Buffalo Wild Wings: Blazin' hot
According to culinary lore, it was 1964 when Teressa Bellissimo, first lady of Buffalo’s Anchor Bar on Main Street, took delivery of what was supposed to be the chicken backs and necks for her signature spaghetti sauce. By mistake, she got the least useful part of the chicken: wings. Instead of tossing them, she split them in two, dropped them in the deep fryer, and gave them away at the bar with celery and blue-cheese dressing left over from her antipasto.
Had Teressa simply discarded those unwanted wings, there would never have been a Buffalo Wild Wings, Inc. (Nasdaq:BWLD), one of the top 10 fastest growing restaurant chains in the country. Founded in 1982 by two hungry guys near The Ohio State University campus, the company went public in 2003 with its successful combination of wings, beer and sports, and hasn’t stopped growing since. The Minneapolis-based restaurant owner and franchiser finished the second quarter of 2008 with 515 restaurants in 37 states, and impressive year-over-year growth in revenue and earnings from both its company-owned and franchised units. Unlike its competitors in the casual-dining business, Buffalo Wild Wings has somehow found a way to convince diners that in spite of $4-per-gallon gas, declining home values and the shrinking roll of cash in their pockets, they should come out for a cold beer, a bucket of Buffalo wings with Blazin’ hot sauce and a game of Sauce N’ Slide.
One of the biggest reasons for the attraction is the product itself. Each restaurant features 20 different domestic and international beers on tap, 14 sauces for the signature wings and extensive media centers, including projection screens and as many as 40 TVs. The food is good and the environment is fun and energetic. Diners not interested in what’s on TV can enjoy the piped in music while they play trivia or video games.
For those with children or an aversion to fried foods, menus have been expanded to include salads and sandwiches, and TV monitors are as likely to be showing the Cartoon Network as the big game. Management has also slyly tapped into the TiVo generation’s powerful craving for customization by creating open and flexible dining spaces. Moveable furnishings can be rearranged to suit any situation, and several different dining options are offered: fast casual counter service, casual dining table service, or takeout. The company has shown considerable ingenuity in keeping the menu fresh and familiar at the same time, and it has invested in effective training and quality service initiatives to insure that the experience is not ruined by an inattentive waiter or a dirty bathroom.
The company’s growth strategy has been equally well planned and executed by a CEO and CFO who have run the company for more than a decade. Its double-digit annual growth trend continued with a 15% increase in total restaurants over the second quarter of 2007. These new additions opened at significantly higher-than-average weekly sales volumes, which contributed to a total weekly sales increase over the prior second quarter of almost 11% for company-owned restaurants and 5.4% for the franchised units. Average same-store sales were up 8.3% for company-owned restaurants and 4.5% for franchised units for the same period, while total revenues for the second quarter were up 28.8% to $97.9 million.
At the same time, management has kept its eye on expenses. Surprisingly, cost of sales at 30% were actually down from the year-ago quarter, as commodities increases were offset by increased menu pricing and a decrease in the cost of chicken wings. Restaurant operating expenses also declined as management did a good job leveraging its infrastructure.
The resulting second-quarter earnings speak for themselves: a 46% increase in net earnings over the 2007 period to $5.6 million, and an impressive performance by a casual dining restaurant pursuing a growth strategy in a down market. Earnings per diluted share of $0.31 represented a 41% increase for the same period, and exceeded analyst estimates of $0.27 per share.
With football season around the corner and a marketing campaign that includes, for the first time, a national presence with ESPN, the Big Ten Network, CBS Sports Net and Westwood One, the third quarter promises more of the same. The company will face challenges as suppliers begin to grumble over the cost of transportation, and there is an ongoing exposure to the cost of chicken wings, which can be driven up by surges in corn prices, an ingredient in animal feed.
Overall, however, the company remains confident in its ability to achieve its 2008 goals of 15% unit growth, 20% revenue growth, and 25% net earnings growth. Third-quarter expansion calls for a net increase of nine company-owned locations and 15 new franchised locations. The projected cost for wings for July and August is $1.15 per pound compared with $1.24 per pound in the third quarter of 2007. Robert W. Baird analyst David Tarantino recently upgraded the stock to "outperform" from "neutral" and increased his price target to $45. With the stock currently trading around $36, Buffalo Wild Wings appears ready to take flight.
