Best Ideas Newsletter holding Buffalo Wild Wings (BWLD) reported a mixed bag for its first quarter as high wing costs weighed on profitability. Revenue managed to grow 22% year-over-year to $304 million, exceeding consensus expectations. Earnings per share were disappointing, falling 11% year-over-year to $0.87. Free cash flow turned negative after it was in the positive $20 million range in the same period a year ago.
In spite of industry-wide negative sales trends, Buffalo Wild Wings was able to muster positive same-store sales growth of 2.2% at franchised owned restaurants 1.4% at company owned locations. This occurred after the firm was impacted by one less week of NFL play and after the company kicked off the quarter with negative 2.8% same-store sales growth. CEO Sally Smith often mentions that sports are more integral to driving traffic than other factors, and with the NBA and NHL playoffs kicking off, we think the second quarter should be strong. April same-store sales are up 5.2%, indicative of a strong quarter to come.
On the cost side, average wing prices increased 9% year-over-year on a per pound basis, but larger wing sizes drove the "all-in" wing cost to soar 30%. Luckily for Buffalo Wild Wings, wing prices appear to be drifting downward which could materially boost results in the back half of the year. Wings accounted for 40% of sales (20% bone/20% boneless), up from 37% during the same period last year, making wing prices an even more influential driver of gross margin.
Management announced an interesting strategic maneuver on the call, saying it will switch from selling numbers of wings to quantities of wings in order to better deal with volatile wing costs. Wings will now be sold in snack, small, medium and large sizes. Although management claims to have analyzed the situation carefully, we're always a bit wary when a company announces a pricing/serving strategy contrary to long-held industry standards. We don't doubt that this could be a superior value for consumers, but we wonder how they will react after the change. Long-time customers might always know to order 8 wings, but question when a medium is now sometimes 6 big wings or other times 10 small wings. We're not sure what the reaction will be, but we wouldn't be surprised to see some initial resistance or blowback.
Also on the strategy side, the firm has partnered with craft brewer Redhook to create a new premium beer called Game Changer, designed to complement the taste of wings. We like this move, and we think it could add another gross margin driver to the company's product mix. Buffalo Wild Wings also made a minority investment in California-based PizzaRev - a Chipotle-like customizable pizza experience. PizzaRev is still too small, in our view, to judge its potential as a national brand, but Buffalo Wild Wings seems excited about the brand's long-term growth profile.
Looking ahead, Smith reiterated the company's full-year earnings guidance of 17% growth, as Buffalo Wild Wings' main input cost appears to be declining in the second half of the year. Overall, we're excited to see declining wing prices and a new craft brew, though we aren't crazy about the new pricing strategy. With wing prices such a material input, earnings may fluctuate in the short-term, but we remain bullish on Buffalo Wild Wings' long-term potential. We continue to hold shares in the portfolio of our Best Ideas Newsletter.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: BWLD is included in the portfolio of our Best Ideas Newsletter.