Still Wild for BWLD

by Kyle Woodley | February 14, 2013 11:27 am

Buffalo Wild Wings (NASDAQ:BWLD[1]) sold off Wednesday after a hike to the minimum wage was tossed around with mediocre earnings, sending shareholders lurching toward the exits.

Geez, what are these guys? Chicken?

Jokes that would get me deservedly tarred and feathered aside, I think yesterday’s selling in BWLD was a little overdone. I’ll explain why, but first, a closer look at what we just learned.

What Spooked Investors

Buffalo Wild Wings’ earnings report had something for everyone — and by that, I mean optimists and pessimists.

The good news: Strong same-store sales and 62 new outlets helped drive revenues 38% higher from a year ago to $303.8 million, beating analyst estimates of $292.4 million. That in turn fueled earnings of $16.7 million, or 89 cents a share — more than 20% better than the year-ago period.

The bad news: That 89 cents in profit fell well short of the Street’s consensus expectation for 96 cents, and probably would’ve been a helluva lot better if B-Dubs* hadn’t been roughed up by record-high prices for wings — an average of $2.07 per pound in Q4[2], vs. record lows around $1.40 at the same time last year. Also, same-store sales for the first six weeks were down by 2.8% and 1.7%[3] at its company-owned restaurants and franchised locations, respectively.

The mixed news: Buffalo Wild Wings actually had a 14th week in its fourth quarter thanks to a 53-week financial calendar. That helped gin up its Q4 results, sure … but it also skewed its same-store sales comparisons from the previous year. According to the Star-Tribune, that means SSS at those company-owned stores and franchised locations actually rose 2.6% and 1.6% — not blowing the doors off, but better than a loss.

The other weight around BWLD’s neck: President Obama’s proposed $1.75/hour hike to the minimum wage. While that possibility similarly hangs around the neck of companies like McDonald’s (NYSE:MCD[4]) that are built upon minimum-wage labor, Buffalo Wild Wings primarily uses servers, who do not receive minimum wage. So why the worry?

Well, several states — including Minnesota, where BWLD is headquartered — don’t count restaurant employees’ tips as income, and thus pay a much higher base wage[5]. The new proposal would exacerbate this problem in these states. Also, how much waiters can claim is far from consistent across numerous states[6], meaning BWLD could face varying levels of pain throughout the U.S. The ultimate effect of a minimum wage hike in these states is uncertain — claimable tips could rise on a state-by-state basis — but the overhang is undeniable.

And Still…

There’s something to be said about a quality slogan, and perhaps none is more simple and illustrative of why I love this company than Buffalo Wild Wings’ “Wings. Beer. Sports.”

Wings: Last summer’s drought — and the resulting increases on price for feed, which in turn jacked up chicken and chicken wing prices — will keep the pressure on Buffalo Wild Wings’ bottom line for several more quarters, though a regular weather year should ease prices by 2014[7]. But what I think is more important (and what many seem to be ignoring) is the other side of the price equation: demand. Heading into this year’s Super Bowl, we were pummeled with stories talking about the high prices of wings, and the National Chicken Council even had to quell rumors[8] that there’d be a shortage for this year’s game. Why? Americans love wings. The NCC says four in five U.S. adults eat chicken wings[9] … and Buffalo Wild Wings is selling what we can’t get enough of. That’s good business.

Beer: I can only speak to my experience here, but the Buffalo Wild Wings that I frequent here in Maryland has more than 20 beers on tap, as well as a number of bottles I frankly never thought I’d see in a B-Dubs. The food is enough to bring in most people, and most people are content to have their wings with a Coors Light. But if I’m choosing between two bars that both have good wings and a lot of big screens, my decision will fall on the one that carries beers like Troegs, too. I’m not alone. People increasingly love their craft brews[10].

Sports: This sells itself. Buffalo Wild Wings caters to the sports crowd with more ginormous TVs than you can shake a stick at. Americans’ love for sports isn’t going away anytime soon, and neither is their love of the social aspect — namely, watching a game with friends. Sure, the U.S. isn’t short on sports bars by any measure, but it’s hard to beat B-Dubs’ combination of sheer size and wealth of viewing options, the beer, the wings and the still-competitive pricing (purchasing power will do wonders against smaller competitors).

Buffalo Wild Wings still says it expects to grow earnings 25% on a 52-week basis compared to 2012, though the final improvement — courtesy of that extra reporting week — is actually closer to 17%. That’ll come in part thanks to plans to open a combined 100-plus company-owned and franchised restaurants in the next year, including additional international expansion.

Analysts expect that same 17% number, then 20% growth in 2014. In fact, they expect an average of 20% annual growth for five years down the pike. So while BWLD’s forward P/E of nearly 18 doesn’t look like a bargain, it looks awfully fair considering its future prospects.

Bottom Line

There are plenty of reasons to worry about the restaurant business right now. The expiration of the payroll tax cuts took a chunk of spending money out of Americans’ pockets, and Obama’s proposed wage hike threatens to bite restaurants to some degree.

Conversely, people aren’t going to go cold-turkey on eating out, but more likely will just shave their habits down a bit. Plus, a minimum-wage hike would mean some people would have more money to spend — and some of that could land right back in the coffers of lower-cost restaurants (say, those that have 60-cent wing nights). So while restaurant stocks as a whole aren’t a screaming buy[11], the environment isn’t so bad that you can’t pick a few winners from the lot.

Buffalo Wild Wings still can make money hand over fist amid record-high prices for what it sells most. That sounds like a winner.


* A shorthand based off its original name, Buffalo Wild Wings & Weck (weck is shorthand for kummelweck, a sandwich roll). That was shortened by many to BW3, or B-Dubs — names I will continue to use … just as I will forever say “Jacobs Field.”

Kyle Woodley[12] is the Deputy Managing Editor of[13]. As of this writing, he did not hold a position in any of the aforementioned securities. Follow him on Twitter at @IPKyleWoodley[14].

  1. BWLD:
  2. an average of $2.07 per pound in Q4:
  3. were down by 2.8% and 1.7%:
  4. MCD:
  5. thus pay a much higher base wage:
  6. far from consistent across numerous states:
  7. should ease prices by 2014:
  8. even had to quell rumors:
  9. four in five U.S. adults eat chicken wings:
  10. People increasingly love their craft brews:
  11. aren’t a screaming buy:
  12. Kyle Woodley:
  14. @IPKyleWoodley:

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