Fast-growing restaurant chain Buffalo Wild Wings, Inc. (BWLD) announced weak third quarter results, Tuesday afternoon. Revenue grew 25% year-over-year to $247 million, but that figure was a bit lower than consensus estimates. Earnings fell 7% to $0.57 per share, a few cents lower than consensus expectations. To view our fair value estimate on "B-Dubs", please click here.
The big drag on profitability has been wing prices, which are 70% higher than a year ago at $1.97 per pound. As a result, cost of sales jumped 270 basis points to 31.2%. Management noted that wing prices have remained high throughout the beginning of the fourth quarter, and profitability is expected to increase 15% year-over-year in 2013.
CEO Sally Smith noted that non-alcoholic beverage sales are down - something we heard earlier this week from Chipotle (CMG). We suspect the impact of rising food prices might be leading consumers to trade down from soft drinks and specialty drinks to water, which may be negatively impacting gross margins. It also appears the company is attempting to shrink portions, effectively lowering cost of goods sold, which may not resonate well with consumers.
Aside from input-cost pressures, Buffalo Wild Wings has done a good job of keeping expenses from bloating. Overhead remained flat year-over-year at 7.9% of revenue, while labor costs actually fell 20 basis points to 30.1%.
Same-store sales were relatively strong, growing 6.2% at company-owned stores and 5.8% at franchised stores. However, we think management was preparing investors for slowing comps in the fourth quarter, or at least October. Smith and CFO Mary Twinem pulled out a laundry list full of blame, including the lack of the Texas Rangers in the playoffs, as well as the absence of hockey due to the NHL lockout.
October may not be great, but we're not too worried about the quarter as a whole. The NFL and NCAA football should drive customers into restaurants, and, as the company noted, advertising spending will be elevated during the quarter. Same-store sales grew 3.8% at company-owned restaurants and 5.6% through the first four weeks of the quarter.
The company also upped its total North American restaurant footprint to 1,700 units from 1,500 previously - meaning the firm believes it can add 70% more units to its current footprint. We've previously outlined how the goal is easily attainable and think that the company is still underestimating its true potential of 2,000 restaurants.
Undoubtedly, revenue and same-store sales growth were strong, but a lack of earnings growth could prove to be a powerful headwind for the stock. We're strong believers that the company has a long road of growth ahead of it, but like Chipotle, it seems to be encountering some troubles.
Fortunately, the company's valuation is not nearly as rich, and it is still on track to grow earnings 20% in 2013. Plus, the company is in the early innings of a massive expansion. We are comfortable holding shares of the restaurant in the portfolio of our Best Ideas Newsletter (click here for the academic support behind it), but we don't have any urge to add to our position anytime soon (and may trim it in coming weeks).
Additional disclosure: BWLD is included in the portfolio of our Best Ideas Newsletter.