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Buffalo Wild Wings: A Stock to Watch

March 12, 2014 | About:

Many restaurant companies have been on the watch lately as the industry portrays new fast-casual restaurants such as Chipotle Mexican Grill (CMG) or Panera Bread (PNRA) as well as an intensified competition among top classic restaurateurs. In this landscape, Buffalo Wild Wings (BWLD) stands alone as one public company which owns, operates and franchises a sports-bar chain, featuring sports, wings and beer.

This company, founded in 1982, operates and franchises more than 930 casual dining restaurants across the U.S. and Canada. One of the main attractions of Buffalo Wild Wing’s restaurants is its combination of a broad menu which includes chicken wings, hamburgers, sandwiches and salads, and a late diner system, opening until 2 a.m., perfect for a team gathering.

As far as its figures are concerned, Buffalo posted mixed fourth-quarter results, as many companies in the industry have been showing, with higher earrings, up 23.6%, but a below-estimated top-line and revenues. Comps though did show a rise of 5.2% year over year due to adjustments on menu prices. Buffalo Wild Wings is increasing its media exposure and developing new marketing strategies such as a smaller restaurant prototype. Buffalo seems to be playing its game well, as recent unit expansion and registered comps growth resulted on higher sales, reaching $319.8 million on last quarter 2013.

A Different Experience

Considered to be one of the most familiar casual dining restaurant chains in the U.S, Buffalo offers a "dine and watch the game experience," with 40 television sets per outlet. But not only sports fans love Buffalo; also families that like to dine while their children watch TV or play games represent an important part of guest traffic. Buffalo’s restaurants are designed to cater to large groups of people, allowing its customers to view different sporting events in wide-open seating arrangements. Management also enhances consumer’s experience through fantasy football draft parties, and playing challenges such as the Bick Kick Challenge, a contest in which the firm sent six winners to the Buffalo Wild Wings Bowl in Arizona. Recently partnering with the National Collegiate Athletic Association (NCAA) to become the “Official Hangout of March Madness,” the company managed to capitalize the basketball season, featuring online competitions to win prizes and growing beyond football seasons.

Buffalo Wild Winds recently announced the introduction of next-generation tabletop technology, installing tables in all its restaurants to provide exclusive social gaming opportunities for each customer. Ones the 7-inch Samsung Galaxy slates powered by NTN Buzztime Inc. (NTN)’s BEOND are on the game – expected to be in all U.S. locations by end 2015 - customers will be able to order food and drinks, play games, pay the bill and more.

All of these initiatives are accompanied by an advertising strategy destined to robust the company’s brand, as well as new point-of-sales programs, improved supply chain management, and a boosted loyalty program.

The Buffalo’s Model

Despite the macroeconomic difficulties, Buffalo Wild Wing has succeeded in posting higher earnings for the past years, especially due to its increased efficiency and cost saving efforts. Regarding its operational system, the company has a franchising strategy, which always facilitates EPS growth as well as ROE expansion, and reduces capital requirements. As a result of its business franchise model, the firm sees more free cash flow which allows it to reinvest in intangible assets, marketing campaign, and increase brand recognition. The company is yet smaller than peers like Chipotle (CMG) or Panera Bread (PNRA), with a market cap of $2.7 billion, but its growth prospect is promising. In January, Buffalo Wild Wings opened its 1,000th store.

The menu innovation is always something restaurants need to look after, as their competitive advantages rely on their capacity of creating new attractive options to lure customers. Buffalo has indeed kept its position as one of the top menu-innovators, with better food presentation and operational efficiency compared to peers. Among its new items there’s the Garden Crasher platter, the Cheese Curds, and of course the company’s recently released new premium craft beer Game Changer Ale which is gaining popularity among consumers as well as leading a list of new beverages to be developed. Moreover, the traditional menu serving saw a change during 2013, as the traditional serving of boneless wings by unit changed and they started to be sold by weight, helping the company to serve a consistent portion to its customers while stabilizing earnings.

Expansion is also in the company’s plans for the near future, and despite the uncertain economy surrounding this industry, the company has managed to sustain a growth momentum and new units are presenting positive comps. Buffalo plans to achieve the 1,700- unit milestone within the next 10 years in domestic market. The international scenario is also being regarded by the firm as a possible future expansion plan, especially in Canada and Mexico. Nevertheless, the company is focusing on new development deals with franchises in US mostly. A recent association with PizzaRev, a fast-casual pizza restaurant, famous for its Craft Your Own initiative, shown the company’s interest in investing in fast-growing smaller restaurant chains and broaden the influence Buffalo Wild Wings has in the QSR industry across the U.S.

Bottom Line

Buffalo Wild Wings is indeed a small company in comparison to industry peers, but still there are good reasons to believe this firm is likely to sustain its growth momentum. It has had quite some outstanding success approaching sports fanatics, and its new partnership with NCAA is expected to increase traffic in the near term. The captive market of sports fanatics is the company’s niche, and as long as sports remain popular their customers are likely to keep entering Buffalo’s.

There are no doubt the restaurant industry pushes companies to expand their margins and compete with peers for consumer’s tightened discretionary spending. Buffalo Wild Wings’ business might be vulnerable, as many others, to these macroeconomic headwinds. However, the brands recognition and the captive sports-fan market might keep the company safe from these threats. Indeed the firm is yet to expand internationally, but this needn’t be regarded as something bad but as a growing opportunity still to be explored. Analysts tend to coincide on a bullish perspective for this stock, as the Buffalo Wild Wings customers keep choosing the company and its performance continues to deliver higher than expected results.

Disclosure: Damian Illia holds no position in any stocks mentioned.

About the author:

Damian Illia
A fundamental analyst at Lonetreeanalytics.com constantly looking for value and income investments.

Visit Damian Illia's Website


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