The Buffalo of 2013

By Jon Quast - October 30, 2012 | Tickers: BWLD, PZZA, CAKE, THI | 0 Comments

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The buffalo has a particularly depressing history.  It is estimated that North America once held the greatest herd of animals ever seen on earth, with the American Bison boasting numbers greater than 50 million.  However, in just a few short years, their numbers had dwindled to near extinction.  A phrase was even coined to illustrate their fate:  "going the way of the Buffalo."

If you saw the reaction to Buffalo Wild Wings’ (NASDAQ: BWLD) 3rd quarter results, you may be inclined to think that this company is also going "that way."  Nothing could be further from the truth.  In fact, 2013 may be Buffalo Wild Wings greatest year ever.

20% Revenue Growth

Buffalo is setting a big goal for 2013:  20% net earnings growth.  That should make your mouth water more than their signature sauces.  But as we know, talk is cheap.  Is this a reasonable expectation? 

BWLD Net Income TTM data by YCharts

As you can see, 20% growth is completely within the range of possible and probable for the company.  Past performance doesn't guarantee future success, but it's worth mentioning that net income is up 176% over the last 5 years. 

We are going to talk about their expansion plans in a second, but there is another compelling reason to believe that they will easily hit this 20% goal.  Three Words:  Chicken. Wing. Prices.  This year, because of the drought, chicken wing prices have spiked out of control.  Traditional wing prices are up a killer 70% this year compared to last year.  In a recent article of mine, I suggested that this was going to lead to an earnings miss for Buffalo Wild, and indeed it did.  They have raised some menu prices in an attempt to compensate.  Fortunately, there doesn't appear to be any customer backlash from the move so far.

Wing prices aren't expected to stay sky high.  The market should start stabilizing early next year.  However, I'm unaware of restaurants lowering prices when food costs go down.  Expect them just to pocket the extra profits.  Could this cause them to beat analyst's expectations in the 1st quarter of 2013?

International Expansion

Buffalo Wild Wings is taking the show on the road.  They already had stores in Canada, which is technically international, but now they are crossing open waters to get there.  Puerto Rico is on their list for 2013.  "Puerto" means "port" in Spanish, but I think the word "puerta" would be more appropriate.  Puerto Rico is part of the United States, but it is the "door" to the Caribbean region.

Can you imagine flying into Santo Domingo, Kingston, or Nassau and being able to watch the cricket game from the comfort of a Wild Wings?  I can, and so can management.  Puerto Rico is exciting in its own right.  But you should be excited for what this means for growth in the region.

But even more exciting is that BWW is expanding into the Middle East.  They have plans for 22 restaurants in the region.  The two main countries in this deal are of course Saudi Arabia and the United Arab Emirates.  If Middle Eastern expansion seems strange to you, it shouldn't.  This region is becoming the new "go-to" place for international expansion.  It makes sense.  Middle Eastern countries are pretty wealthy and their citizens enjoy some American offerings.  

Targeting the Middle East is not unique to Buffalo Wild Wings.

The Middle East is a very hot place for international expansion right now, and Buffalo Wild Wings is planning on tapping this market for the first time in 2013.

Store #1,000

Buffalo Wild Wings is on track to open their 1,000th location before the end of 2013.  Now, 1,000 is just a number.  Is it really all that better than 999 or 1,001?  Location number 1,000 is a milestone, but what does it mean for the company?  

It means that they are exploding with growth.  Wild Wings had approximately 220 locations in 2003.  They have had incredible growth since then.  80 new locations in 2010.  85 in 2011.  This year they expect around 90.  That puts the total count at approximately 875 locations currently.  So, in summary, at some point before the end of next year, Buffalo Wild Wings will have more than 125 additional locations than what they have right now.  That's huge.

But to Buffalo Wild, #1,000 isn't a compelling reason to slow down.  Management says that getting to 1,000 next year helps them reach their goal of 1,700+ in the next 5 to 7 years.  Management is expecting their business to double in the next 5 years.  Stock price should, at the very least, follow suit.

My Conclusion

I've liked Buffalo Wild Wings for some time, but I'm really liking what I read in the 3rd Quarter conference call.  If you've been rattled by the recent Buffalo sell-off, I hope this has helped you regain a vision for this company.  When investors become nearsighted, we see these temporary sell-offs.  But that is to an investing visionary's advantage.  In short, 2013 is going to be the year of the Buffalo.

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