BWLD

Buffalo Wild Wings, Inc. (BWLD)

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Buffalo Wild Wings, Inc. (BWLD)

Q3 2012 Earnings Call

October 23, 2012 5:00 p.m. EDT

Executives

Mary Twinem – CFO, EVP

Sally Smith – President and CEO

Analysts

Bryan Elliott – Raymond James

Larry Miller – RBC Capital Markets

David Dorfman – Morgan Stanley

Jeff Farmer – Wells Fargo

Jason West – Deutsche Bank

David Tarantino – Robert W. Baird

Brian Bittner – Oppenheimer

Will Slabaugh – Stephens, Inc.

Jeffrey Bernstein – Barclays Capital

Matthew DiFrisco – Lazard Capital

Chris O'Cull – KeyBanc Capital Markets

Nick Setyan with Wedbush Securities

Conrad Lyon – B. Riley & Co.

Peter Saleh – Telsey Advisory Group

Greg Mckinley – Dougherty & Co.

Mark Smith – Feltl & Co.

Presentation

Operator

Good afternoon, ladies and gentlemen. Welcome to the Buffalo Wild Wings third quarter 2012 conference call.

[Operator Instructions]. I would like to remind everyone that this conference call is being recorded.

I would now like to turn the conference over to Mary Twinem, Chief Financial Officer and Executive Vice President of Buffalo Wild Wings. Please go ahead.

Mary Twinem

Goof afternoon and thank you for joining us as we review our third quarter 2012 results. I’m Mary Twinem, Chief Financial Officer and Executive Vice President of Buffalo Wild Wings. Joining me today is Sally Smith, our President and Chief Executive Officer. By now everyone should have access to our third quarter earnings release.

Before we get started, I'll remind you that during the course of today’s call various remarks we make about future expectations, plans and prospects for the company constitute forward-looking statements based on a number of factors. Actual results may vary materially from those contained in forward-looking statements based on a number of factors, including but not limited to, our ability to achieve and manage our planned expansion, the sales and other growth factors that are company-owned and franchise locations, our ability to successfully operate in new markets including non-US markets, unforeseen obstacles in developing sites including non-traditional and non-US locations, the cost of commodities, the success of our key initiatives and our advertising and marketing campaigns, our ability to control restaurant labor and other restaurant operating costs, economic conditions including changes in consumer preferences or consumer discretionary spending and other factors disclosed from time to time in our filings with the US Securities and Exchange Commission.

On today's call, Sally will provide an overview of our performance for the third quarter. After that, I will provide further detail on the quarter and comment on trends to date and the year in full. Finally, Sally will share some additional thoughts about the remainder of this year and the year ahead. We will then answer questions.

So with that, I'll turn things over to Sally.

Sally Smith

Good afternoon, everyone. We're pleased with our strong top line growth of nearly 25% in the third quarter. We focused on operational excellence at the restaurant level and our teams delivered strong same-store sales with increases of 6.2% at company-owned restaurants and 5.8% at franchise locations. In addition, we leveraged labor, operating and occupancy expenses. High cost of sales and incremental pre-opening expenses moderated our bottom line expansion, producing earnings per diluted share of $0.57 for the quarter, compared to $0.61 in 2011.

We focused on adapting to current wing market conditions. Our restaurants have transitioned to larger-size wings in response to the continuing shift in the poultry industry to larger bird production. We took many price increases in July and subsequent wing price increase in mid-August to compensate for the bigger wings and record-high wing costs. These adjustments are beginning to ease the pressure on our cost of sales.

We are currently testing serving our wings in flexible portions rather than fixed quantities, which will lessen the cost of sales impact from future fluctuations in wing size. We're monitoring the impact of this test on sales, margins and guests' perceptions in about 60 restaurants, and based on the results, we'll incorporate these changes at our remaining locations in the first half of 2013.

In the third quarter we made investments in our future as we upgraded our technology infrastructure, continued our international expansion, and worked towards purchasing additional franchise locations.

We had successful marketing campaigns in the third quarter. The Summer Olympics provided opportunities for friends to gather in our restaurants and cheer our athletes onto the gold. On the heels of the closing ceremonies, we shifted our focus to the gridiron and more football fanatics filled our restaurants for our annual Fantasy Football Draft Promotions than ever before.

In the third quarter we had two menu inserts to highlight our ongoing new menu offering. We featured three new flatbreads, Thai curry chicken, Caribbean barbecue pork, and five cheese italian pepperoni. We also featured two refreshing new Summer Salads. Guest response to these new items was commended, and based on their popularity, our pepperoni flatbread and chopped salad will become permanent menu items in 2013.

Our expanded retail gift card program continued to generate revenue throughout the third quarter and produced nearly 50 basis points of incremental same-store sales. We're pleased with the success of this program and its potential to introduce the Buffalo Wild Wings brand to new guests.

Our operations teams focused on providing our guest with a great football experience to encourage repeat visits throughout the season. In addition, they worked diligently to manage costs and certify additional training restaurants to support our ongoing new restaurant openings.

Mary will now provide additional details on the third quarter as well as the fourth quarter to date. Then I'll return to talk about the remainder of the year and beyond.

MT:

Thank you, Sally. Our revenue in the third quarter grew by 24.8%, increasing to $246.9 million. System-wide, sales that are company-owned and franchise restaurants were $592.9 million for the quarter, more than 16% higher than the same period in the prior year.

Company-owned restaurant sales for the third quarter increased to $228.4 million, a 26.2% increase over the same period in the prior year. Same-store sales were 6.2% for the quarter compared to the 5.7% last year. Menu price increases and adjustments taken during the past 12 months at company-owned restaurants were about 4%. We had 55 additional company-owned restaurants in operation at the end of this quarter versus third quarter last year, a 19% unit increase.

Average weekly sales increased by 6.3%, slightly higher than our same-store sales percentage for the quarter. The average weekly sales calculation benefited by about 50 basis points from the closing of older lower-volume locations during the last 12 months. Company-owned locations opened during the last 15 months contributed an increase of 30 basis points. The 17 locations that we purchased from franchisees in the last 15 months are performing in line with our expectations but lowered our weekly average by 70 basis points.

Our royalty and franchise fee revenue for the third quarter grew by 10.2% to $18.4 million, versus $16.7 million last year, with an additional 13 franchise units in operation at the end of the third quarter versus a year ago. As a reminder, we have purchased 15 franchise locations in the 12 months preceding the end of this quarter, which lowers the year-over-year increase in franchise units.

Same-store sales at franchise locations increased by 5.8% in the quarter, compared to a 4.2% increase in third quarter last year. Average weekly sales volumes for the quarter increased by 8.3%, a 250-basis-point increase over same-store sales. About 170 basis points of the increase is attributed to the closure of locations and our acquisition of the 17 franchise units.

The following comments will focus on the performance of our company-owned restaurants. Cost of sales for the third quarter was 31.2% of restaurant sales compared to 28.5% in third quarter last year, a 270-basis-point increase. Traditional wings were $1.97 per pound this quarter, $0.81 or 70% higher than last year's average of $1.16. Added to this increase is the lower wing per pound yield as a result of poultry producers moving production to larger birds. And the result is that our cost per wing by the end of the third quarter was about 90% higher than the unusually low wing cost of last year.

Read the rest of this transcript for free on seekingalpha.com