Flying with Fragile Wings

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

Football season is upon us once again.  I love when the season first begins because my dreams of the Jaguars reaching the Super Bowl for the first time have not yet been crushed.  (That doesn't typically happen until about week 10...)

The following that the NFL enjoys in the United States is astounding, as is the number of football-related snacks we consume.  We love our burgers, pizza, and nachos for sure.  But the greatest of all football treats are the quintessential chicken wings.

Cashing in on America's love for chicken wings is the company Buffalo Wild Wings (NASDAQ: BWLD).  Buffalo Wild has other things on their menu, but as their name suggests, the buffalo wings are the specialty of the house (was anyone else confused as a kid why they were called buffalo wings...and why you had never seen a flying buffalo before?  When I asked my dad, he said they had cut the wings off all the buffalo so we could eat them, and that's why you had never seen a flying one, but I digress...)

<img src="http://media.ycharts.com/charts/ebe534f480cc1ab95ec4fd7b74316471.png" />

BWLD Revenue data by YCharts

This chart (besides being a spectacular demonstration of revenue growth) shows an interesting trend, yet not surprising.  There are flat sections on the line, typically around mid-year, followed by a tremendous spike in revenues through the fall and winter.  The spikes in revenue coincide with football season.  It's no secret that Buffalo Wild Wings tailors its business to sports fans, and with the wings they serve up, it's no wonder that more and more football fans go there to enjoy the game.

A Potential Warning Sign

To be clear, I love Buffalo Wild Wings both as a company and a stock, but there might be a reason to be a little worried this football season.  Currently, the United States is experiencing the worst drought in over 50 years. This has started a chain reaction that is causing prices to go up for things like beef, corn, and ... chicken. Chicken wing prices have already gone up, but some believe it could get worse.

Tyson Foods (NYSE: TSN) and Sanderson Farms (NASDAQ: SAFM) are two of several chicken suppliers struggling with this situation.  Chicken feed prices have become more expensive because of the drought.  In an effort to preserve profitability, output is being cut.  Sanderson Farms just recently had a pretty solid quarter, but this drought is making things hard.  After a rough 2008 and 2009, Tyson had been getting profits back on track, but it's currently a tough environment to grow profits.  

Everything is pointing towards higher chicken prices in the short term.  Besides being a tough situation for Tyson and Sanderson Farms, this is also problematic for Buffalo Wild.  Some companies, like Kraft (NASDAQ: KRFT), are relatively unaffected when food prices surge.  They are protected with contracts that lock them in at a certain price.  But Wild Wings has no such contract.  In their most recent quarterly statement, they admitted their current reality is "purchasing chicken wings at market prices."

To me, this is kind of like a perfect storm situation.  Normally, when a business has higher costs, they pass that cost on to consumers; in this case through a re-pricing of the menu.  Buffalo Wild Wings hasn't talked about raising menu prices yet.  But remember: chicken market prices have gone up, and they buy their chicken at market prices.  Therefore, profits are already being affected.  Couple that with the fact that last Sunday, BWW kicked off its biggest yearly influx of customers.  They're going to have a ton of people in their restaurants eating wings and cheering their teams; all the while Buffalo Wild will be making less money per wing than they anticipated.

I'm not doom and gloom on Buffalo Wild, but this could lead to a quarterly earnings miss, if not in October, in January 2013.  Perhaps the market will see it for what it is: a temporary problem for a very strong company.  But what could very likely happen is a significant drop in stock price as panicked investors run away from "falling" profits.

What it Means

I do think that an earnings miss is very possible, which could lead to a drop in stock price.  In 2008 this stock saw a substantial drop as high gas prices affected their profits.  After the drop was a great time to get in.  I see this as a temporary potential setback, rather than a long-term problem.  If you're in, I would stay in.  If you're wanting in, a drop in stock price could provide a beautiful entry point to a strong stock.


thequast has no positions in the stocks mentioned above. The Motley Fool owns shares of Buffalo Wild Wings. Motley Fool newsletter services recommend Buffalo Wild Wings. 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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