Buffalo Wild Wings is a great business, but investors should
keep three key risks in mind. Credit: Buffalo Wild Wings
Earlier this week, I offered three reasons
Buffalo Wild Wings
could potentially rise
going forward. After all, the popular beer, wings, and
sports-centric restaurant chain is implementing plans for
ambitious global expansion, looking forward to its biggest driver
in American football season, and keeps diners happy with
continuous, clever tweaks to its menu.
At the same time, however, investors shouldn't ignore
potential risks to Buffalo Wild Wings' business going forward.
So, in the interest of looking at both sides of the table, here
are three reasons Buffalo Wild Wings stock could fall.
Costs are expected to rise
Even if Buffalo Wild Wings continues to grow sales quickly,
increasing operating costs could eat into its bottom line.
First, Buffalo Wild Wings warned during the subsequent
conference call of a coming rise in hourly wages, thanks to
both impending minimum-wage increases in California and
Minnesota, and the expected addition of "Guest Experience
Captains" at nearly 80 additional company-owned locations in
Perhaps most notable, however, is B-Dubs' cost of chicken
wings, which were were roughly $78 million last quarter alone, or
21.3% as a percentage of the cost of overall sales. Buffalo Wild
Wings expects chicken wing prices for the first two months of Q3
to be around $1.46 per pound, which looks relatively mild
compared with the $1.71 per pound they paid around this time last
year. For perspective, in 2012 Buffalo Wild Wings paid an average
price for chicken wings of roughly $1.90 per pound.
To its credit, a combination of those previous high prices and
an industry shift toward larger-sized birds spurred the
implementation of Buffalo Wild Wings'
new volume-based pricing last summer
-- think, for example, of its change to snack-, small-, medium-,
and large-sized portions, rather than selling specific numbers of
wings. This, in turn, helps Buffalo Wild Wings adjust the number
of wings people receive to better coincide with their actual
cost. But even then, the strategy doesn't provide
flexibility, so any truly significant upticks in wing costs going
forward could negatively affect profitability.
Diners are seeking faster, healthier options
Finally, beer and wings might be delicious, but they aren't
exactly health food. And the recent
shift in consumers' preferences
toward healthier, faster options could be bad news for Buffalo
Chipotle has grown quickly by offering healthy food through
a fast-casual approach, Credit: Chipotle Mexican Grill.
Consider a prime example in the remarkable rise of
Chipotle Mexican Grill
, which grew revenue 28.6% year over year to $1.05 billion in its
most recent quarter, helped by incredible comparable restaurant
sales growth of 17.3%. And in keeping with its "Food With
Integrity" slogan, Chipotle has won huge points with hungry fans
by maintaining its steadfast "commitment to finding the very best
ingredients raised with respect for the animals, the environment,
and the farmers."
What's more, Chipotle also enjoys its status as a
"fast-casual" restaurant chain, which strikes an intriguing
balance between high-quality food and the speed at which
customers receive it. Buffalo Wild Wings, by contrast, relies on
its sports-centric atmosphere as a differentiator to keep diners
staying longer, and then later coming back for more.
But that's also part of the reason Buffalo Wild Wings recently
invested in PizzaRev, a fast-casual pizza chain that operates in
Chipotle-esque fashion by cooking artisan pies in under three
minutes. But PizzaRev certainly has some catching up to do: As it
stands, it has only 12 locations listed on its website, including
Buffalo Wild Wings' first company-owned PizzaRev, which opened in
Minnesota in May.
Buffalo Wild Wings is looking to capitalize on fast-casual
fare through PizzaRev, Credit: PizzaRev.com.
It's getting harder to grow
that Buffalo Wild Wings has laid out plans for significant
growth, investors should keep in mind that growth needs to happen
in a methodical, thoughtful manner. This is especially important
when identifying increasingly sparse prime locations to prevent
cannibalization and sales transfer in established markets like
the United States.
In fact, the "Risk factors" section of Buffalo Wild Wings'
most recent annual report admits:
We and our franchisees intend to open new restaurants in our
existing markets, which may reduce sales performance and guest
visits for existing restaurants in those markets. In addition,
new restaurants added in existing markets may not achieve sales
and operating performance at the same level as established
restaurants in the market.
What's more, it remains to be seen exactly how diners in
various international markets will respond to Buffalo Wild Wings
as it begins expanding outside the U.S. and Canada. To be sure,
that B-Dubs' food should lend itself well to the sweet, spicy,
and saltier tastes of basketball- and soccer-loving diners in the
Philippines. But investors should keep a close eye on when and
where Buffalo Wild Wings next decides to make a push overseas,
where it estimates it should have 400 locations over the next 10
This doesn't mean I'll be selling my own shares of Buffalo Wild
Wings in the near future. To the contrary, I'm still optimistic
that Buffalo Wild Wings' catalysts should propel its stock upward
over the long term. But Buffalo Wild Wings also faces challenges
in managing operating costs, the growing influence of its healthy
fast-casual competitors, and pursuing increasingly difficult
long-term growth. At this point, investors can take solace
knowing Buffalo Wild Wings is working to mitigate these
challenges, but investors should also keep a close eye on them
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3 Reasons Buffalo Wild Wings Stock Could Fall
originally appeared on Fool.com.
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