Buffalo Wild Wings: Good SSS and Unit Growth Prospects
Gayatri is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Buffalo Wild Wings Inc. (NASDAQ: BWLD), based in Minneapolis, owns, operates, and franchises over 800 restaurants throughout the U.S. and Canada. Last month, sell side reduced Buffalo’s estimates and price target after the company reported Q2 EPS miss and lowered guidance. But now it seems that the company is reviving its position within casual dining to alleviate top-line macro headwinds, supported by healthy July SSS (6.8% vs. consensus estimate of 5.7%). I believe the company's partial franchise model, good returns on capital, near-term top-line momentum, a clean balance sheet with no debt, and an extended track record of delivering healthy growth makes it an attractive addition to any investor’s portfolio.
Menu price increases are expected to partially offset rising wing prices
As signature traditional and boneless wings account for ~40% of the company’s sales, dramatically rising wing costs y/y (+86%) and heavy wing weights (which hurts as there are fewer wings per pound and Buffalo sells wings by the piece) have become worrisome for investors. I expect 3Q wing costs to average ~$1.95/lb in 3Q, up ~70% y/y. The company is currently running about 3% menu pricing and will roll out another 1% price increase in early September. Although I believe that this company’s additional menu pricing is not enough to completely offset the rising wing prices, it will nevertheless help the company achieve its lowered EPS guidance. The company is also planning to test per pound pricing in selected stores. If the tests are successful, per pound pricing will be implemented as early as 2013; providing substantial support to the ongoing cost pressures.
SSS momentum to continue with higher marketing and promising sports calendar
Buffalo is renowned as the most differentiated sports bar operator in a crowded casual dining segment. Many investors are attributing the company’s impressive SSS recently to the Euro Cup final and an extra UFC event alone. However, I believe that these events may have provided a modest boost to the sales this month, but did not fully account for the SSS gain. I believe that continued growth in targeted sports advertising has led to SSS better than the industry average, and going into the latter half of the year, A&M spending is expected continue to grow further. The company has plans for new sponsorships and advertisements to enhance its attack through media in 2H12. I am optimistic that Buffalo will continue to drive SSS growth over the near term through increased brand awareness, greater marketing and a promising sports calendar ahead.
Growth in New Store Sales has outpaced Same Store Sales.
Buffalo follows stringent system of operational checks and balances to help ensure that new units enter in the restaurants space with its best foot forward. As a result, growth in new store sales has outpaced same store sales over the last four quarters. New store growth above 10% is among the best in class. I believe that there is plenty of room for quick unit growth as the company is running at nearly half of its ultimate unit potential and superior returns in new higher volume markets are expected to follow. I expect the company to maintain at least a 10% unit growth rate till 2015, driven by the combination of emerging international development prospects, best-in-class new unit productivity, and improving unit level economics. Last month, the company also signed a deal to license up to 22 locations in the United Arab Emirates, Saudi Arabia, and up to four additional Middle Eastern countries. Further, I believe this expansion in non-traditional locations will show impressive results in the coming years.
Buffalo is among very few in the industry delivering double-digit unit growth (& strong positive SSS). I expect to see continued best-in-class SSS, driven by the combination of increased focus on national advertising, pricing power, and robust long-term growth prospects. Buffalo is currently trading at forward PE of 19.4x which is well above the casual dining peer group mean of 16x, but well below Chipotle Mexican Grill’s (NYSE: CMG) forward PE of 27.19x and BJ’s Restaurants’ (NASDAQ: BJRI) forward PE of 26.12x. Chipotle and BJ are expected to grow EPS by 21.2% and 23.2% respectively, which is slightly higher than Buffalo’s expected EPS growth of 17.9%. Therefore, I believe that Buffalo deserves some discount based on lower expected EPS. But the valuation discount seems a bit exaggerated considering a near term catalyst in the upcoming busy sports calendar and long term growth prospects with encouraging new store sales trends. Thus, I recommend it as a buy.
GayatriSharma has no positions in the stocks mentioned above. The Motley Fool owns shares of BJ's Restaurants, Buffalo Wild Wings, and Chipotle Mexican Grill. Motley Fool newsletter services recommend Buffalo Wild Wings and Chipotle Mexican Grill. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
