The last time we spoke about my pick in the Best Stocks for 2016 contest, I was gung-ho on the ability of Buffalo Wild Wings’ (BWLD) stock to outperform the remainder of the year. The stock hadn’t gotten off to the best start in 2016, but I suspected better execution at the company would push both the shares and earnings higher in the near term.
Well, first-quarter numbers came out on April 26 and the stock tumbled as much as 15.5% the following day. The stock has been a disaster largely because execution has been a disaster, and while the value proposition remains intact, I can only hope CEO Sally Smith figures it out or is shown the door.
Let me briefly remind you what I saw in BWLD stock in the first place. The company is an owner, operator and franchisor of sports-themed restaurants that feature wings, beer and sports. I’m sure you’ve heard of them, and many of you have probably watched one of their 50+ televisions at each location.
The company has grown rapidly since its beginning as a single restaurant in Columbus, Ohio in 1982, with more than 1,080 stores spread across the United States, Canada, Mexico and the Philippines today. And there’s no denying it’s been a runaway success over the last half dozen years. BWLD stock rallied 786% from its January 1, 2009 open to its high point in July 2015, and you can see the company’s underlying growth trends over the last five years in the chart below.
| BWLD Annual Growth Trends | 2011 | 2012 | 2013 | 2014 | 2015 |
| Revenue | +27.9% | +32.7% | +21.7% | +19.7% | +19.5% |
| Company-Owned Stores | +6.1% | +6.6% | +3.5% | +6.5% | +4.2% |
| Franchise-Owned Stores | +3.6% | +6.5% | +3.3% | +5.6% | +2.5% |
Click to Enlarge
But BWLD stock has struggled recently and it all comes down to two things: poor execution and food illnesses. I’m hopeful we’ve moved beyond the latter now, but after that horrible first-quarter report, it’s clear that execution is still an issue.
On the bottom line, BWLD earned $1.73 a share, below estimates for $1.76 a share, and revenue of $508.3 million was short of expectations for $532.2 million. Guidance for the year was also off, with management expecting $5.85 a share while the Street was up at $6.10. Same-store sales and average weekly sales were also down, although same-store sales at franchise-owned stores increased 2.4%.
I understand there are macro issues outside management’s control, such as the cost of chicken wings (see below), fuel, etc. And with such uneven execution, costs are that much more important. We especially need to keep an eye on the price of chicken wings, which came into the year higher in an environment where passing costs along to customers is difficult. Still, this fourth consecutive miss calls for new blood at CEO, which is something I’ve been watching all along.
| Historic Changes in Chicken Wing Prices (per pound) | 2011 | 2012 | 2013 | 2014 | 2015 |
| $0.91 | $1.89 | $1.74 | $1.36 | $1.74 |
For a while, Wall Street blamed the economy and gave Buffalo Wild Wings the benefit of the doubt even as it was missing consensus time and time again. But now the tables have turned, and the company will need to convince the Street that it still has the ability to live up to all the hype.
Naturally, earnings estimates have come down, which means any beat in the future will come with a caveat. That said, it needs to start happening immediately and continually. Analysts are now looking for earnings of $1.27 a share for the current quarter when they were all the way up at $1.41 just three months ago. But with more than 13% of the float short, a solid beat and strong guidance in July could spark momentum.
Here’s another bit of good news: Rating agency Nielson recently revamped its analysis on sports viewing done outside the home. The results were good for ESPN and others, and should also prove to be encouraging for Buffalo Wild Wings. While SportsCenter has seen a double-digit decline in its viewership, out-of-home viewing grew 6% between September 2015 and March 2016.
| Out-Of-Home Sports Viewing |
Source |
| 30% | Bars & Restaurants |
| 11% | Gyms |
| 8% | Office |
| 7% | Hotels |
In the end, there’s no hiding the fact that BWLD is extremely oversold and will likely trade in a wide range between key support at $125 and resistance at $156 for some time. That said, the company is valued very reasonably — even low if it’s able to gain top-line momentum — and current retail trends bode well for the restaurant industry.
The weakness is a buying opportunity for investors with the patience to hold longer term while enduring a bit of volatility in the near term.
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