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Will Higher Costs Mar Buffalo Wild Wings' Results This Year?

Zacks Equity Research

On Aug 14, we issued an updated research report on Buffalo Wild Wings Inc. (BWLD).

On Jul 29, Buffalo Wild Wings posted strong second-quarter 2014 results with earnings and revenue beating the Zacks Consensus Estimate. Adjusted earnings of $1.25 per share for the second quarter grew 42% year over year. Solid top-line growth and lower cost of sales backed the upside. Total revenue increased 20% year over year to $366.0 million driven by strong comps and new unit openings.

Buffalo Wild Wings registered company-owned comps growth of 7.7%, far better than a 3.8% increase in the year-ago quarter and a 6.6% increase in the previous quarter, owing to improvement in guest count. Same-store sales were strong during the NBA and NHL playoffs. Additionally, the 2014 FIFA World Cup added 100 basis points (bps) to comps growth in the quarter.

The company expects earnings to grow 25% in 2014 and even reach 30% compared to its prior expectation of 20% growth. However, rising food and other costs remain a matter of concern for the company. This caught investor attention, resulting in a massive decline in share price despite strong quarterly results.

Food costs have risen sharply so far in 2014. Chicken prices have increased due to widespread drought conditions and supply shortages and are expected to increase further in the second half of the year, thereby hurting the company’s profitability. However, the company had been benefiting from serving chicken wings by portion for so long. The company will no longer benefit from this way of serving chicken in the second half of 2014 as prices continue to rise. This would tremendously pressurize its margins.

Also, the company’s sales initiatives like unit expansion and the addition of guest experience captains at its restaurants will also put pressure on margins. These would automatically increase labor costs and pre-opening expenses.

We believe these costs would make it difficult for Buffalo Wild Wings to register more than 25% earnings growth for 2014 let alone record a 30% increase, which translates into earnings of $4.93 per share. Buffalo Wild Wings carries a Zacks Rank #3 (Hold).

Other Stocks to Consider

Better-ranked stocks in the same industry include BJ's Restaurants, Inc. (BJRI), Chipotle Mexican Grill, Inc. (CMG) and Jamba, Inc. (JMBA). All these stocks sport a Zacks Rank #1 (Strong Buy).

Read the Full Research Report on BWLD
Read the Full Research Report on CMG
Read the Full Research Report on BJRI
Read the Full Research Report on JMBA

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