Buffalo Wild Wings: Behind The Headlines

By Chad Henage - May 10, 2012 | Tickers: BWLD, CMG | 0 Comments

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I wonder if there will be a time when Buffalo Wild Wings (NASDAQ: BWLD) is as well respected as Chipotle (NYSE: CMG)? I only ask the question because, both companies are popping up all over the place, and both show tremendous potential and growth. Their valuations on the other hand are not similar. We'll look at a few comparisons of the two, but for now my main focus is how Buffalo Wild Wings did in this most recent quarter. With a market cap of just $1.5 billion, Buffalo Wild Wings isn't as well known as some of its competition. But if the company keeps turning in quarters like this one, that will soon change.

In their most recent earnings report, Buffalo Wild Wings reported revenue up 37.9% and EPS up 21%. Equally impressive was the company's same store sales increased 9.2% at company-owned restaurants and 7.3% at franchised locations. Those are the numbers that most everyone already knows about.

Some of the behind the scenes numbers that I picked up on are encouraging, but show room for improvement in the future. For instance, average weekly sales at company owned stores were up 12.9% versus franchised location sales were up 8.6%. This was a theme throughout Buffalo Wild Wings earnings release. The company-owned stores do better than the franchised locations. This is both a positive and a negative.

The positive is, most of the stores that Buffalo Wild Wings is planning on opening are company-owned. This year so far the company has opened 64 company-owned restaurants and 17 franchised restaurants. With nearly 80% of new openings coming from the company, this bodes well for future growth. The negative is, why is there a disconnect between the performance of the company-owned locations versus franchised locations? In all likelihood this speaks to better training and oversight at the company-owned locations. The problem this creates is the company's margin is lower at company stores versus franchised stores. You can see this issue in the company's operating margin decrease from 2011 to 2012. In the same quarter last year operating margin was 12.1%, this year it was 10.7%. One of the big contributing factors was, an increase in the percentage of company-owned stores relative to franchised locations. In short, Buffalo Wild Wings probably needs to work a little harder on training their franchise owners, and increase oversight of these stores. When same-store sales and average weekly sales are lower at the franchised locations versus company stores, there is a disconnect somewhere. This isn't just a one quarter issue either. In the last 4 years, only 1 year shows franchised stores outperforming company-owned stores on a same-store sales basis.

While this issue with the franchisees is a longer-term opportunity, the outlook for Buffalo Wild Wings itself is great. The company expects to develop 1,500 locations in North America in the next 5-7 years. With 832 restaurants currently, this points to the development of about 668 new restaurants in the next 5-7 years. With a five year rollout this would be about 133 new stores a year, over seven years would mean about 95 new stores a year. Even at the slower pace this would indicate a starting rate of about 11% new stores each year, which would decline as the store count grew. With comparable sales in the 7-9% range, this combination would seem to indicate healthy growth going forward. The company agrees with this outlook saying they “believe we will achieve our goal of net earnings growth of 20%”. In addition, the company is pursuing two new areas of growth. First, the company is looking to expand internationally through franchising opportunities. Second, the company said they are looking at “potential concepts for acquisition”. That last statement is a new comment that I don't recall seeing before. With strong domestic growth, and the potential for positive acquisitions and/or international expansion, Buffalo Wild Wings appears set to grow for quite a while. Is the stock fairly valued at current prices though?

I think the comparison to Chipotle is a closer comparison than some Chipotle investors would like to believe. Buffalo Wild Wings sells for about 25 times future earnings and is expected to grow at 20.49%. Chipotle sells for 45 times forward earnings, and is expected to grow at 22.30%. On a cash flow basis, Chipotle has generated $0.18 of free cash flow per $1 of assets in the last year. Buffalo Wild Wings generated just $0.04 of free cash flow per $1 of assets in this same time frame. This sounds like a reason for Chipotle to be valued higher, and to some extent it is. However, when you consider that Chipotle has over 1,260 restaurants, versus 832 for Buffalo Wild Wings, Chipotle has a larger restaurant base to spread their costs across. With 51% more restaurants, certainly this contributes to Chipotle's better free cash flow. As Buffalo Wild Wings expands, it can spread its fixed costs across a larger base which will contribute to better cash flow.

In the end, it appears that Buffalo Wild Wings is firing on all cylinders. If the company were to acquire another concept it could add a new dimension to the company's growth profile. Even if an acquisition doesn't occur, the expanding the concept in just the U.S. will keep growth going for at least the next 5-7 years. If the company is successful internationally, many more years of growth would lie ahead for shareholders. At 25 times projected earnings, the stock is not cheap in the traditional sense. However, if investors are willing to pay 45 times earnings for Chipotle's 22% growth, maybe 25 times earnings for 20% growth at Buffalo Wild Wings isn't such a bad price after all.

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