The Exchange

For Buffalo Wild Wings, sales miss was something it couldn't afford

The Exchange

Buffalo Wild Wings (BWLD) saw its shares slump Wednesday as a slight revenue shortfall created jitters about growth, underlining the notion that even a minor misstep by a company whose stock doubled last year could derail the restaurant chain's momentum.

In recent trading, Buffalo Wild Wings was down 10.4% to $126.12 on four times the normal daily volume. The drop was a notable one for the shares, which have experienced only 13 double-digit percentage declines since their late 2003 initial public offering.

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Much of what was contained in the Minneapolis-based company's earnings report posted Tuesday afternoon was perfectly fine, and little was said on a subsequent conference call (full transcript is available here) to suggest its expansion or business plans are being pared. Earnings, in fact, are projected to grow 20% this year. But revenue for the fourth quarter was light, totaling $341.5 million vs. the $347.1 million analysts expected. Although the profit of $1.10 a share was better than the consensus forecast by 4 cents, and same-store sales climbed 5.2%, topping the projection of 4.2%, that wasn't enough.

To their credit, management didn't blame the horrors of icy weather for being shy on the top line. However, no matter the reason, the revenue miss was enough to send traders who'd enjoyed last year's gigantic gain to safer ground. In 2013, Buffalo Wild Wings soared 102.1%, a performance that effectively doubled what was a hot industry the restaurant stocks. Of the 37 names we tracked last year, they averaged a jump of more than 50%, well ahead of the S&P 500's 29% advance.

In a recent profile of what was working for Buffalo Wild Wings, we noted it might have entered a place where any mistake could be met with a harsh response. That appears to be the case today. Some of the air had already been let out of the price after it hit a record high of $152.53 last November, though it's continued to drift lower and sits 17% below there with the post-earnings selloff.

That stockholders would hit the sell button here probably shouldn't be a surprise. Right before the quarterly report, the next-12-months multiple was above 29, surpassing the 21.9 average of the past five years, FactSet data show. It's been elevated for some time. For the technically inclined, the 200-day moving average is around $117, at which point it still would have a forward price-to-earnings ratio of 24.4, exceeding the norm.

Last year's run-up got an assist from short sellers abandoning their downside bets. As they threw in the towel and sought to buy back the shares they'd already sold, the demand, to some degree, helped the stock stay aloft. While short interest remains 7.2% of the stock's float, the total position has dropped a whopping 64% in the past 11 months.

Fast casual space

One thing the market will have to sort out is whether it wants to view Buffalo Wild Wings as fast casual, casual dining or even something else, because that will have an effect on its valuation. It is a bit of an in-betweener. Whereas it does offer takeout, it's largely a stay-in restaurant with a bar. Alcohol is nearly one-quarter of revenue, and patrons tend to linger to watch sports on the TVs around the shops, rather than make a quick trip in for a rushed meal.

The company is building some cover here. It's already invested in custom pizza seller PizzaRev, and it's angling to take further stakes this year in one or two small operators, perhaps in the casual dining arena. The current crop of casual dining stocks and stores such as Chipotle (CMG) are all the rage, as sit-down chains (think Darden's (DRI) Olive Garden) and fast food operators, like McDonald's (MCD), struggle to keep traffic growing consistently. Guest counts for many of them have flat-lined or even fallen.

For Buffalo Wild Wings, traffic isn't a problem, according to CEO Sally Smith, who says she believes guest counts are staying positive. That's a clear plus in these hyper-competitive times for the restaurants.

"We always look at our same-store sales, and we expect it to outpace our menu price increases," she said. "And we know that's either coming from increased traffic or perhaps a mix, although we don't change up the mix all that much. So it's probably coming from increased traffic. We have very positive same-store sales, and menu price increases have been pretty minimal, so ... that leads me to say that there's traffic [growth]."

That said, more price increases are coming to the menu, executives say. Buffalo Wild Wings isn't exactly a cheap meal as it is, but if it can get more dollars from visitors while boosting traffic, and at the same time benefit from manageable wing prices wings are about 39% of overall revenue it may have an upbeat surprise ahead. The World Cup on tap this summer has the potential to be a nice incremental plus for its numbers.

Of course, if it disappoints again even modestly against the still lofty Wall Street targets, sellers most certainly will be ready.

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