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Buyers will be back for Buffalo Wild Wings

Russell Akred brought the heat to the grand opening of Buffalo Wild Wings' new prototype restaurant. Akred ate 12 Blazin Hot Wings in two minutes to win the Blazin Challenge, Dec. 17,2012, In Cincinnati.(Photo by Tony Tribble/Invision for Buffalo Wild WIngs /AP Images)

Sometimes, when you predict earnings growth of "only" 30%, your stock gets taken apart.

That was the case for Buffalo Wild Wings (BWLD), whose shares were slumping 14.2% to $143.43 Wednesday, its fourth-worst decline ever, a day after it suggested full-year profits might not meet Wall Street's expectations. The last time the stock fell further in a single session was in April 2010, when it had a drop of 17.1%.

Considering Buffalo Wild Wings' past, traders aren't inclined to be patient, even if it speaks to the absurdity of the market. Buffalo Wild Wings is a company that's building new locations, increasing earnings and expanding same-store sales at one of the best rates in the restaurant industry -- it's getting a great deal right. Only today, it happens to be its own main enemy.

Although the magnitude of the downturn was certainly notable, Buffalo Wild Wings has seen this type of severe selling before, as the Minneapolis-based sports bar operator is regularly a big mover after its earnings. In the past 12 quarters, half of the post-report days have been up and half down, with the average gain at 8.9% and the average loss at 9.2%.

On the whole, however, the stock for years has been a star for anyone who has owned it, gaining what amounted to 27.7% annually from 2008 through 2012. In 2013, it jumped 102.1%. It started this year on the sluggish side, but following a second-quarter rebound it was up, before earnings, nearly 14% for the year to date. It even traded at an all-time high of $167.64 on Tuesday. Now it's negative for 2014.

Though it's not unreasonable to have trepidation, the surprise will be if shares don't bounce back.

Cost concerns

The selling doesn't lack all logic. Prior to posting its second quarter and updating its forecast, which, incidentally, keeps going higher, Buffalo Wild Wings in fact was (and remains) overvalued relative to its five-year averages on a significant number of key metrics, including trailing and forward price-to-earnings ratios and price/earnings-to-growth. That tends to make traders flee fast when anything less than perfection arrives.

Buffalo Wild Wings now thinks earnings may improve as much as 30% from last year's $3.79 a share, implying a profit of $4.93. Analysts, according to FactSet, have forecast $5.04, what would be a 33% increase. With the multiples the market had given the stock, it might as well have warned of a loss

It does have to manage costs, specifically wing prices, which have been favorable for months, and what it pays employees. Both concerns have weighed on the stock at times in the past, and analysts on a conference call after the earnings fretted about what an increase in either would mean for margins. The upside is these aren't surprise risks, even if their future levels are impossible to quantify with certainty. The downside is they'll never go away.

Already, the company has changed its sales model to weight-based orders from orders that were based on a specific number of wings, a plus financially. But because it's not a cheap meal, with per-person checks that can surpass $12 (without alcohol) quickly, the chain now has to be careful about maintaining affordable prices, as there's no doubt traffic growth has been key to its consistently enviable comparable-store sales. As its own business costs climb, it will have to decide whether to push visitors to pay more or to suffer the consequences on the bottom line.

Here, it's about the food. Chipotle (CMG) has demonstrated that diners will buy expensive fare if they're getting their money's worth, so Buffalo Wild Wings has to maintain what are perceived as quality goods. Now at 1,028 stores, it has said it believes it can have 1,700 units in North America. Quality will always be a challenge amid the build-out.

Strong sales

But the worries likely will wane as the weeks progress, and the stock will recover. There's a simple reason for this: The company's growth is far better than most of the 41 other restaurants Yahoo Finance regularly tracks, and its financials are strong in a group where revenue and customer traffic gains have been extremely difficult to attain. The expectations are that none of this is near to changing. Investors will calm down.

Competition among restaurants is tremendous, and consumers are still watching their spending on dining out. That translates to a lot of discounting losers in the space. Buffalo Wild Wings has been one of the few real winners, with wings, and chicken broadly, a tremendous business. Estimates are that each of us will eat 85 lbs. of chicken in '14, while the National Chicken Council has projected that 3 billion lbs. of wings alone will be marketed this year in the U.S.

For Buffalo Wild Wings, that's good and bad. Good that demand is high, bad that competitors are everywhere, including WingStop, local bars and chains such as Chili's and Pizza Hut. What its numbers have shown, though, for years, is that Americans are continuing to make it part of their wings habit. As noted, if it keeps quality at a level customers will buy it, that won't stop anytime soon.

In the latest quarter, Buffalo Wild Wings' earnings of $1.25 a share, revenue of $366 million and same-store sales advance of 7.7% at corporate-owned stores exceeded estimates. Its TV-lined restaurants received a lift from the World Cup in recent weeks. Of course, the model of wings, beer and sports doesn't need a lot of help generally. The World Cup is only once every four years, but the NFL, NHL, NBA and March Madness are annual events. And as long as there are sports, Buffalo Wild Wings is going to get some of the hot-wings and booze crowd.

But that's not what matters for today. For now, the sky is falling, even with a 30% EPS goal.