This Company Is On a Blazing Run

AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

A pleasant part of due diligence can be actually visiting a business worth investigating. It had been a while since I ate at Buffalo Wild Wings (NASDAQ: BWLD). I wanted to see how busy it was, menu prices, and customer mix on an early Saturday evening around dinnertime, as opposed to a major sporting event.

The company has 407 company-owned and operated restaurants and 525 franchised ones. It has a five-year revenue CAGR of 25% and a 24% net earnings five-year CAGR thanks to its proven concept of ""

No surprise, this one was busy, with plenty of families, small groups of adults, and singles at the bar, but the noise wasn't unbearable. The sports screens were on, but as a nod to non-sports enthusiasts, regular news programming was available as well.

There were plenty of local specialty brews available, as well as Samuel Adams craft brands and the big beer giants. If you know anything about restaurants, you know a liquor license is a license to print money and specialty cocktails could be had. Buffalo Wild Wings pours more brew on draft than any other U.S. restaurant chain. You need something to put out the blaze consuming you after even the medium heat wings.

I've written before how much I admire this company's ability to run a sports bar/casual dining chain that is still family-friendly. It doesn't reek of spilled beer or tolerate rowdy behavior. On Wednesdays, it is Kids Night with cartoons on the big screens and special kids menu prices.

The restaurant boasts several community involvement awards and is strategically located in an affluent neo-traditional community, a trend that is rarely mentioned in financial news about the company, it's real estate savvy, gradually moving away from its original college town beer bust locations. The other closest Buffalo Wild Wings is also located in another affluent neo-traditional community.

Another thing to like about the company is its expansion to more burgers and trendy casual dining appetizers, and the wings, while always good, have been the victim of their own popularity with wing prices rising in the last few years.

On the Q1 earnings release on April 29, CEO Sally Smith noted the volatility in wing prices and wing yields and said the company had decided to address this with servings of wings by portions in snack, small, medium, and large. My snack included eight boneless wings and was filling enough. These new portions are supposed to generate cost savings of 40-50 basis points to its current cost per sales of 32.7%.

More game changers ahead besides ale

And as fellow Fool Steve Symington discussed, each table had an advert for its new Game Changer ale available on tap, created in connection with craft brewer Redhook Brewery.

At the Oppenheimer Consumer Conference in June, the company presented its aim to almost "B-dub"ble the number of restaurants to 1,700 in North America and begin international franchising in earnest. It has locations in Malaysia, the Philippines, and Vietnam in negotiation and openings in Saudi Arabia, Riyadh, and three Mexican cities.

Last year, the company began a concerted effort to advertise nationally on TV, radio, and the internet and it also sponsored all NCAA championships. National advertising is still only 3% of sales. The company has inked a deal with DirectTV to make sure it has all types of sports available to air on its screens.

On its last earnings call, CEO Smith said that another innovation would be tabletop tablets in the restaurants for at table gaming (not gambling), and eventually feature music and ordering capabilities. This was not available at the one I visited, but Smith expected them to be in 100 locations by year-end.

As mentioned before, chicken commodity costs rose 30% over the year ago period, but the company noted a downward trend for the first two months of Q2, which it will report on July 30. On the last call, chicken costs were expected to come down to $1.75/lb., and possibly as low as $1.50/lb.

Competitors at the table

The company's most direct competition is listed as Hooters of America, not exactly family-friendly, and other privately held chains. Yum! Brands (NYSE: YUM) could be considered a competitor, but it doesn't serve liquor at its KFC restaurants nor offer TV screens for sports viewing.

Yum! has fifteen times the market cap of Buffalo Wild Wings' $1.88 billion. Yum! has a 1.90% yield and a lower trailing P/E of 23.53 to Buffalo Wild Wings' 33.90. Yum!'s PEG at 2.09 is higher than B-Dub's 1.53 as well.

Yum! also is a global fast food story known for its extraordinary success in China with over 4,000 restaurants. This week, the China story again worsened with China Central TV reporting Chinese KFC's ice was unsanitary, this coming on the heels of several quarters of lost sales after a Chinese chicken illegal drug scandal.

Another up-and-coming competitor is BJ's Restaurants (NASDAQ: BJRI), a smaller chain with only 134 restaurants in 15 states. Its concept is casual dining with burgers, sandwiches, pasta, pizza, and 19 BJ's craft beers and ales without Buffalo Wild Wings' sports kicker. Most of its locations are centered in the West and Southwest, as well as Florida, and three states in the Midwest.

Like Buffalo Wild Wings, it has a market cap under $2 billion. It has a trailing P/E of 34.38 and its short interest is higher as well at 14.90%. Buffalo Wild Wings still elicits a 12.50% short interest, which is decreasing. I find it hard to understand as the company has a low corporate governance risk score of 2 and has less headline risk than say, Yum! Brands with its Chinese PR troubles.

If Buffalo Wild Wings would offer a dividend, it would be a nearly perfect stock. Analysts see 18.08% five-year EPS growth which is slightly above the company's own ambitions.The company has attracted several institutions, which hold over 5% stakes like FMR LLC, Wellington Management, The Vanguard Group, and Fidelity Growth Company Fund, which holds the largest institutional stake at 8.26%.

The Foolish takeaway

I expect the Q3 and Q4 reports to reflect the success of these initiatives: the Game Changer ale, snack portions, and lower chicken costs. All the shareholders want B-Dub to do is what Blazing Saddles villain Hedley Lamarr exclaimed, "Go do that voodoo that you do so well!"

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AnnaLisa Kraft has no position in any stocks mentioned. The Motley Fool recommends BJ's Restaurants and Buffalo Wild Wings. The Motley Fool owns shares of BJ's Restaurants and Buffalo Wild Wings. 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!

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