Buffalo Wild Wings: Strong Earnings And A Growing Costumer Base

| About: Buffalo Wild (BWLD)
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Summary

BWLD stands out among casual-dining restaurants--in past years, it has managed to achieve unprecedented growth even while competitors have struggled.

Stocks have dropped in the last quarter due to a recent buy back of franchises. However, we foresee growth for BWLD in the long-term for two reasons.

The first, BWLD's buy back signifies a decision by the executives to prioritize the customer experience, a business model that has allowed BWLD to stand out among the competitors.

The second, in recent years, there has been a gradual increase of women in sports. We foresee this as a consumer base that BWLD will have access to in coming years.

By Candy Janachowski and Minahil KhanScreen Shot 2016-04-01 at 8.47.50 PM.png

Company Overview

Buffalo Wild Wings (BWLD) has a price of $149.95, with a 52-week range of $134.95 - 205.83. The company currently had a market-cap of $2.72B.

Description of business model

According to Buffalo Wild Wings' website, the company utilizes a Guest Experience Business Model:

Our Guest Experience Business Model is a comprehensive approach to restaurant operations, which includes the addition of Guest Experience Captains, a refined management structure with clearly defined roles, and the introduction of new guest technology including unique tabletop tablet and the development of a proprietary television network.

More recently, management has greatly reduced business risk by shifting to a weight-based (as opposed to piece-based) chicken-wing ordering system. As a result, food costs have stabilized, rising only slightly last year, to 29.6% from 29.1% the year before.

Competitive advantage(s)

Buffalo Wild Wings stands out among casual-dining restaurants--in past years, it has managed to achieve unprecedented growth even while competitors like Red Lobster, Olive Garden, and Applebee's have struggled. As Business Insider puts it, "How did executives do it? By making Buffalo Wild Wings a fun place to hang out. While many chains focus on the food and the menu, Buffalo Wild Wings invests in the customer experience." BWLD's Guest Experience Business Model is taking it further than its competitors.

Growth opportunities/Catalysts

2015's earnings slowdown resulted from management's buy back purchase of 41 locations from a franchisee. The company now owns 50% of total locations versus 39% in 2011. Although this purchase may have hurt profits in the short term, executives predict that the company will increase earnings by between 20% and 25% in 2016. This move is beneficial for Buffalo Wild Wings in the long-term because of its emphasis on the Guest Experience Business Model. Although the franchise model makes it easier for a company to grow its store base and often results in a consistent income from royalties, companies must "give up important operational control over things like hiring in exchange...And that can make it difficult to ensure a consistent, top-notch experience for...customers" (The Motley Fool). This buy back by BWLD therefore signifies a decision by the executives to prioritize the customer experience, a business model that has allowed BWLD to stand out among the competitors. We believe that in the long-term, this shifted focus will result in increased growth for BWLD.

Over the last 15 years, the sports industry has retained a steady ~60% of Americans saying they are sports fans. These are mostly upper-income men, with men more likely to be sports fans than women (66% vs. 51%) (Gallup). However, we see potential for growth among female sports fans with the rise of discourse surrounding the unequal attention given to women's sports.

We believe that this increased discourse is a crucial first step in giving more credit to women in sports. According to CNN:

'Girls' and women's sports are growing in popularity as participation increases,' said Deborah Slaner Larkin, chief executive officer of the Women's Sports Foundation. 'Once sports are recognized as a birthright for both genders, the rest will fall into place... Helping get us there...is a new generation of moms who played sports as a result of Title IX, which became law in 1972...These women identify as athletes and women's sports fans, and they will now pass down their experiences to their daughters.'

This is a crucial shift in sports culture, and the increased discourse exemplified by articles such as this one by CNN show how the transition towards a greater focus on women in sports is already happening, spurred by Title IX in 1972. This is a huge opportunity for growth--as female involvement and interest in sports grows, this opens up a whole new consumer base for Buffalo Wild Wings in the following year. Like men, women will want to come together to support women in sports in a sports-bar setting, and Buffalo Wild Wings leads in this sort of atmosphere.

Valuation

With a total debt of $73.1 million and 2015 EBITDA of $74 million, Buffalo Wild Wings has extremely low debt and therefore has little risk. It also implies financially flexibility to buy more franchise locations if the company desires to do so.

Buffalo Wild Wings Financial Summary:

2014A

2015A

2016E

Revenue

1,516.2

1,812.7

2,141.9

EBITDA

238.0

273.5

329.6

EPS

4.95

4.97

6.11

Revenue is expected to grow 18% in 2016 and resulting in EBITDA growth of 20%.

Comps:

Comparable Company Analysis

Summary

P/E

EV/EBITDA

Price

Shares

Mkt Cap

EV

2014A

2015A

2016E

2014A

2015A

2016E

Buffalo Wild Wings

147.94

18.83 M

2.77B

2.83B

29.9

29.8

24.1

11.9

10.3

8.5

Ruby Tuesday (NYSE:RT)

4.47

59.3 M

263.9M

441.5M

NM

NM

64.8

5.3

5.5

5.4

BJ's Restaurant (NASDAQ:BJRI)

43.21

24.1 M

1.04B

1.11B

44.5

25.0

22.0

11.6

9.0

8.0

Wingstop Inc. (NASDAQ:WING)

24.28

28.6M

$694.0M

778.8M

70.8

67.4

44.2

37.1

30.3

24.09

Mean

48.4

40.7

38.8

16.5

13.8

11.5

Median

44.5

29.8

34.2

11.8

9.7

8.3

Min

29.9

25.0

22.0

5.3

5.5

5.4

Max

70.8

67.4

64.8

37.1

30.3

24.1

P/E ratio: In 2015 BWLD had an EPS of 4.97. The median PE multiple of 29.8x for the comps in 2015 implies a valuation of 29.8*4.97= 141.1

EV/EBITDA: In 2015 BWLD had an EBITDA of 273.5 M. The median EBITDA multiple of 9.7x for the comps in 2015 implies enterprise value of 9.7*273.5=2.65B

2.65B-.05B=2.60B

2.60B/18.83M=138.34

Buffalo Wild Wings is worth between $138.34 and $141.1 based on 2015 EBITDA and PE multiples of public competitors.

WACC: 7.53%WACC=E/(E + D)*Cost of Equity+D/(E + D)*Cost of Debt*(1 - Tax Rate)

Weights: E=$2.774B, D=73.1M, Weight of equity= .974, Weight of debt=.0257

Cost of Equity: Risk-Free Rate of Return=1.78%, Beta=.78, Market Premium=7.5%, Cost of Equity= 1.78%+.78+7.5%=7.63%

Cost of Debt: Interest Expense: 2.3, Total Book Debt: $73.1M, 2.3/73.1= 0.03%

Average Tax Rate: 30.425%

WACC=.974*7.63%+.0257*.03*(1-30.425%)=7.43%

Return on Invested Capital: 16.61%

Buffalo Wild Wings produces a 9.18% higher return on investment than it costs them to raise the capital required for said investment. So for every dollar Buffalo Wild Wings invests into capital, 9 cents of value is created. In other words, the company is earning excess returns which will likely positively correlate into increased value as growth increases.

Disclosure: I/we 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: Please consider this article for the Spring 2016 Harvard stock pitch competition.