Hold the Wings in 2013
Shweta is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Buffalo Wild Wings (NASDAQ: BWLD) has built an exceptional growth story since its IPO in 2003. The chicken wings chain has reported steady growth in same store sales throughout these years, if we ignore the last two quarters. With an altogether distinct approach of “Wings – Beer – Sports” in the casual dining segment, the company is now the largest sports bar restaurant chain. But the company had a softer SSS in the fall of 2012, and I think this trend may continue in the near term. The stock price also has seen a downfall of ~15% in the last three months of 2012 with an overall return of ~11% for the entire year. The downfall was mainly due to rising chicken prices, which impacted the company's bottom-line. I feel this short-term drop provides a good investment opportunity as the long-term growth prospects remains intact. Let's discuss some of its growth fundamentals in detail.
The speedy expansion
The company is planning to bring its total chain count to 1000 by the end of 2013 with ~105 new restaurants this year. With this plan, it is focusing on the key markets of California, Seattle, Philadelphia, Boston and the Mid-Atlantic region. These places though have a long history of high real estate and labor cost, but they have also significantly contributed to average unit volume. Additionally, the company is now targeting non-traditional places such as airports which have reported higher sales volumes in the past. Moreover, Buffalo Wild Wings is focusing heavily on North America by doubling its unit count in this region. I anticipate the unit growth for the company to be around 10% for the next 3 years.
The company also has plans for international expansions and has signed development agreements for 22 franchised locations in the Middle East region. Additionally, four locations are expected to open in Puerto Rico in early 2013. The Company is also in discussion for expansions in the Philippines, Germany, the U.K. and Panama. The expansion deals outside of North America would be mostly license agreements with the minimum burden of overhead costs on the company.
Although Buffalo Wild Wings is known for its male focused approach, the company has already made a decent shift towards broader demographics. As the company cannot compete with the mammoth ad budgets of its competitors, it has resorted to viral and digital ads and both seem to be successful so far in order to create a buzz. The company aims to keep its ads more appealing and focused on funny sports scenarios. Its advertisements are already featured nationally on ESPN, CBS Sports and Fox Sports and with the bowl football promotions from 4Q12 into 1Q13, investors can anticipate further monetization.
The Wendy's Company (NASDAQ: WEN), has failed to impress its customers with its breakfast menu and is pulling back its offerings from some of the markets. The margins reported were also below the expectations due to lack of advertising. But we can expect other stores to contribute to revenue in 2013 and hope that Wendy's comes out with a different marketing approach to offset the losses. Furthermore, Wendy’s image program is in its early stages and the reported sales increase for renovated units are similar to the 2011 figures. Another competitor Chipotle Mexican Grill (NYSE: CMG) is targeting to cash in on the opportunities with its other two start up businesses from its regular QSR. Chipotle opened the first ShopHouse Southeast Asian Kitchen in 2011 in Washington D.C. with the hope to replicate its original Chipotle service format to this new concept. Second, ShopHouse is expected to start in early 2013. Though with the same service format, it has a different cuisine for its new customers. Chipotle also plans to expand internationally and so far they seem to be doing well. It operates with 10 international locations and has entered into Vancouver, Canada in December 2012 along with a German launch in 2013. The London locations are reporting good margins and the company expects these new units to contribute more.
The investing opportunity
One important factor which I like about Buffalo Wild Wings is that the company is steadily working towards improving its margins which were hit by high chicken prices. The company is currently running the test phase in around 60 restaurants to change its servings from fixed to flexible quantities. This initiative will be further rolled out in the remaining locations in 1H13 aiming at decreasing the cost of sales. Such initiatives will offset the rising costs and will support the company's bottom-line.
Summing up, I feel that Buffalo Wild Wings is well placed to benefit with strong expansion plans along with cost saving initiatives. Since its IPO in 2003, the company has never had any debt on its financial statements and I anticipate it will be able to fuel its growth both domestic and abroad via its cash flow from operations. I expect the company to maintain about a 10% growth rate till 2015 mainly driven by its international prospects and best-in-class innovation strategy. Though the investors can anticipate weaker SSS in the near term, the stock will be a safe bet over the long run.
ShwetaDubey has no position in any stocks mentioned. The Motley Fool recommends Buffalo Wild Wings and Chipotle Mexican Grill. The Motley Fool owns shares of 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!