Seeking Alpha
Research analyst, portfolio strategy, newsletter provider, CFA
Profile| Send Message|
( followers)  

Buffalo Wild Wings (NASDAQ:BWLD) has been a hot growth stock, but this company has plenty of room to run higher as the firm continues to execute its domestic and international growth strategy. This is a company with huge potential in Restaurant and Services sector as the company's customer base continues to grow and remain loyal. Below is our introduction into its business model, it's strengths, and the buying opportunity that currently exists for Buffalo Wild Wings. Wall Street has not yet realized the full potential of this company as it continues to be seen as a seasonality play in this space. The company continues to prove this stigma wrong. The company has a market cap of $2.06 Billion and reports the next quarter on October 21, 2013. With this in mind, we value Buffalo Wild Wings at $123.00 by year-end of 2013 and $138.00 by May 1, 2014, an increase of 28% from current levels. We strongly feel that this company has the potential to see major upside over the next year and we could see the stock continue to run like Chipotle (NYSE:CMG) or Panera (NASDAQ:PNRA) in recent history. Dining and entertainment demand is growing and Buffalo Wild Wings continues to take market share, as the company has some of the best customer retention rates and average ticket sales in the sector. We will later highlight:

1) The future of restaurants and services and new opportunities for Buffalo Wild Wings

2) The economics of the BWLD business and industry overview

3) Growth drivers in the future

4) Cash/Valuation and Key Statistics vs. Best of Breed

Buffalo Wild Wings in Layman's Terms

Buffalo Wild Wings is involved in the ownership, operation, and franchise of restaurants primarily in the United States. It offers chicken, various food and beverage items; including bottled beers, wines, and liquor. As of July 30, 2013, the company owned, operated, and franchised approximately 930 Buffalo Wild Wings Grill & Bar restaurants in the United States and Canada. The restaurants create a welcoming neighborhood atmosphere which include an extensive multi-media system and full bar. The company has discovered a market that appeals to sports fans and families alike. At the end of 2012, BWLD sat at #18 on Forbes Best Small Companies List.

Buffalo Wild Wings Growth Strategy

Buffalo Wild Wings continues to expand domestically and has started to put the international expansion plan into action. The company continues to operate better than competition and has established strong brand loyalty from customers through strong media and advertising.

  • Continuing development to 1700 locations in the U.S. and Canada
    • Driving sales through innovation and branding
    • Sustaining net earnings growth by strong restaurant performance and infrastructure leveraging
  • International growth through franchising
    • Franchises being built in Mexico
    • Negotiations completed in Saudi Arabia, Dubai, and the Philippines
    • In-process negotiations occurring in Malaysia, Vietnam, and China
  • Expansion through emerging brands (PizzaRev - Buffalo Wild Wings experience, but with pizza)

Construction on restaurants is scheduled to begin this year in the Philippines, with restaurants planned for Makati City, and the Manila area. Restaurants in Mexico and the Middle East are nearing completion, earlier than expected for new customers to enjoy.

"The Philippines is among the fastest growing economies in Asia, so it is a natural choice for Buffalo Wild Wings. The economy is growing faster than China's and with an expanding middle class, there is a lot of enthusiasm for casual dining. The exciting sports atmosphere of the restaurant will fit perfectly with sports fans in the Philippines." - Matt Brokl, Vice President of International Development

Investors need to focus on the strong brand loyalty that Buffalo Wild Wings has created through effective media and advertising campaigns. This is an area of focus for the company and one of the areas of business that BWLD excels in order to keep the customers coming back, and not just for sporting events. Buffalo Wild Wings boasts a 98% customer retention rate, meaning that once an individual dines at the restaurant, it is almost a guarantee that it will return at some point in the future. The company also has one of the highest average ticket sales in the casual dining space at $27.54 per customer. By integrating technology and gaming into the dining experience, BWLD customers stay an average of 32 minutes longer than it would at other dining establishments, which leads to higher food and beverage sales. Some of the strengths can be seen from specialties in the food area, to the customer experience in general, including:

