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Billionaire Ken Griffin Beefing Up His Buffalo Wild Wings Position

March 19, 2013 | About:
[/b]Billionaire Ken Griffin of Citadel Advisors now owns over 959,000 [b]Buffalo Wild Wings (BWLD) shares, an increase of over 275% from the 254,000 they owned at the end of 2012. That's 5.1% of Buffalo's outstanding shares. Should we be following Griffin into Buffalo? I think so.

Griffin began trading stock options from his dorm room in 1986, and by his sophomore year he had launched a convertible-bond arbitrage fund. Griffin then founded Citadel Investment Group in 1990 with a mere $4 million of assets of under management. At the end of 2011, Griffin managed one of the largest funds in the world, with over $41 billion of assets under management.

Why Is Griffin Buying Buffalo?

Buffalo Wild Wings reported fourth quarter 2012 earnings of $0.89 per share, up 22% year over year, on the back of a 5.8% rise in company operated same store sales, and a 7.4% rise in franchised same store sales. To help drive future performance Buffalo is undertaking various initiatives, such as menu and restaurant upgrading and the company also has a multi-year affiliation agreement with the NCAA. Buffalo expects net earnings growth of 25% in 2013, much higher than the 17% growth in 2012. Driving this growth will be restaurant expansion.

Last quarter, Buffalo opened 38 new company-owned restaurants, while shutting down one franchised restaurant. In 2013, the restaurant chain plans to open more than 60 company-owned and 45 franchised restaurants, and also expects to achieve the 1,000 total unit milestone by the end of the year. Long-term plans include opening 1,500 new units in the U.S. over the next five to seven years. In addition, it is hard to see the expansion into new markets as a problem, whereas different taste preferences might make diffusion for restaurants, such as Olive Garden and Red Lobster, difficult. Buffalo's concentration of a diversified menu and beer can appeal to a wide audience.

How the industry stacks up

Brinker International Inc. (EAT)
owns and develops the major restaurants of Chili's and Maggiano's Little Italy. Unlike Buffalo, which does not pay a dividend, Brinker pays a 2.27% dividend yield. Chili's has excelled over the past few years thanks to its "lowest per person average check" claim, which has been influential with cost conscious customers amidst a sluggish economy. Brinker reported last quarter results that were relativley in line with consensus at earnings of $0.50 per share, but the company has robust plans for the future, hoping to double its earnings by 2015. Expansion beyond U.S. should be a key part of this, as the domestic restaurant market is somewhat saturated, Brinker has already established a strong presence in Mexico and the Middle East and hopes to open 420 more Chili's restaurants globally by 2015.

Texas Roadhouse Inc. (TXRH), like the other major restaurant operators, pays a modest dividend, yielding 2.48%. Texas Roadhouse is centered around a single chain, but it is growing. The company posted sales for the first two months of 2013 that showed sales up 2.2% year over year. On future guidance, the company expects to see positive comp sales for 2012 and open around 28 restaurants, but food inflation is expected to be upwards of 7% for the year, possibly squeezing margins. I don't necessarily like this company given it is solely dependent on its single steakhouse full-service restaurant.

Darden Restaurants Inc. (DRI) pays the highest dividend yield among the five restaurant stocks listed, one that yields 4.2%. The company owns and operates the major chains of Red Lobster, Olive Garden and Longhorn Steakhouse. Despite its diversified restaurant portfolio, Darden has seen some of the more robust pressure due to the economic slowdown. Darden reported last quarter results that showed under performance at in same store sales at all three top brands and earnings down 37% year over year. The company also trimmed its 2013 guidance, with sales growth for fiscal 2013 expected to be around 8.5%, versus prior expectations of 10.0%. This is the second guidance cut for Darden in the last six months. The restaurant has set 2013 comp sales growth at 1% to 2%, which is below its long-term guidance range.

The Cheesecake Factory Inc. (CAKE) pays a dividend yielding 1.35%. The restaurant has entered into an agreement to expand to the Middle East, but its previous international expansion plans have come up short, with the company having only opened two units outside of the U.S. so far. However, a number of other restaurants have already expanded beyond the U.S., giving them a competitive advantage. The other headwind for Cheesecake is the seasonality of its business, where 90% of its restaurants are located near shopping centers and malls, making it heavily dependent on shopper traffic. As well, around 20% of the total dining capacity at the restaurants is patio seating, which is vulnerable to severe weather conditions.

Let's look at some numbers

Buffalo does trade at the high end of the industry, with a P/E ratio of 28 times. However, the case can be made that Buffalo deserves this premium valuation:

Price to Earnings

  • Buffalo Wild Wings 28
  • Brinker 17
  • Texas Roadhouse 19
  • Darden 14
  • The Cheesecake Factory 20


Part of that warranted valuation is driven by the company's better than industry profitability and balance sheet. Meanwhile, the company's long-term growth rate is rather robust:

Five-Year Expected EPS Growth Rate

  • Buffalo Wild Wings 19%
  • Brinker 14%
  • Texas Roadhouse 14%
  • Darden 7%
  • The Cheesecake Factory 15%


The balance sheet is robust given the company has no debt.

Debt Ratio

  • Buffalo Wild Wings 0%
  • Brinker 47%
  • Texas Roadhouse 7%
  • Darden 43%
  • The Cheesecake Factory 47%


And its profitability is industry tops:

EBITDA Margin

  • Buffalo Wild Wings 14.4%
  • Brinker 13.4%
  • Texas Roadhouse 12.9%
  • Darden 13.5%
  • The Cheesecake Factory 12.3%


Buffalo appears to have impressive growth prospects and might be worth considering, especially considering food is a fundamental necessity, and as the economy shows signs of strengthening the number of people "eating out" should rise. Also, billionaire investor Steve Cohen of SAC Capital and "tiger cub" Patrick McCormack of Tiger Consumer Management agree with Griffin, as they are also Buffalo's top hedge fund owners.



Be sure to check out our detailed stock analysis (click here).

About the author:

mdhargrave
Investment adviser and startup striver.

Visit mdhargrave's Website


Rating: 2.8/5 (4 votes)

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