Buffalo Wild Wings Stock Sinks as Chicken Costs Go Wild

I made the mistake of dismissing Buffalo Wild Wings (NASDAQ: BWLD) when it went public. What did the world need with another restaurant chain? My error was that I saw it as a restaurant. Well, it obviously is, but that’s not the consumer sales message.buffalo-wild-wings-earnings

Just as Southwest Airlines (NYSE: LUV) is about freedom and not about being an airline, and just as Starbucks (NASDAQ: SBUX) is about a meeting place between home and work and not about coffee, Buffalo Wild Wings is about creating a chain of sports bars, not about being a restaurant.

That’s when I realized how wrong I had been. Americans, and even Europeans, go to sports bars or pubs to watch sporting events. They have multiple TVs, food and beer. You go there with your friends.

Yet until Buffalo Wild Wings came along, there was no chain of sports bars. Now there is.

The product and quality of Buffalo Wild Wings locations are consistent. You know what to expect. There are plenty of TVs with all the games on at one time. There’s lots of room for groups of friends. Even when there aren’t any sports events going on, it still services consumers as a decent restaurant. That’s rare, of course, because there always is some kind of sporting event going on.

Buffalo Wild Wings has only one major Achilles’ heel it cannot control, and it’s in the company’s name: wings. Namely, the price of chicken wings. Over the past year, the price of those cluckers have soared through the roof – by 41% compared to an unusual market low the year before.

So when you see the numbers from Tuesday’s quarterly earnings, note how great they actually are, except when it comes to expenses.

Buffalo Wild Wings delivered a total revenue increase of 19.8%, which is outstanding. It came on very robust same-store sales increases of 7% at company-owned stores and 6% at franchised locations. Most restaurants would kill for those kind of comps.

The comps increase on the franchises contributed to an 11.8% increase in franchise royalties and fees, and it’s one reason I love the franchising model. It’s free money for the company. The brand has become so valuable that people will spend money to buy into franchising and pay a piece of their gross income every year.

Alas, the huge increase in wing costs wiped out much of these gains, and only lifted net income 2.6%. This isn’t much of a surprise, because CEO Sally Smith rightly warned investors of this situation. The company ended with $29 million in net income, but had an additional $50 million in wing and labor costs as part of it.

Despite the setback, the company still projects earnings growth of 18% for the year, which is impressive.

So, with Buffalo Wild Wings stock down 13% Wednesday (as of this writing), is this is a time to buy on the dip?

Buffalo Wild Wings has $114 million in cash and no long-term debt, giving it about $6 per share in cash. Free cash flow has been increasing each year.

Fiscal year 2014 earnings were $4.95 per share, so an 18% increase would mean $5.84 for FY 15. That gives the stock a not unreasonable price-earnings ratio of 27.

I think investors who are willing to hold a growth stock for a while, and understand the risks associated with a business where commodity prices underlie its ultimate success, may find Buffalo Wild Wings to be tempting.

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Published by Wyatt Investment Research at