- BWLD reported a 44% increase in Q2 net income.
- On Wednesday, shares dropped 14.2%.
- Despite the temporary drop in price, BWLD is on track for continued success.
Buffalo Wild Wings (NASDAQ:BWLD) operates and franchises restaurants serving primarily chicken and various other food and beverage items. After reporting a 44% increase in Q2 net income, BWLD saw shares drop 14.2% on Wednesday -- the fourth-worst decline ever. The company has a market cap of $3.1 billion and a P/E ratio of 36.8.
Currently there are eight analysts who rate BWLD a buy, one analyst who rates it a sell, and nine who rate it a hold. I agree with some of the analysts; Buffalo Wild Wings saw a great quarter, and can anticipate continued success. My confidence in BWLD can be backed up by a simple equation:
Increased Sales + Higher Margins = Increased Profits
Margins are notoriously bad in the restaurant industry. However, I anticipate Buffalo Wild Wings controlling them in two major ways:
1. Lower cost of chicken
Chicken wing prices are generally low. This year was no exception. The lower prices helped increase the company's operating margin to 9.6% from 7.9%. Prices for wings did temporarily increase when McDonald's (NYSE:MCD) attempted to expand the presence of wings on their menu. McDonald's buying power raised wing prices across the entire industry. However, the strategy was unsuccessful with McDonald's, driving prices back down.
2. Lower labor costs
The company is investing in new tabletop tablets to allow customers to place orders and pay for their meals themselves. The tablets can also be used to keep track of sporting events and play games while waiting for food to arrive.
I speculate that with the increased presence of tablets in the restaurants there will be less of a demand placed on servers. Since the tablets will take care of the ordering and payment process, each table will require less of the server's time. Therefore, each server will be able to tend to more tables, and fewer servers will need to be staffed at any given time. With increasing labor costs in the U.S., this would have huge implications on the company's bottom line.
The company is increasing sales in three major ways:
1. Increased customers (and returning customers)
BWLD saw an influx of customers in Q2. This was largely driven by sporting events such as the World Cup and NHL playoffs. CEO Sally Smith said in the company's earnings release, "With the 2014 World Cup, we had an opportunity to showcase the brand and capture sales from the growing U.S. soccer audience." However, she also addresses the impending football season, which she describes as "[o]ur favorite time of the year."
While some may argue that major sporting events are temporary, you cannot ignore the long-term implications. BWLD expertly invested in areas of their business, such as labor, during the World Cup to entice return visits. By providing customers with a positive experience, BWLD took the increased exposure opportunity to convert first-time customers into repeat customers. This will in turn show investors increased sales come Q3 and football season.
Investments are also being made in consumer insights. The restaurant wants to see what the customers would like from their dining experience, and are then adapting their strategy to be in line with these desires. For example, consumer frustration was identified with the selection of sporting events on screen at restaurants. Some customers were coming in to watch a game, but did not see the game on screen. After identifying the problem, BWLD instituted a policy to ensure that any game requested by customers will be put on the screen. Although this seems like a simple change, dedication to customers contributes to return rates.
2. Increased turnover
The tablet investment can increase sales in two major ways. First, it will increase customer satisfaction. Customers will no longer have to anxiously await for their server to place their order or get the check. Now, customers have the power to chose when they are ready. Also, the reduced waiting time will increase turnover rates. This will decrease waiting time for a table and will increase the number of customers the restaurant can serve each night.
The company is currently expanding in two major ways: through franchising their brand and opening new PizzaRev locations. Expansion through franchising is attractive for the company in the long term because it lessens overall risk. Also, in May the company acquired a minority stake in PizzaRev, a new pizza restaurant following the "Chipotle model." BWLD is opening new locations, and has plans to expand it to a national chain.
BWLD's dedication to long-term growth is apparent in their current strategic decisions. They are certainly seeing impressive increases in net income, and we can expect this to be a continuing trend for quarters to come.