Buffalo Wild Wings: Going Nowhere of Late
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After a huge surge in February last year, Buffalo Wild Wings (NASDAQ: BWLD) has gone virtually sideways. The stock had a huge day on February 7 where it surged from $70 to $82.50 yet the next year has seen nothing but disappointment for investors.
The company operates and franchises Buffalo Wild Wings Grill & Bar restaurants with nearly 900 restaurants in 49 states and Canada. The restaurants feature a variety of chicken wing options along with 20 signature sauces and seasonings in a venue designed for viewing sporting events.
After a year of absorbing those gains has the growth of the company finally caught up with the stock price?
Q4 2012 Earnings Highlights
The company provided the following highlights for Q4 2012:
- Total revenue increased 37.8% to $303.8 million
- Company-owned restaurant sales grew 39.3% to $282.7 million
- Same-store sales increased 5.8% at company-owned restaurants and 7.4% at franchised restaurants
- Net earnings increased 22.3% to $16.7 million from $13.6 million, and earnings per diluted share increased 21.9% to $0.89 from $0.73
The market was generally disappointed as the company was expected to earn $0.96 during Q4. Guidance for Q1 was also disappointing as the company only expects flat year over year numbers. The big key will be whether it can achieve the new forecasted 25% earnings growth over 2012. The growth will come from the last 3 quarters in the year starting with Q2 growing by 22% over last year.
Investors need to understand that Buffalo Wild Wings can be especially difficult to forecast quarter to quarter due to the constantly shifting sporting event dates. A NFL weekend can shift from one calendar year to the next while not impacting the financial prognosis of the concept.
The company has missed earnings expectations in the last three quarters, but conversely Chipotle Mexican Grill (NYSE: CMG) missed estimates in the last two quarters and Panera Bread (NASDAQ: PNRA) has seen pressure on out year earnings. Though Panera doesn’t face the same pressure on meat prices being more focused on bread items than the other two.
Chicken wing prices
A key issue in the industry has been the rising prices for meat, especially chicken wings in the case of this company. For Q4, the company reported the price per pound had risen to $2.07 or a 46% increase from $1.42 last year. Q1 has continued to see price increases with price rising to $2.13 in the first two months of 2013. The average for Q1 last year was $1.92.
While most investors consider this a greater and greater concern, the logical assumption should be that prices would eventually revert to the mean. No rationale exists that one-time issues, such as the summer drought, won’t revert to the mean and at some point provide a tailwind for the pricing environment. Discretionary consumers will revert to cheaper food items and the higher prices will encourage chicken farmers to grow more. Eventually the system works and prices end up lower.
The company has plans to reach 1,700 North American stores compared to the 900 current stores. While it has already started opening up stores in Canada, the first real international expansion begins in the Middle East starting this year and Puerto Rico in 2014.
As a competitive example, Chipotle operates over 1,400 restaurants and Panera Bread has 1,650 locations with a new unit target of up to 125 in 2013. Even though it has already reached 49 states, Buffalo Wild Wings appears to have more growth potential than the listed goal of 1,700 based on Chipotle and Panera.
Based on Panera alone, the company could reach 2,000 units. In the local metro area, the company has three locations but still lacks restaurants in some of the major entertainment areas. As a further example, Panera has 7 locations within 10 miles and several other locations further out in the metro area.
While the fast-casual concepts won’t ever match the units of McDonald’s, it does need enough areas to limit driving times as the concept will never be seen as a destination such as a high-end steakhouse. Though Buffalo Wild Wings might obtain such a designation on sports event driven days, consumers won’t generally drive a long distance no matter how good the wings.
The general category has been weak over the last year. As the below chart highlights, the nearly 13% loss by Buffalo Wild Wings sits in the middle of the group and significantly below the benchmark S&P 500:
The sector has considerably underperformed the market providing the potential for a sector rotation later this year especially if meat prices peak. Another catalyst for Buffalo Wild Wings could be the resuming earnings growth starting with Q2.
The stock has gone nowhere in the last year since spiking in early February 2012. After a year of digesting those gains, the stock might be poised for another rally as the company has years of strong growth ahead with store counts in the US alone set to double.
Mark Holder and Stone Fox Capital Advisors, LLC have no position in any stocks mentioned. The Motley Fool recommends Buffalo Wild Wings, Chipotle Mexican Grill, and Panera Bread. The Motley Fool owns shares of Buffalo Wild Wings, Chipotle Mexican Grill, and Panera Bread. 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!