Buffalo Wild Wings' Performance Continues To Amaze

| About: Buffalo Wild (BWLD)

Buffalo Wild Wings (NASDAQ:BWLD) announced solid second quarter results. Revenue jumped 28% year-over-year to $305 million, a touch better than consensus estimates. Earnings per share surged 42% year-over-year to $0.88, far better than consensus expectations. Free cash flow year-to-date totaled $13 million, equal to just 2% of total revenue. Free cash flow is temporarily depressed as the firm continues to expand its domestic and global footprints. Eleven franchise-owned restaurants were opened during the quarter, as well as 10 owned by Buffalo Wild Wings.

Same-store sales during the quarter grew 3.8% year-over-year at company-owned restaurants and 4.1% year-over-year at franchise-owned restaurants. Relative to most of the restaurant space, these numbers look wonderful, but Buffalo Wild Wings has grown accustomed to seeing same-store sales expansion in the high-single-digits.

There are likely a few factors driving the deceleration, with the most obvious being that as restaurants mature, it gets harder and harder to boost traffic. Sporting events may have also mildly impacted results, especially when considering the lull of interesting events after the completion of the NBA season. Sporting event changes can materially swing results in the short term, but we suspect such a dynamic balances out over the long run. The weakness in same-store sales expansion might also be attributable to slower marketing in the summer months, particularly as the company allocates capital toward building restaurants ahead of the fall sports season.

Though same-store sales growth wasn't as robust as in years past, the firm did an excellent job improving profitability. G&A increased only $3 million on an absolute basis and declined 100 basis points year-over-year as a percentage of sales to 7.7%. Cost of sales also fell dramatically, declining 120 basis points year-over-year to 30.4%, driven primarily by the fall in wing prices. Unfortunately, a 100 basis point increase in labor expenses occurred, largely attributable to 'Guest Experience' spending. Overall, operating margins increased 50 basis points year-over-year to 7.9%.

Buffalo Wild Wings must deal with the ebb and flow of summer sports and ramifications from the firm's attempt to change wing portions. We predicted that there would be some push-back, and CEO Sally Smith confirmed there was, saying on the conference call:

"…wings by the portion rolled into all restaurants July 15, so it's been in the sack [ph], I guess, for a couple of weeks, so half of July. To go back to when we tested it, the first round of testing, we did have a few negative comments from guests and probably saw a decline in same-store sales just briefly in a few of the test markets."

However, Smith thinks management has adequately trained the staff to avoid customer dissatisfaction and to communicate the portion change in a reasonable way.

Management provided little commentary on its investment in PizzaRev except for mentioning that Buffalo Wild Wings plans to open its own PizzaRev restaurant in Minneapolis in 2014 to test the business model's viability.

Looking ahead, management noted that July was a slow month at both company-owned and franchise-owned restaurants, as same-store sales growth totaled 1.5% and 1.2%, respectively. While Smith and company were not quick to blame the weather, we would like to point out that the weather across the Midwest during July (and even June) was colder and wetter than normal. Further, we saw little, if any, compelling sports action during the month of July. Therefore, we wouldn't read too far into July results and extrapolating them into the rest of the year.

Our Take

Without question, Buffalo Wild Wings' robust top-line performance suggests that the firm can continue to grow revenue at a rapid clip. Due to volatility in wing prices, year-over-year earnings comparisons can fluctuate, but the general trend of increasing earnings and revenue remains intact. The change toward wing portions may help to decrease earnings volatility going forward, smoothing out the profitability growth story. With several years of expansion ahead of it, Buffalo Wild Wings remains a large holding 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 a holding in the performance of our Best Ideas Newsletter.

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Tagged: , Restaurants, Earnings
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