Buffalo Wild Wings Earnings: As Good as They Seem? (BWLD)

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I figured out the trick to Buffalo Wild Wings (BWLD), conceptually speaking. The reason the chain is doing so well and Buffalo Wild Wings stock has done very well is that it solved a problem. Sports fans didn’t have a standardized place they could go and watch sports while drinking beer and eating food.

Buffalo Wild Wings NASDAQ:BWLDThe only places that existed were local sports bars, whose food was likely sub-par and had the stink of beer at all hours of the day. BWLD basically applied the concept of Starbucks (SBUX) to the sports bar, giving people a place to meet, drink and watch sports.

The chain is hitting some speed bumps, however. Time will tell if its rapid growth is coming to an end, but I’m concerned that it has. While this quarter’s revenues were up a very impressive 16.5%, costs weighed on the bottom line. See, the problem with running a place called Buffalo Wild Wings is the “wings”, which are obviously parts of chickens, which are commodities — and commodities can have volatile prices.

Right now, and for several quarters, those prices have been increasing, cutting significantly into profits. Chicken wings were 26% higher on a per-pound basis versus the same quarter last year.

Digging Into BWLD Earnings

The chain introduced a new restaurant position known as the Guest Experience Captain: “Guests will welcome and appreciate your help as you keep the vibe alive with fresh, fun sports news…The GEC gauges Guests’ interests, plans fundraisers and local activities, and introduces Buffalo Wild Wings specials and new foods and beverages.”

As a result, labor expenses increased $22 million in the quarter, just like last quarter.

I think the concept could go either way. Nobody likes a chatterbox when you’re there to eat wings and watch football, just as nobody wants their Starbucks barista asking them about complex political issues. Alternatively, it could add to the atmosphere. But personally, I’m skeptical that it’s worth the cost.

Even though revenues were strong, and same-store sales increased 4.2% at company stores and 2.5% at franchises, net income fell 9.3% to $21.5 million from $23.7 million. That drop was largely the result of higher expenses.

Same-store sales are the most indicative of a company’s success, and Buffalo Wild Wings stock has been all over the place in that regard. As you can see from the press release, there’s really no pattern to them.

All the additional expenses also crimped margins. Gross margins declined more than 200 basis points, while net margins fell from about 6.6% to 5%. Free cash flow also declined from $45 million to $33 million, although that’s not terribly concerning.

The good news with Buffalo Wild Wings stock is that it still holds $90 million in cash and investments (about $5 per share) and has no long-term debt.

Bottom Line on Buffalo Wild Wings Stock

We always come back to the question as to whether or not BWLD belongs in your portfolio. The troubling aspect of Buffalo Wild Wings stock is the same thing that’s dogging many high-profile stocks across all sectors — they’re all insanely expensive.

Look, Buffalo Wild Wings stock leapt to $190 in pre-market trading on Wednesday. Back out the $5 per share in cash and it is effectively trading at $185 per share. FY15 EPS estimates are for $5.77 per share, which is 16% YOY. The CEO actually expects closer to 13% as a projection.

So Buffalo Wild Wings stock trades at a P/E of 32 — more than twice its growth rate, along with skyrocketing chicken prices. There’s just too much risk at this price to justify buying the stock. Personally, I would sell it and take profits.

Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. As of this writing, he was long SBUX. He has 20 years’ experience in the stock market, and has written more than 1,200 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/07/buffalo-wild-wings-stock-earnings/.

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