Buffalo Wild Wings Alert: Maintain Buy Despite Q2 Miss
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Recently, Buffalo Wild Wings Inc (NASDAQ: BWLD) announced its financial results for the second quarter ended June 24, 2012. BWLD reported 2Q12 EPS of $0.62 missing the consensus estimates by $0.06 as a result of wing inflation and moderating same store sales in the latter half of the quarter. After 6.7% same store sales growth in the first four weeks, the trends slowed and resulted in an aggregated 5.3% increase in the second quarter. Other highlights for the second quarter versus the same period a year ago were:
- Total revenue increased 29.7% to $238.7 million
- Company-owned restaurant sales grew 31.4% to $220.6 million
- Net earnings increased 9.3% to $11.7 million from $10.7 million
- Restaurant margin came down 340bps to 17.5% (vs. consensus of 18.1%)
Margins also missed expectations due to COGS pressure from higher wing costs. COGS rose more than expected with a 440bp year over year increase and hurt EPS by ~$0.06. BWLD lowered 2012 earnings growth guidance to 15-20% from 20% previously, citing elevated wing costs (~100% inflation). Management also reiterated plans to open more than 70 units for the remainder of 2012 with 41–46 new company locations and 32–34 franchised locations. We remain optimistic about the company’s growth due to the following reasons.
Q2 SSS below Consensus but promising start to Q3: Second quarter company-owned Same Store Sales rose 5.3%, which included 1.8% of price increases. SSS at the franchise stores rose 5.5%. Company and franchised SSS slowed on a two-year basis compared to the first quarter with company stores experiencing a 190bp decline and franchised locations experiencing a 70bp decline.
However, the company started the third quarter with an upside. In the first four weeks of the third quarter, SSS at company stores increased 6.8% compared to the Q3 consensus estimate of 5.7% and at franchised stores rose 7.3% compared to third quarter consensus estimate of 4.9%. We would expect top-line results to remain strong in the back half of the year given current SSS trends, additional price increases ( ~2%), and more sporting events in the upcoming sports calendar as compared to last year including the Summer Olympics, six additional Thursday night NFL games, and one additional Q3 UFC fight.
Revised 2012 guidance and pricing incorporates an uptick in wing costs: Cost of sales rose 440 bps due primarily to an 88% increase in traditional wings costs, and to a lesser degree due to larger wings, which hurts as there are fewer wings per pound and BWLD sells wings by the piece. Wings have averaged $1.95 per pound so far in the third quarter, or up 68% compared to last year. In order to mitigate some of this pressure, management plans to run additional price increases of just over 3.0% during Q3 and around 4.0% during Q4. The company is testing menu options that would be linked to the per pound price. The new menu options could be in place as early as January/February 2013 if testing is successful, which would help lower food costs in 2013.
Management lowered 2012 EPS guidance despite healthy July sales trends, additional pricing in Q3 and Q4, the acquisition of 9 franchise locations in Q3 and an extra week. We believe the lowered guidance incorporates an uptick in wing costs from the $1.95/lb quarter to date average and back the company to achieve its lowered EPS guidance despite high wing costs.
Long-term growth thesis remains intact: In the post-recession period, the company has effectively transferred the wing boom into its topline, increasing revenues by an average of 22.9% per annum in the past three years. Interestingly, this is significantly higher than the restaurant industry average of 4.4%, and competitors like Darden Restaurants (NYSE: DRI) at 4.2%, Brinker International (NYSE: EAT) at -13.3%, Ruby Tuesday (NYSE: RT) at -2.4%, and DineEquity (NYSE: DIN) at -12.7%. Moreover, going into FY13, BWLD’s expected EPS growth of 18.6% is better than Darden’s 13.8%, Brinker’s 17.5%, Ruby Tuesday’s -2.2% and DineEquity’s 3%.
We believe the company is well positioned in near-term and long term; in the near term with its promising start to the third quarter and upcoming sports calendar and in the long term with its strong same store sales and rapid unit expansion. Moreover, new units are averaging annualized sales higher than previous classes, supporting the company’s argument that it could double the system size. Thus, we maintain our buy rating despite the earnings miss in the second quarter.
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