $6.5 million

Management Team Highlights & Competition (Chick-fil-A, El Pollo Loco, Church's Fried Chicken, KFC and other Fast Casual Restaurants)

President and CEO Charles Morrison has served in his position since June 2012. His previous experience includes executive positions at Pizza Inn Holdings, Metromedia Restaurant Group, Kinkos, Boston Market and Pizza Hut.

Chief Operating Officer William Engen has served in his position since September 2014. He has previous executive experience from 7-Eleven and Circuit City. Mr. Engen has also held management roles during his almost 20 year career in retail operations at Saks Fifth Avenue and Bachrach Clothing Company, a men's clothing retailer.

Although Wingstop took the popular pub fare and introduced buffalo chicken wings as a fast food option, the company notes that the trend may fade. In addition, competition comes from a variety of sources such as casual dining restaurants, pizza joints, sports bars, and others such as KFC, El Pollo Loco (NASDAQ:LOCO), McDonalds (NYSE:MCD), Pizza Hut, Dominoes Pizza (NYSE:DPZ), Buffalo Wild Wings Grill and Bar (NASDAQ:BWLD), Popeye's Louisiana Kitchen (NASDAQ:PLKI), and others.

Early Market Performance: Solid Start

WING's IPO priced at $19 per share, higher than its expected price range of $12 to $14. The stock opened on the first day of trading at $30.50 and closed at $30.59, for an increase of 61 percent. Since then the stock reached a low of $21.62 on November 17. Currently, the stock trades at $21.25 (12.1.2015).

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(Nasdaq.com)

Conclusion: Considering Shorting WING Ahead of Its Lockup Expiration

Our firm has found abnormal negative returns for IPO lockup expirations to be over 4% in a 1-2 week window, leading up to and shortly following the expiration date.

We like WING as a short candidate as it boasts a diverse set of insiders (2 firms and 12+ individuals); together, these major pre-IPO shareholders hold over four times the presently trading shares.

As WING sits nicely above its IPO price, this group could be ready to take initial profits, leading to a short opportunity as a new supply of shares floods the market.

We suggest shorting WING ahead of Dec. 9th to take full advantage of potential declines.