Higher Wing Prices Hurt Earnings Expansion At Buffalo Wild Wings

Feb.20.13 | About: Buffalo Wild (BWLD)

Buffalo Wild Wings (NASDAQ:BWLD) announced solid fourth quarter results on February 12. Revenue surged 38% year-over-year to $304 million, easily exceeding consensus estimates. Earnings, on the other hand, grew 22% year-over-year to $0.89 per share, falling short of consensus estimates by several cents. For a read on what we think of Buffalo Wild Wings' valuation, please click here.

Revenue growth at company-owned restaurants totaled 39% year-over-year to $283 million, though same-store sales performance was somewhat modest (up 5.8% compared to the year-ago period). This compared unfavorably to franchise-owned stores, where same-store sales advanced 7.4% versus the fourth quarter of 2011. We think the divergence was a result of franchise-owned restaurants being comparatively younger stores than the more mature company-owned restaurants (we believe performance will eventually converge, however).

We are a bit worried that the firm's expansion was mostly driven by a 6% price increase. This could mean that higher prices are impacting demand for the restaurant's food, and it may also suggest that the firm is losing a bit of its momentum. This view is supported by the firm's same-store sales growth rates during the first six weeks of the first quarter, which were only up 2.8% at company-owned restaurants and up 1.6% at franchised locations. When accounting for NCAA and NFL football shifts, results look even worse. CEO Sally Smith explained on the conference call:

"To help quantify the effect of the calendar shift, we calculated our first six weeks of same-store sales as if the NFL and college seasons were aligned, using the first six weeks of 2013 compared to the second through seventh weeks of 2012. When we do, our same-store sales show an increase of 2.6% at company-owned and 1.6% at franchised restaurants."

We'll be monitoring same-store sales trends very closely going forward, and we expect them to improve as the year progresses.

On the cost side of the equation, profit expansion was constrained by higher input prices. Cost of sales jumped 260 basis points year-over-year to 32% of revenue. The company dealt with significantly higher wing prices (up 46% on a per pound basis). Though prices have recently begun to moderate, they will likely still negatively impact comparisons. Draft beer prices were also higher during the period, but we're confident the higher wing prices were the primary culprit of margin compression. Labor costs increased 30 basis points year-over-year to 30.2% of sales, but we're not too concerned. Restaurant operating expenses and occupancy costs both declined during the quarter, which helped offset the expense pressure.

Looking ahead, Buffalo Wild Wings still has plenty of room to grow its restaurant base, though its established restaurants appear to be maturing. After opening its 900th restaurant, the firm believes it can achieve 1,700 locations in the U.S., and we completely agree. Smith kicked around the idea of adding additional concepts, which could be another potential source of upside. Wing prices remain a near-term headwind, but we do not expect them to remain elevated over the long haul. The firm intends to open 60 company-owned and 45 franchised-owned restaurants during the year, helping propel earnings growth of 17% (25% on a comparable 52-week basis). Although shares are experiencing some weakness, we remain huge fans of the company, and we intend on holding steady with respect to our position in the portfolio of our Best Ideas Newsletter.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.