Impressive Report If You Look Past EPS

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

I've followed Buffalo Wild Wings (NASDAQ: BWLD) since first discovering it from multiple articles on Fool.com. The story from the company seems to always be the same. Investors have high expectations, the stock is bid up until they report earnings, then earnings disappoint and the stock falls. The company followed this predictable pattern yet again when they reported earnings, but I think investors are missing the big picture. In fact, if you look past the company's earnings-per-share decline, this was actually a pretty impressive report.

The Numbers You Know:

The headline numbers are pretty straightforward. Buffalo Wild Wings reported revenue up 24.8%, but EPS declined by 6.6%. As anyone who has followed the company for a while knows, the problem was the rising cost of chicken wings. When your primary business is selling chicken wings and beer and one of your primary input costs rises faster than sales you know earnings could suffer. However, this is likely a short-term phenomenon and investors need to look at everything that's going on to determine whether this represents an opportunity or a value trap.

Opportunity Lies With Franchisees:

One thing that I noticed is the company has very strong same-store sales and they have been very consistent as well. In the current quarter, same-store sales increased by 6.2% at company-owned restaurants and 5.8% at franchised stores. This wasn't a flash in the pan either, as same-store sales have increased about 6% each quarter over the last two years. If there is any problem with same-store sales, it lies with the fact that Buffalo Wild Wings needs to train its franchisees better. Over the last 3 years, only one quarter did franchisees outperform company-owned restaurants when it comes to same-store sales increases. In addition, there is tremendous opportunity for the company should it choose to buy out some of its franchisees. Consider this; of the 343 company-owned restaurants they each generated $665,941 of revenue per restaurant. Looking at the 511 franchised restaurants, each of these generated just $36,088.06 in revenue for the company. I understand that Buffalo Wild Wings in theory takes on less risk with franchisees, but when 59% of your restaurants are contributing 1700% less in revenue you have to wonder if franchisees are the right way to build the business. The company seems to be addressing this weakness by opening more company-owned stores (55) and less franchised stores (13). In addition, while sales at company owned stores were up over 25%, franchise royalties were up just 10% on a year-over-year basis. While this shows several places the company can improve going forward, on several other metrics, Buffalo Wild Wings turned in pretty good numbers.

Operating Cash Flow Shows Good Growth:

One thing I always look at is the cash flow situation at any company I watch. Buffalo Wild Wings increased operating cash flow in the current quarter by 22.83%. Competitor Chipotle (NYSE: CMG) reported about 30% growth in operating cash flow, and the more established Brinker International (NYSE: EAT) showed just over 10% growth. Where Chipotle is concerned, the company offers less of a sit and eat atmosphere diners could easily choose to stop by Chipotle instead of sitting down at Buffalo Wild Wings. When it comes to Chili's (owned by Brinker), the company offers a more traditional dining experience yet is growing at a much slower pace than Buffalo Wild Wings. As you can see, Buffalo Wild Wings is increasing operating cash flow at just under the amount of revenue growth. Given the company is performing in line with its competition, their EPS miss doesn't seem quite as bad.

Free Cash Flow Per $1 Of Sales Is Impressive Too:

Another way for investors to value companies is to compare their free cash flow. However, looking at free cash flow across different size companies can sometimes be a challenge. For this reason, I use free cash flow per $1 of sales to get an apples to apples comparison. By this measure, Buffalo Wild Wings reported $0.11 of free cash flow for each $1 of sales during the last nine months. By comparison, the argued industry leader in free cash flow creation, Chipotle generated $0.20 of free cash flow using the same measure. Brinker International is more well-established, but was only able to generate $0.06 of free cash flow per $1 of sales. Considering that just a few months ago Buffalo Wild Wings was generating less than half as much free cash flow, you can see the company is actually performing much better than the headline numbers might indicate.

Conclusion:
What investors need to keep in mind is, you can't always just look at reported EPS to determine if a company is performing well. Sometimes digging into the company's financial statements paints a very different picture. We've already seen that Buffalo Wild Wings Reported Negative EPS Growth, yet the Company grew their operating cash flow at a rate close to their revenue growth rate. In addition, the company expects to benefit from an additional week of sales this year and should post earnings growth of about 15%. In 2013, the company not only expects to report 20% EPS growth, but they expect to open 60 new company-owned restaurants and 45 new franchised restaurants to reach a total of 1,000 in total. In addition, management suggested that they now believe that Buffalo Wild Wings can expand to at least 1,700 restaurants in just North America, and of course this doesn't count the tremendous opportunity overseas. While the stock has followed its usual pattern, it appears this could be a good long-term buying opportunity for investors who really understand the company. Buffalo Wild Wings is still in the middle portion of its growth phase. With the recent decline in the stock, the company now sells for a forward P/E ratio of almost equal to its expected growth rate in the next few years. If the company can deliver on its growth expectations, investors should be very pleased with the results.

Foolish Bottom Line

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MHenage 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.If you have questions about this post or the Fool’s blog network, click here for information.

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