How Buffalo Wild Wings is at The Mercy of McDonald's

TheStreet.com

NEW YORK (TheStreet) - Consumers love chicken wings. Add in beer and watching football, basketball or any sporting event, and it's a combination that Buffalo Wild Wings has created its restaurant concept on.

As the restaurant sector begins to polarize -- fast-casual and fine dining eateries are winning, while quick-service and full-service casual eateries struggle, Buffalo Wild Wings seems to be bucking the trend. Last night, the Minneapolis-based company reported above-consensus earnings of $1.10 a share for the fourth quarter. The company also surpassed expectations for same-store sales growth for both its company-owned and franchised locations. Still the 1000-location casual eatery fell short of expectations for overall revenue.

Shares were plunging 9.7% to $127.07 on Wednesday on concerns that perhaps growth is slowing at the wing chain, particularly in new units. Recently surpassing its one thousandth location, B-Dubs, as its known, reaffirmed its earnings growth expectations of 20% for 2014.

"We remain Neutral rated on BWLD shares, as we see several current positives, but limited visibility towards future growth," Goldman Sachs analyst Michael Kelter wrote in a note to clients. "To the upside: (1) SSS remain firmly in the mid-single digits despite the impact of weather. (2) The installation of tabletop tablets in 2H14 could provide a boost to future sales. (3) Wing costs are down significantly and may aid restaurant margins by 150-200bp. All told, we are solidly above BWLD's guidance and consensus forecasting 33% EPS growth in 2014.

"This said, BWLD is at 1,000 units, and guidance of a 1,700 total opportunity suggests it will be 80% to full maturity in just 3-5 years," he penned. "It is unclear if second concepts or international expansion can ramp quickly enough to offset the impending P&L impacts of this dynamic. As is, BWLD's new unit productivity, while robust, is already starting to decelerate. We generally see this as a cautionary sign with respect to growth concepts."

Miller Tabak analyst Stephen Anderson also rates the company at "hold" but has a slightly more optimistic view of the company.

"By nearly all measures, it was a solid quarter from an earnings perspective, though the company did not deliver a blockbuster sales quarter that high-growth peer Chipotle Mexican Grill (CMG, $540.59, Hold) delivered last week. BWLD reiterated its 2014 goal for EPS growth, but we think the combination of mid-single-digit comp growth, still-solid unit growth (about 10% y/y), sharply lower average wing costs, and reduced operating costs as a percentage of sales will result in EPS growth above guidance for 2014," Anderson wrote.

"Moreover, we think as new unit development shifts increasingly toward franchise development, we model an increasing stream of franchise fees will support consistently positive free cash flow -- and potentially share buybacks -- beginning in 2014. Given the near doubling in the share price in 2013, as well as expectations for another strong year in 2014, however, we see limited upside for BWLD shares, and thus would await a pullback," he wrote.

TheStreet spoke with CEO Sally Smith on Tuesday evening. An edited version of the transcript is below.

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Buffalo Wild Wings CEO Sally Smith

How many chicken wings did you sell on Super Bowl?

Smith: I can tell you what we sold last year, we're still waiting for the numbers to come in from Sunday. Last year we sold 8.8 million. We do know that with more locations and positive same-store sales we expect that that number will increase over prior year and its always a big takeout day for us as well as in-restaurant. Last year takeout was 45% of our sales and we'll have a little bit more color on that hopefully the by the end of the week.

Are you feeling the pressure from fast-casual chains like Chipotle ? Is the full service dining model still en vogue?

Smith: I do think there is still that occasion [dining]. I think that fast casual has done a really nice job of providing some other opportunities maybe [when] you don't want to take quite as much time. But I can't really answer what the competition are doing. I think our occasion is perhaps a little bit different in that you're not going to get that same experience in a fast-casual restaurant. I mean if you're going to go watch a sporting event or get together with friends and family, which is what our guests tell us they like to use Buffalo Wild Wings for, I don't know that you're going to get that same feel [at] fast casual.

You spoke on the call about potential investments by Buffalo Wild Wings in additional concepts and later talked about preferring fast-casual concepts? Why fast casual?

Smith: As we look at the segment -- quick service, fast casual, casual and fine dining -- we don't really have experience in quick service or fine dining and it doesn't meet our parameters in terms of ease of kitchen -- that kind of thing so it leaves fast casual and casual dining. If we saw the right small casual dining we'd certainly take a look at that. It just seems that more of the emerging brands happening today tend to be a little bit more in that fast-casual arena.

We're always looking and as soon as we have a deal we're certainly going to announce it.

Let's talk chicken wing prices. As I understood it from the call, prices actually went down compared to last year?

Smith: [Last year there were] probably some of the highest chicken wing prices we've seen in a decade.

How does changing chicken wing prices affect the bottom line?

Smith: What it did was really helped our cost of sales this year. Last year cost of sales was 32% [of restaurant sales]; this year 29.8%, so it was really a big impact for us.

What about looking at the rest of 2014?

Smith: We've always floated with the market on wings and we've been able to manage that, I think it depends on what McDonald's does. If they're going to roll out "Mighty Wings" this year. I think that did drive some of the cost pressure last year. In typical years, and I don't know if we've seen a typical year in a few years prices moderate throughout the summer and then start climbing as we move into what we call ham and turkey season and that demand on sporting events and football.

What about technology? You spoke of tablet rollouts (the company plans to have tablets in all of its company-owned stores by the end of 2014), can you share a little more on how Buffalo Wild Wings plans to use them?

Smith: Tablet rollouts will be used in a variety of ways, if you've been to a Buffalo Wild Wings you know that trivia in our restaurants is big and its online real time at all our locations across the country. We were working with Buzztime and they're the ones that are developing this tablet with us so that you can play trivia; you're also going to be able to play arcade games; you're going to be able to order music and play what typically used to be a jukebox as well as order - [it will] eventually have the full menu on it. Right now we're testing the buttons that says "Wing Me" or "Beer Me," meaning I want more wings, I want more beer. And then we hope that tablet can be the go-to place for sporting news as well.

What about mobile payments?

Smith: Yes I should have mentioned that. When I think of ordering I always think of mobile payments kind of in the same brow.

Where is the next big growth area for Buffalo Wild Wings?

Smith: We still have a lot of room for growth on the West Coast and in the Northeast and really the South, Atlantic seaboard as well. We'll see continued growth in California, Washington, New York, and Boston. So we'll have unit growth as well as continuing to drive same-store sales through some of these guest experiences ... and just continue menu development. We have seven limited time sauces that we will roll out this year giving guests another reason to come in and get it while they can.

We're excited about 2014 were looking forward to a strong year as we continue strong growth domestically, but also starting to move our brand in the international market. And we think that gives us the ability to really grow as well.

I know that you have signed franchise agreements in Mexico, where else?

Smith: We have franchise agreements signed for about 30 locations in Mexico with three different groups. We also signed The Philippines ... between four and six locations and then we will actually open in Dubai and Saudi Arabia before the end of the year. We have a franchise agreement for I think about four countries in the Middle East for around 15 locations over the next five years.

--Written by Laurie Kulikowski in New York.

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