I confess I had never set foot into a Buffalo Wild Wings (BWLD) until last year during the NFL playoffs. Since then, I’ve had the opportunity to drop in on BWLD after one opened up relatively close by. I had heard about BWLD stock for some time, and that it seemed to perform well, but I just didn’t have interest in restaurant stocks, and BWLD didn’t seem to have anything terribly special about it.
Then I remembered all the other restaurant stocks that have done well over the years. There’s P.F. Chang’s, which got bought out by private equity. Cheesecake Factory (CAKE) has done very well over the years. And Chipotle Mexican Grill (CMG) appears to be unstoppable.
After BWLD delivered another amazing quarter, I decided I had to examine BWLD stock more closely. It doesn’t seem to be just another publicly held sports bar. What makes the difference between restaurant stocks that seem to take off, and ones that flop? What is special about BWLD specifically?
Part of BWLD’s success seems to be focus — “Beer, wings, and sports”. Just the other night I went to watch Monday Night Football at my local sports bar. The food is decent but not great. The drinks are standard fare. However, the TV screens were too small. Then I went over to BWLD at halftime. Large screens, better food (although it’s pricier), better drinks, and a bigger crowd. It’s more of a party.
That’s when I clued in. Maybe BWLD and BWLD stock are really about having a sports-watching party in someone else’s living room. To me, it seemed like the sports bar equivalent of Starbucks (SBUX), which was not built around the notion of coffee, but rather a place to meet someone outside of work and home.
I think that may be the conceptual aspect of BWLD that is making it work.
BWLD Cooking Up Profit
Q3 earnings came in with revenue up 18%, BWLD same-store sales up 6%, and EPS of $1.14 per share up 20% over last year. BWLD stock’s growth model is assisted by the franchise fees the company assesses, and growth of the franchises themselves.
There’s some risk, however, with respect to expenses. Labor costs are rising, as more and more localities and states raise the minimum wage. Also, the company is held hostage by chicken wing commodity pricing, which has been rising and is expected to continue rising. These things go in cycles, but it creates a risk you might not see in other businesses.
EPS are slated to grow 30% this year, 18% next year and five-year annualized growth is pegged at 19.4%. BWLD stock has $100 million in cash and short-term investments (about $5.50 per share), and no long term debt. BWLD generated $143 million in operating cash flow, up from $122 million last year. This is a very robust model, with net margins between 8% and 10%.
With BWLD stock hovering $150, it trades at 29x FY14 estimates after backing out net cash and 25x next year’s estimates. The stock feels just a bit pricey, even with the premium it deserves for its cash flow and growth.
Then again, it is a growth stock: Buffalo Wild Wings’ CEO CEO sees room for another 700 stores in the U.S.
For growth-oriented investors who aren’t afraid of the rising-cost risks, I think BWLD stock is worth considering.
As of this writing, Lawrence Meyers was long SBUX. He is president of PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at pdlcapital66@gmail.com and follow his tweets at @ichabodscranium.