  • Food Innovation
    • Sauces and seasonings
    • "Build Your Own" flavors
    • Sharable appetizers
    • Insight-based development
  • Beer Experience
    • Craft offerings
    • Value selections
    • Unique products
    • Tastings and food pairings
  • Branded Event Days
    • Wing Tuesdays
    • Boneless Thursdays
  • Customer Experience
    • DIRECTV® for every game available
    • Proprietary BDubs TV Channel
    • Tablet-based guest technology
  • Advertising and Media
    • Memorable ad campaigns
    • National TV presence
    • Engaging fans with social media and online marketing
    • Buffalo Wild Wings Bowl
    • NCAA Sponsorship of all 89 championships

Buffalo Wild Wings Year-To-Date

As of June 30, 2013, BWLD owns and operates 407 company-owned stores and franchised an additional 525 Buffalo Wild Wings Grill & Bar restaurants in North America. The company is looking to grow the Buffalo Wild Wings brand to about 1,700 locations in North America alone and to about 300 internationally, continuing the strategy of developing both company-owned and franchised restaurants.

The company will open 58 company-owned and 45 franchised restaurants in 2013. With continued same-store sales momentum and consistent cost reduction, the company should achieve 17% net earnings growth for 2013. Buffalo Wild Wings is entering the sweet spot of the year with the NFL, NHL, and NBA seasons beginning and the MLB Playoffs set to start in the coming weeks. Increased customer traffic will lead to higher overall trend in average weekly sales and cash flow per location, as the company remains committed to high quality operations and guest experience.

Buffalo Wild Wings Weekly Sales Trends (in Millions)

Sales at company-owned restaurants represented 94% of total revenue in the second quarter of 2013. Food and nonalcoholic beverages accounted for 78% of restaurant sales. The remaining 22% of restaurant sales was from alcoholic beverages. The menu items with the highest sales volume are boneless and traditional wings at 20% and 19%, respectively. Royalties and franchise fees make up the other 6% of total revenue for 2013.

Results of Operations for the Second Quarter of 2013

Restaurant sales have increased by 29.4%, to $285.4 million in 2013 from $220.6 million in 2012. Franchise royalties and fees increased by $1.4 million, or 7.9%, to $19.6 million in 2013 from $18.2 million in 2012. The increase was primarily due to royalties related to additional sales at 20 more franchised restaurants in operation at the end of the period compared to prior year, and an increase in same-store sales for franchised restaurants of 4.1% in the second quarter of 2013.

Buffalo Wild Wings Same Store Sales Growth vs. Casual Dining Sector

Results of Operations Year-To-Date

Restaurant sales have increased by $117.0 million, or 25.8%, to $569.8 million in 2013 from $452.9 million in 2012. The increase in restaurant sales was due to a $106.3 million increase from 27 new company-owned restaurants that opened by the end of second quarter and $10.7 million from a 2.6% increase in same-store sales.

Franchise royalties and fees increased by 6.9%, to $39.5 million in 2013 from $37.0 million in 2012. The increase was primarily due to royalties related to additional sales at 20 more franchised restaurants in operation at the end of the period compared to prior year. These are important numbers to pay attention to when looking for trends that will continue into the future. From 2010 to 2012, the number of company owned stores increased by 47.1% while the number of franchise stores grew by 7.82%. When looking at revenue over this same time period, we can see that revenue from company owned stores increased by 73.63%, while revenue from franchises increased by 31.55%. As BWLD continues to increase its store count, investors can expect to see revenue generation far outpace the addition of new stores.

