Buffalo Wild Wings: Aggressive Unit Growth and Moderate Valuations
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Buffalo Wild Wings Inc (NASDAQ: BWLD) will announce its second quarter earnings on 24th July. We believe the company will achieve Q2 EPS guidance of $0.65-$0.69 and will post strong SSS growth (in mid-single digits). The first quarter of 2012 showed net earnings growth of 23% and the company achieved same store sales growth of 9.2% over the prior year. Strong Q1 SSS growth was supported by a range of factors, including industry demand trends (particularly for sports driven occasions), incremental marketing spending and further efforts to drive happy hour and draft beer sales. SSS growth in the second quarter may be less than what the company achieved in the first. However, we believe the company will post far better SSS growth than the Knapp Track.
Buffalo Wild Wings reiterated its guidance for 2012 EPS growth of +20% which implies an EPS of $3.27+ versus consensus estimates of $3.29. The company is certain that it will achieve the target EPS even if Q2-Q4 same store sales drop lower. We expect the company’s impressive run to continue in the latter half of 2012 and beyond due to the following reasons.
Encouraging SSS trends in early-Q2: The company started Q2 on a good note, posting SSS growth of +6.7% (vs. +5.3% year-ago and +6.2% consensus estimate) in the first four weeks of the second quarter. The company marked its return to a traditional communication approach that has worked well in the past by launching new television advertisements. There has also been incremental spending on national radio spots in the second quarter, which would have provided further support for the SSS trends in the remainder of the quarter.
Aggressive unit expansion: The company has been aggressively expanding its unit count since 1999 when a private placement jump-started unit additions. In the first quarter, the company opened 10 company-owned and nine franchise locations. In 2012, the company expects to increase its units by 11%, with two-thirds of that increment to take place in the back half of the year. Buffalo is among only three restaurant companies that are going to deliver more than 10% unit growth in 2012, the other two being BJ’s Restaurants Inc (NASDAQ: BJRI) and Chipotle Mexican Grill (NYSE: CMG). Even with aggressive expansion, it has managed to consistently grow its net earnings. In the last five years, the company has achieved a compounded annual growth rate of 25%. We expect BWLD to maintain its 10+% unit growth rate till 2015, driven by the combination of best-in-class new unit productivity, improving unit level economics, and emerging international development prospects.
Moderate valuation: BWLD is currently trading at 21.68x forward P/E (2.5x above the 2008–10 average), as compared to peers BJ's Restaurants Inc (25.67) and Chipotle Mexican Grill (35.94x). While BWLD does deserve some discount based on the challenging and competitive segment in which it competes, we do believe the current valuation difference is too extreme.
Looking forward, over the next few years, we expect BWLD to trade with a valuation in the mid to high 20x’s range, supported by high-teens EPS growth driven by low-double-digit system unit growth and low-single-digit same-store-sales growth. It definitely appears to be a good buy.
TheAnalystBlog has no positions in the stocks mentioned above. The Motley Fool owns shares of BJ's Restaurants, 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.