I'm Buying The Buffalo Wild Wings Dip (And I Don't Mean Blue Cheese)

| About: Buffalo Wild (BWLD)


Buffalo Wild Wings took a hit due to weaker-than-expected guidance.

The company has been known to sandbag. Earnings may very well beat estimates.

Buffalo Wild Wings represents a compelling growth and value play with the stock down along with a free wild card.

Buffalo Wild Wings (NASDAQ:BWLD) released its second quarter results and beat across all metrics: it beat sales estimates, it beat earnings estimates, it beat same-store sales estimates - and then the stock itself got beat in after hours, down double-digit percentages.

What gives?

Aside from the stock trading at an all-time high ahead of earnings, the street was apparently looking for absolute blow-out numbers, and not just a beat of analyst estimates that tend to be low-balled in the first place. As a Buffalo Wild Wings fan of the restaurants as well as the stock story, I thought the numbers were extremely excellent, but they were within the realm of "real" expectations. Revenue was up 20% to $366 million, same-store sales were up 7.7% at company-owned spots and 6.5% at franchises, and net income was up 43.8% to $23.7 million.

There was a huge sporting event. Unless you've been living in a cave, you already know that sporting events sell a lot of wings and beer. Having big growth numbers wasn't exactly a shocker.

But that wasn't the problem. In the release, CEO Sally Smith stated:

Based on our year-to-date performance, our current same-store sales trends, and anticipated food costs and labor expense, we believe net earnings growth will exceed 25% for 2014, and could reach 30%.

Not too shabby. The only problem is that puts the EPS for the year at somewhere between $4.74 and $4.93 per share versus analyst estimates of $5.09 at the time. With a P/E in the 30s as it was, the market at least in the immediate term left no room for error.

But I'm ready to buy if the price stays at double-digit percentage off its all-time high reached hours before earnings. For starters, Buffalo Wild Wings already gave us a partial preview of the third quarter with growth of same-store sales of 8.2% at company-owned locations and 7.4% at franchises. This is a little better than the growth in the second quarter and well north of the gains a year ago of 1.5% and 1.2% respectively.

Then you have the fact that the earnings outlook is a little down versus estimates but mainly because of extra per-new-unit expenses from the rapid expansion. Much of that is due to labor expenses and IT investments according to the conference call. The IT investments are expected to be mostly temporary for the third and fourth quarter and are not part of a long term sustainable trend. Each new location on average is a major hit, so these upfront investments will likely pay off handsomely.

Next, Buffalo Wild Wings has a history of sandbagging. Take for example the year-ago period for the same report. Smith then stated,

We remain confident we will achieve 17% net earnings growth for 2013.

Net earnings blew that target away with a 23.9% gain for the year. This came out to EPS of $3.79 compared to the guidance of $3.58. If Buffalo Wild Wings is doing the usual sandbagging, expect earnings to be much higher than not only guidance but the current analyst estimates.

Finally we have the PizzaRev wild card. This is a tiny fast-casual pizza chain that Buffalo Wild Wings acquired and owns that it plans to turn into a national chain with 14 coming-soon sites already announced on its website. Nothing was mentioned about it in the earnings release, but Smith stated during the conference call:

Our first PizzaRev restaurant opened in Minnesota in May. We are pleased at how well the community has accepted the brand, and we're looking forward to opening our second location in August.

So far it seems like the street is giving zero value baked into the stock price for this chain's potential. I like a "free" wild card.

With Buffalo Wild Wings down, it trades with a PE in the upper 20s based on what I believe the earnings will be for this year (over $5 EPS), and even cheaper next year. I don't think the street is pricing in much of the current and future rapid growth in sales, same-store sales, and earnings along whatever PizzaRev may contribute. Count me in Buffalo Wild Wings shortly.

Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in BWLD over the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.