Buffalo Wild Wings Store Count

Buffalo Wild Wings Revenue Trends (in Billions)

Fiscal Year 2012 Compared to Fiscal Year 2011

Restaurant sales increased by $246.6 million, or 34.4%, to $964.0 million in 2012 from $717.4 million in 2011. Franchise royalties and fees increased by $9.5 million, or 14.1%, to $76.6 million in 2012 from $67.1 million in 2011. The increase was primarily due to royalties related to additional sales at 12 more franchised restaurants in operation at the end of the period compared to prior year, and an increase in same-store sales for franchised restaurants of 6.5% in 2012. Some of the company highlights for 2012 were:

  • BWLD increased company presence with 74 net additional restaurants in North America, ending the year with 891 locations in 49 states and Canada.
  • Sales increases helped to drive a 32.6% increase in revenue and helped the company surpass the one billion dollar mark in revenue for 2012.
  • Achieved strong sales in new and existing restaurants to deliver net earnings growth of 13.6% - provided substantial value to shareholders with earnings per share of $3.06 for the year.
  • Kept focus on long-term success by investing in technology and innovation in restaurants.

Over the last three years, Buffalo Wild Wings has seen gross profit increase by almost 61%. This trend will continue in the future as revenue generation continues to outpace the addition of new stores.

As a valuation play, it is tough to compare Buffalo Wild Wings to direct competitors such as Hooter's, Tilted Kilt, Wing House, and others, which are privately held companies. But when compared to another casual dining experience such as Panera , Buffalo Wild Wings does trade at a pretty significant discount on a Price/Sales and Price/Cash Flow basis. Panera trades at a 2.21 Price/Sales and 17.51 Price/Cash Flow while Buffalo Wild Wings trades at 1.77 and 14.98, respectively.

Sales Growth is another key metric to look at in the Restaurant and Services Sector. Even though Hooters is a privately held company with a similar business model, the company has made news in recent history with significant store closings all over the country because of slowing sales. With sales growth of 32.64%, Buffalo Wild Wings has proven that a high quality product can be successful and sustainable.

Buffalo Wild Wings boasts a nice Gross Profit Margin at 42.21%, which outpaces other best of breed companies such as Chipotle at 26.52%. The company also generates a nice amount of Cash Flow Per Share at $7.31.

Buffalo Wild Wings is in a strong position from a financial standpoint as the company currently has very little debt at $30.25 Million and plenty of cash to expand operations.

Obviously when looking at these measures, BWLD is succeeding on all fronts. When specifically focusing on the ROA of 10.94%, the company is performing well when it comes to the operating efficiency based on the firm's generated profits from total assets. The ROE of 15.62% shows the solid performance in terms of the shareholders rate of return on investments. The ROI of 13.32 shows the firm's efficiency in utilizing invested capital. BWLD has outperformed its peers and with big opportunities approaching in the near future, expect this outperformance to continue.

(click to enlarge)

What Investors Need to Know

Buffalo Wild Wings is a highly undervalued restaurant and service company with huge potential on an international level. Traditionally, investors and Wall Street have seen this company as a seasonality play, but that is simply not the case based on the customer trends we discussed. We believe that the aggressive international business model will provide huge growth opportunities for the company going forward. The next earnings release will give investors insight into how the beginning of the strong season for BWLD is going so far. Expect this company to continue to outperform in the dining and entertainment space as it has one of the industry's best business models and management teams. The first half of the year proved that the company has adapted and can weather tougher dining environments and poor trends in overall casual dining, while positioning itself for the second half of the year.

With this in mind, we value BWLD at $123.00 by year-end of 2013 and $138.00 by June 1, 2014, an increase of 28% from current levels. We arrive at this number by assuming that Buffalo Wild Wings will continue to trade at its current P/E multiple of 34.17 (only slightly above the industry standard, which is warranted) and this year's EPS estimate of $3.63 ($3.63*34=$123.42).

Source: Buffalo Wild Wings: Not Just A Seasonal Play, Customers Coming In Herds For The Long-Term

Additional disclosure: AlphaStreetResearch is a team of Investment Research Analysts. This article was written by Mr. Hunter Orr, Director of Research, with research assistance from Mr. Aaron Zander, Junior Research Analyst.