We have reiterated our long-term Neutral recommendation on
Buffalo Wild Wings Inc.
), a casual dining restaurant operator, based on its consistent
track-record of success, viable business strategies and a debt-free
balance sheet. However, increasing wing costs, uncertain economic
environment and stiff competition from other casual dining
operators, along with budget-constrained customers, are the major
Buffalo Wild Wings' second quarter 2012 earnings of 62 cents per
share were well below the Zacks Consensus Estimate of 68 cents, but
above the year-ago quarter earnings of 58 cents per share. The
lower-than-expected result was attributed to an upsurge in wing
Total revenue climbed 29.7% year over year to $238.7 million, but
missed the Zacks Consensus Estimate of $240.0 million. Same-store
sales escalated 5.3% and 5.5% at company-operated restaurants and
franchised restaurants, respectively.
Restaurant operating margin contracted 340 basis points (bps) to
17.5%, owing to a 440-bps hike in cost of sales to 31.6%, arising
from an 86% year-over-year surge in traditional wing costs and
lower wing-per-pound yield as poultry producers are shifting
production to larger sizes in order to maximize protein weight.
In the second half of 2012, management expects a continued rise in
traditional wing prices owing to an increase in the price of corn,
used in chicken feed, due to the recent drought, as well as modest
price hikes in other commodities. The wings' cost will also remain
unfavorable for the third quarter of 2012 as in the first two
months of the quarter; the price of chicken wings has averaged to
$1.95 per pound as compared with $1.16 in the year-ago quarter.
During the second quarter of 2012, the company also incurred
expenses for the roll out of the new point of sale and back office
systems at company-owned locations. Similar expenses are also
estimated in the third and fourth quarters, as the company
continues the roll-out. Additionally, labor costs as a percentage
of restaurant sales are also estimated to be slightly higher in the
third quarter of 2012, due to an expected increase in training
associated with the roll-out of a new POS system and new service
strategy to further build the brand.
Pre-opening expenses are also projected to be higher in 2013,
related to development schedule. Based on cost inflation, Buffalo
Wild Wings also revised its net earnings growth target range to 15%
to 20% from previous goal of 20%.
However, company remains focused on combating cost inflation,
particularly the persistent high cost of wings through menu price
increases and expense control. Overall Buffalo Wild Wings expects
menu price increases to run at 3% annualized pace in the third
quarter and at 4% in the fourth quarter.
Moreover, Buffalo Wild Wings is beginning to test a different
way of packing its wings -which would enable them to reduce the
number of wings per order. The company also expects the ongoing
sales momentum and unit level growth to overcome cost inflation.
Over the long-term, the company expects cost of sales ratio to be
in the range of 29-30%.
Same-store sales also remain impressive as it grew 6.8% at
company-owned restaurants and 7.3% at franchise locations in the
first four weeks of the third quarter of 2012. Comps in the early
third quarter have benefited from an extra UFC event, Euro Cup
final as well as increased menu pricing in mid-July.
Moreover, comps should be able to continue its solid momentum in
2012, based on incremental marketing (including new radio spots and
new television creative), greater focus on NFL draft parties
(increasing by 50% vs. last year), higher pricing contribution and
increased visibility of the brand due to its first-time sponsorship
association with a long-standing college bowling game, which from
now onwards will be titled Tthe Buffalo Wild Wings Bowl.
The Buffalo Wild Wings Bowl will be played in Tempe, Arizona on
December 29th between the Big Ten and Big Twelve teams.
Additionally, an extra Thursday night NFL game in September has
also propelled comps growth.
Furthermore, the company is able to attract customers through
radio, digital and social media. To increase customer visitation,
Buffalo Wild Wings continues to focus on Happy Hour and draft beer
sales, gift card sales, remodeling of restaurants, shutting down of
underperforming restaurants and new menu offerings.
The company has introduced an online ordering system, new
facebook promotion and is also testing the use of interactive
technologies, including tablets and smartphones. To enhance
functionality, the company is also investing in technology to
upgrade its point-of-sale and back office systems.
Additionally, to provide customers with the experience of
stadiums in restaurants, the company is focusing on a new design
and expects to have two of the new design prototypes built in the
Cincinnati and San Diego markets. One location is expected to open
in the fourth quarter and the second location thereafter.
Additionally, the company provides ample growth opportunities given
its plan of opening 1,500 restaurants in the United States within
the next five to seven years and 50 in Canada by 2015. Apart from
venturing in Canada, the company has also inked two deals with
franchised partners in the Middle East and Puerto Rico to further
expand its footprints.
In the Middle East, the company plans to open up to 22 locations
across six countries over the next six years and in Puerto Rico, it
plans to unveil 4 locations by the end of 2016. Buffalo Wild Wings
is also evaluating potential acquisition deals for additional
BUFFALO WLD WNG (BWLD): Free Stock Analysis
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