The national sports bar chain Buffalo Wild Wings (NASDAQ:BWLD) reported quarterly earnings on Tuesday after the closing bell, and disappointing results sent BWLD stock down some 10% in Wednesday’s premarket trading.
Investors waiting for a pullback in this hot-running stock shouldn’t look this gift horse in the mouth.
Buffalo Wild Wings Q1 Earnings
For the first quarter, BWLD reported revenue of $441 million, below the $452 million Wall Street analysts were looking for, but still a 20% increase year-over-year. That jump came amid same-store-sales that rose 7% at company-owned stores and 6% at franchised locations.
Net earnings rose 2.6% to $29.1 million, or $1.52 per share, up from $28.3 million ($1.49) in the year-ago period. Still, profits missed expectations of $1.63 per share. Management said the weak earnings were caused by higher costs of sales, as chicken wing prices jumped 41% per pound and labor costs inched higher.
Management also told investors that current quarter’s sales are slowing, which likely is contributing to investors’ concern. For the second quarter in 2014, same-store-sales rose 5.7% at company owned locations and 4.4% at franchised stores, but over the first four weeks of Q2 2015, comps are only up 4.2% and 1.8%, respectively.
I actually understand why the market punished BWLD stock after posting these disappointing figures. But I also think the market has created an opportunity for new money as a result.
Why I Still Like BWLD
Buffalo Wild Wings has been the stuff of investors’ dreams over the past few years. BWLD stock has fired off 31% gains over the past 52 weeks, 385% returns over five years, and more than 1,000% in the past decade. The S&P 500, by comparison, is up 13%, 90% and 77% over those time frames.
BWLD got there by firing on all cylinders and growing at a massive rate, sure, but those uninhibited gains have sent Buffalo Wild Wings to some pretty lofty valuations. Before the post-earnings drop, BWLD stock was trading at 37 times trailing earnings and 25 times next year’s estimated earnings.
Investors had baked in constantly impressive growth, and by the looks of Q1 and the preliminary Q2 report, growth just isn’t impressive anymore. But it’s still brisk, and it’s worth pointing out, we’re only four weeks into the second quarter.
Also, while Buffalo Wild Wings did miss on the top and bottom lines, BWLD still managed to improve revenues by 20% and earnings by 1.7% despite dealing with massively higher costs of chicken wings — its most popular menu item by a wide margin.
BWLD management, as a result, is introducing more new pork offerings as a way to help control and reduce the impact of higher chicken prices on its bottom line in the future. If these menu items gain traction, earnings shouldn’t be jeopardized as much when chicken wing prices rise higher in the future.
Also, for a long time, Buffalo Wild Wings has mostly been seen as a sports bar. A place that is great to go to watch the big game and hang out with friends, primarily during the evening. Last week management expanded the company’s menu offering to specifically focus on capturing office workers during their lunch break. The “B-Dubs Fast Break” as the company is calling it, offers quick to prepare items for those who need to be in and out within 30-40 minutes. If BWLD can grow its lunch business with this new menu even just by a few percentages, the company would be quickly back on track with same-store-sales figures.
Also, for a long time, Buffalo Wild Wings has mostly been seen as a sports bar — a place to watch the big game and hang out with friends, primarily during the evening. However, management last week expanded the company’s menu to specifically focus on capturing office workers during their lunch break. The “B-Dubs Fast Break” offers quick-prep items for the lunch crowd that needs to get in and get out. If successful, this could be a shot in the arm to those struggling comps.
Bottom Line
Wall Street is punishing BWLD stock this morning because the company’s valuation simply outran its potential. But today, investors will get a discount on a company that’s still expected to grow earnings by 20% next year on revenue growth of 15%.
Quarterly figures didn’t look amazing, but BWLD stock still has plenty to offer.
As of this writing, Matt Thalman did not hold a position in any of the aforementioned securities, but was considering initiating a position within the next 48 hours. Follow him on Twitter at @mthalman5513.
