BWLD - SWOT's The Matter Now?
AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Once again, Buffalo Wild Wings (NASDAQ: BWLD) disappointed and has been selling off since they reported Q3 earnings on October 23 earnings per share of $0.57 versus the year ago $0.61 EPS. This has become annoyingly predictable. They also missed on the previous earnings report. The numbers weren't that terrible nor were they unexpected. Let's see what's really going on at Buffalo Wild Wings with a Strengths, Weaknesses, Opportunities, and Threats analysis also referred to as SWOT in the competitive intelligence community.
- The company has no debt and has been fueling expansion at a pace where it doesn't incur debt. It has total cash of $83.83 million.
- The return on equity is 16.23%. Net earnings growth is still 15%, albeit lower than previously announced guidance. But on the Q3 call CEO Sally Smith guided for 20% for 2013.
- The brand is gaining name recognition as it grows to 1,000 restaurants in the US and Canada in 2013. The company has also been advertising more on TV, radio, and on the web.
- The restaurants offer a full bar and large selection of craft, domestic, imported beers and wine and yet are still family friendly.
- Corporate governance risks are low in all categories: audit, board, compensation, and shareholder rights.
- The menus are varied beyond just wings including burgers, salads, sides, desserts, and appetizers.
- Football season is in full swing and soon basketball, especially college basketball, will then take its place in driving foot traffic.
- Revenues rose 24.8% year over year and company operated store sales rose 26.2% both year over year. Franchise and royalty fees grew by double digits.
- Despite the huge increase in the cost of wings the company managed to partially offset it with declines in labor, occupancy and operating costs. Where they can they have been containing costs and increasing prices.
- The company has not done enough to make potential customers aware of the variety of their menu.
- The company has work to do to attract more families and women and still keep the atmosphere they have now.
- There is a great deal of competition from privately held sports bars, including the Hooters chain. Making chicken wings is easy and if there's a liquor license in place the only advantage to Buffalo Wild Wings is their abundance of big screen TVs.
- Buffalo Wild Wings has no yield to protect the stock from the 21% short interest willing to pressure the stock.
- This year's drought caused a 70% increase in wing costs. The restaurant's bottom line is extremely sensitive to price hikes in the costs of its signature menu item. The title is Buffalo Wild Wings, remember. This was the main cause for missing on earnings the last two times.
- Growth in comparable same store sales is slowing from a year ago.
- The company should start the planned international expansion as soon as possible, witness the popularity of competitor Yum! Brands (NYSE: YUM) Kentucky Fried Chicken in China. Sports, especially soccer, has just as many rabid fans overseas as football and basketball here.
- Aggressively advertise the availability of menu options beside chicken, for example, running Facebook specials on burgers or fish tacos, etc.
- Initiate and commit to a dividend at some point to make the stock more attractive once the US market is saturated with restaurants.
- Promote special events for families, youth sports groups, womens' groups to expand the customer base.
- Implement measures to increase efficiency per square foot as competitor Chipotle Mexican Grill (NYSE: CMG) has optimized their units to be considered the number one name in efficiency per square foot for fast serve casual.
- Capitalize on their cred as the nations' largest wings and sports restaurant chain by emphasizing the many locations, the friendly atmosphere while also stressing how well the brand fits in with their local community as a neighborhood place to gather.
- The most pressing threat is Yum! brands just introducing its first stand alone WingStreet restaurant in Texas, featuring the wings available at their Pizza Huts. This is a serious threat as Yum! has the advantage of size and purchasing power with a market cap at 32.48 billion compared to the 1.33 billion of Buffalo Wild Wings. Yum! also owns more than 38,000 restaurants worldwide.
- Yum! has a lower P/E at 21.14 with a 1.90% yield and has authorized a buyback of $1 billion in shares making it a more attractive stock to possible investors.
- Buffalo Wild Wings has the same risks that any business with alcohol has as well more difficulties in opening new locations because of liquor licensing requirements.
- Opening more locations outside of North America will be challenging as they do not have the same expertise and contacts as a Yum! Brands.
- Since they are really a one concept restaurant they do not have the backup that a second concept would offer in times of strained commodity costs. Chipotle, for instance, has been trying out an Asian fusion theme chain and Yum!, of course has Taco Bell, KFC and Pizza Hut to hedge their bets.
Buffalo Wild Wings has been challenged this year by a once in a lifetime drought sending chicken prices soaring. Still, as wings as a menu item and snack have become ever more popular the price of wings has tripled. Wings, once the chicken part most likely to grace a pot of soup bones became the second most popular part. Short of genetically engineering chickens to grow extra sets of wings there is little that Buffalo Wild Wings can do. But it has been commendably containing costs in other areas. They are executing their expansion plans well, although at a more ambitious pace than in the past. Once the effect of the drought wears off and chicken prices stabilize Buffalo Wild Wings still needs to make the rest of the menu more memorable.
Yum! will continue to be a better buy until Buffalo Wild Wings' P/E is lower and it initiates a dividend.
leglamp has no positions in the stocks mentioned above. The Motley Fool owns shares of 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!