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Buy BUFFALO WILD WINGS ($48.84)
Growth Drivers
Comparable sales increases will be primarily supported by menu prices that should rise (the most recent rise was on July 1) around 2% yearly. An expected 25% increase in advertising spending through year's end will lend support to the next menu price hike that will go into effect early 2011. Traffic is likely to remain positive into 2011, after a favorable recent turn, bringing company owned same-store comparisons to about 3% next year. Note that recent comparable sales choppiness, along with negative comparisons in the first month of the fourth quarter, have kept a lid on the Street's comp sales expectations. My comparable sales forecast increase in 2011 would suggest a positive surprise. I think the third quarter jump is sustainable, helped by reduced promotional activity on the part of competitors, and taking into consideration that the early Q4 comps were against very tough prior year comparisons.
Unit counts through 2011 will stay at the low end of 13-15% annual range targeted by management. Much of the growth in company owned units will be focused on the West coast, where BWLD is under-represented. July was the final planned company restaurant closure for 2010. Early next year, BWLD will open its first units outside U.S. borders - in Canada, where the success of niche competitors bodes well for the chain. Still, it's premature to place any value on (talk of) expansion opportunities into Europe, at least until early returns from Canada are assessed.
Margins and profit
I expect the operating margin will continue trending upward through 2011, helped by: sales leverage, past cost-cutting efforts, and increased sales of higher margin boneless wings and alcohol. Boneless wings are contracted into 2012, and alcohol will benefit from a broad roll out of happy hour. Finishing at around 9.4% this year, the operating margin improvement next year, at about 50 bpâ€™s, will take it further into record levels. Wing costs, which have driven much of the recent margin gains, are assumed to continue at recent levels of around $1.50 a pound, near the five-year average.
Competition
The casual dining segment of restaurants is highly competitive. But even though there are several national chains offering wings, including Pizza Hut and TGI Fridayâ€™s, BWLD is the only one to specialize in the category. Independent quality surveys strongly suggest that customers favor BWLDâ€™s wings, and are relatively loyal, helped by the fact that many patrons regularly visit to watch sports events on TV. On a local level, bars and grills also compete for BWLDâ€™s business, including wings and alcohol. However, none of these local players can match BWLDâ€™s scale in terms of advertising or the consistency of its product offering.
Valuation
BWLD has the second-fastest (after CMG) unit growth of the 12 restaurant names that I follow. This growth rate reflects solid demand for the concepts products, and is evidenced by a strong record for comparable sales. I think the company's superior growth profile will continue over the coming three to five years, helping to support a premium multiple. I ascribe about a 25X P/E to my $2.75 estimate for â€™11, resulting in a target price over the next 12 months of $68.
Comparative Valuations
EV/EBITDA | PE | |||||||||
11E | 10E | 09 | 08 | 07 | 11E | 10E | 09 | 08 | 07 | |
BWLD | 6.9x | 8.5x | 9.0x | 7.3x | 8.3x | 17.2x | 21.8x | 23.7x | 18.8x | 20.8x |
(NASDAQ:CAKE) | 8.2x | 9.2x | 7.8x | 6.6x | 13.6x | 17.5x | 20.6x | 18.6x | 12.4x | 23.6x |
(NYSE:CMG) | 14.9x | 18.0x | 9.6x | 10.8x | 29.9x | 30.1x | 37.3x | 21.9x | 25.5x | 67.1x |
(NASDAQ:CBRL) | 7.5x | 8.1x | 7.6x | 6.1x | 7.9x | 13.8x | 14.9x | 13.2x | 7.2x | 13.5x |
(NYSE:MCD) | 9.5x | 10.4x | 9.7x | 10.4x | 15.5x | 15.1x | 16.7x | 15.2x | 16.5x | 29.8x |
(NASDAQ:PNRA) | 8.7x | 9.8x | 8.9x | 8.7x | 7.1x | 21.0x | 24.5x | 24.6x | 24.4x | 19.8x |
(NASDAQ:PZZA) | 6.9x | 7.0x | 6.1x | 6.5x | 9.6x | 13.3x | 13.7x | 12.2x | 14.2x | 20.8x |
(NASDAQ:RRGB) | 6.2x | 5.5x | 4.9x | 5.0x | 7.1x | 19.5x | 19.9x | 15.8x | 9.9x | 17.6x |
(NASDAQ:SONC) | 9.0x | 8.6x | 7.1x | 7.6x | 11.9x | 21.9x | 21.2x | 11.4x | 12.0x | 24.1x |
(NASDAQ:SBUX) | 8.7x | 9.4x | 12.7x | 6.2x | 11.1x | 20.0x | 22.9x | 35.8x | 21.8x | 22.5x |
(THI) | 8.9x | 9.6x | 9.8x | 11.1x | 16.2x | 16.5x | 18.1x | 18.1x | 18.4x | 25.5x |
(NYSE:YUM) | 10.9x | 11.4x | 9.1x | 8.9x | 12.2x | 18.3x | 19.8x | 15.8x | 15.7x | 22.8x |
Avg. | 8.9x | 9.6x | 8.5x | 7.9x | 12.5x | 18.7x | 20.9x | 18.8x | 16.4x | 25.6x |
Disclosure: Accounts I manage have a long position in BWLD.