Buffalo Wild Wings' Long-Term Growth Plan Continues With Rusty Taco Investment

Aug.28.14 | About: Buffalo Wild (BWLD)

Summary

Rusty Taco investment diversifies the company into Tex Mex, a hot growth market for restaurants.

Buffalo Wild Wings maintains track to having 900 additional locations under emerging brands.

The company has big plans for international growth, and is only at 60% of the US goal for namesake brand units.

After expanding to more than 1000 locations of its namesake sports bar, Buffalo Wild Wings (NASDAQ:BWLD) is focusing on small equity investments in rising restaurant chains to capture additional growth. This practice, along with international expansion and restaurant initiatives will continue to send shares higher.

Buffalo Wild Wings announced an equity investment in Rusty Taco. Founded in 2010 by Rusty Fenton, the chain focuses on food truck-style tacos ordered in a fast-casual setting. From the site, "All recipes are made fresh and from scratch."

A look at Rusty Taco's current franchisee requirements also reveals more company ideals. The chain "offers a simple menu of tasty and authentic tacos prepared fresh every day, using many of the cooking techniques found in Mexican kitchens." The franchise section also states that Rusty Taco is "expanding rapidly across the United States with experienced multi-unit operators." The chain is actively seeking experienced multi-unit franchisors that are willing to open a minimum of three units and have a net worth of $1 million.

Buffalo Wild Wings investment in Rusty Taco may be similar to PizzaRev, in the fact that Buffalo Wild Wings will start franchising the brand out itself and opening locations near its existing Buffalo Wild Wings locations. The company has familiarity with many territories and large towns across the country. Buffalo Wild Wings will also share the concept with its existing team of franchisees as an additional concept they could open.

Buffalo Wild Wings Chief Strategy Officer Kathy Benning said in the short term, they will open Rusty Taco locations in existing Buffalo Wild Wings areas. She also added, "We really think (Rusty Taco) has legs and become a national concept."

Rusty Taco currently has only 9 locations, with a food truck also in operation. The small chain has five locations in Texas (3 in the Dallas market), three locations in Minnesota, and one in Colorado, the home of Chipotle Mexican Grill. No plans were revealed on the finance side, including Buffalo Wild Wings' investment size or the amount of equity received. The company said it will provide more details on its upcoming October conference call.

I see this as an incredibly smart investment by Buffalo Wild Wings. The investment is in another small brand that can be expanded and scaled nationally, providing additional franchises for Buffalo Wild Wings. The investment also diversifies Buffalo Wild Wings into the popular Tex Mex market that has been growing strong.

El Pollo Loco Holdings (NASDAQ:LOCO) recently held its initial price offering. The chain of more than 400 quick service Mexican restaurants has seen its stock price increase 31% since its IPO. Shares are now up more than 100% from their actual pricing at $15 a share.

The investment in Rusty Taco follows Buffalo Wild Wings' highly covered equity stake in PizzaRev, a fast-casual upcoming pizza brand. In August, Buffalo Wild Wings opened its second PizzaRev franchised location in Minnesota.

PizzaRev also has corporate locations opened, with several coming soon, according to its website. The site has 11 California locations, 2 in Minnesota, and 3 in Utah. The site lists "coming soon" as California (7 locations), Missouri (1), Nebraska (1), South Dakota (1), and Texas (1). Buffalo Wild Wings now has two PizzaRev locations open in Minnesota. The chain continues to get comparisons to Chipotle's business model. BravoTV called PizzaRev "the Chipotle of artisanal pizzas".

Buffalo Wild Wings has 1030 locations opened under its own brand. The investments highlight the company's goal of having 3000 total units open someday across all of its brands. The company is open to investing in additional concepts, including those not in fast-casual. NRN.com highlighted this when naming Buffalo Wild Wings the ninth-fastest growing chain in August. One of the keys to growth listed was new concepts, where the site said Buffalo Wild Wings "aims to act like a growth company managing a portfolio of upstart chains".

The investments by Buffalo Wild Wings support the piece I wrote in April citing international growth and new concepts as a key growth driver. The company has a goal of 1700 US units under the Buffalo Wild Wings brand, 400 international Buffalo Wild Wings locations, and 900 locations under other investment brands. Buffalo Wild Wings said, "We'll evaluate additional concepts, with the goal of investing in three to five, with the goal of growing at least one of them to be the next Buffalo Wild Wings."

Now there is obvious risks here, as the smaller concepts may never scale nationally and may end up losing money for Buffalo Wild Wings. It also provides the risk that Buffalo Wild Wings is dumping cash into these brands, rather than supporting the growth of its proven namesake brand. However, the company clearly believes that it can spot breakthrough brands before they hit it big. This provides some uncertain upside for investors.

As I reported in that April article, Buffalo Wild Wings already has 45 international locations in five countries signed to deals. The locations are in Mexico, United Arab Emirates, Saudi Arabia, and the Philippines. Buffalo Wild Wings has also been scouting for locations in South Korea, India, and Vietnam. The long-term goal is to also get locations open in Brazil and China.

I still believe investors are underestimating this potential, and it may end up serving as justification for the high price multiple the company has always commanded. With 1030 locations open, Buffalo Wild Wings is only 61% to its North American unit goal. In total, only 1030 out of a possible 2100 Buffalo Wild Wings are open, or less than 50%.

Buffalo Wild Wings shares got hit after an impressive second quarter. Investors were expecting more, despite the company beating expectations. Same-store sales rose 7.7% for company-owned locations and 6.5% for franchised locations. Company revenue increased 20% to $366 million, while system-wide sales increased 18.9% to $803.4 million.

Perhaps more noteworthy to investors were the bullish tones for the current third quarter offered up during the earnings call. The first four weeks of the third quarter had same-store sales increases of 8.2% and 7.4% at corporate and franchised locations respectively. A 0.6% price increase is also being added to the menu in September, which could further boost sales. Investors should also be prepared to hear long-term goals for PizzaRev and Rusty Taco on the October call.

Analysts see Buffalo Wild Wings posting earnings per share of $5.05 in fiscal 2014. Revenue is expected to rise 18.7% to $1.5 billion. In fiscal 2015, earnings are seen rising to $5.97 on revenue growth of 14.9% to $1.7 billion.

Shares of Buffalo Wild Wings have been on fire over the last five years. Trading in the triple digits, the company now has a high price-to-earnings ratio. In 2014, shares are up a modest 2%, after a very strong 2013. I have been bullish on Buffalo Wild Wings for years, as I was once a shareholder in the company. My first Seeking Alpha article recommending the company has seen shares go on to gain more than 400%. Recent articles highlighting the PizzaRev acquisition and international growth have provided gains of 72% and 5% respectively.

Investors should consider investing in Buffalo Wild Wings on any dips, as the brand is set for long-term growth. The company has a history of producing strong 20% increases in revenue, earnings per share, and unit growth. With additional chains and the increasing international presence, Buffalo Wild Wings should be able to maintain its high growth and reward steady, patient investors over the next five years.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within 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.