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Buffalo Wild Wings: A Good Pick In The Restaurant Industry

May 25, 2014 | About:
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kcpl

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The restaurant industry in the U.S. was badly hit in 2013 with the bad weather in December and a shorter holiday season further declining the already bad condition. The consumers were very selective with respect to spending due to a cash crunch on account of the sluggish economy so all doesn’t look rosy for the industry. The annual same-store traffic was a negative 2.1% in 2013 as compared to 1% growth reported in 2012 as per the expectations according to a Black Box International report.

However, there are a few restaurants who have managed to brave the headwinds and have come out as winners. Some of these are Buffalo Wild Wings (BWLD), Sonic (SONC), and Domino's Pizza (DPZ) -- which have bucked the industry trend.

Buffalo Wild Wings’ solid growth

The simple business model of Buffalo Wild Wings comprises of tasty food, wide selection of beers, and widely available TVs to watch sports that has worked well over the years. This company earned quite well and carried over the second-quarter momentum into the recent quarter. Buffalo Wild Wings augmented the number of company-owned restaurants by 21% compared to the quarter last year, and same-store sales increased 4.8% at company-owned restaurants and 3.9% at franchised locations. This resulted in 27.9% increase in revenue versus the same quarter a year ago.

The strong top-line growth and earnings per share came in at $0.95 on account of a lower cost per pound for traditional chicken wings as compared to last year. This led to an awesome 66.9% growth versus the comparable quarter last year. The growth in comps was fueled by partnering with Yahoo! Sports and hosting Fantasy Football National Draft Day Parties.

According to Buffalo, there’s potential for about 1,700 restaurants in the U.S. and Canada. Going forward, this presents a good growth opportunity from its current count of less than 1,000 restaurants. Moreover, it is also diversifying by entering into partnership with PizzaRev for pizza, and plans to open the first company-owned PizzaRev in the Minneapolis area in early 2014. In addition, it also plans to open 45 company-owned and 40 franchised restaurants in the U.S. and Canada, and internationally, it expects 10 franchised locations in the entire year.

Sonic and Domino’s: Doing well

For the past one year, Buffalo Wild Wings is clearly outperforming peers on the Street, but all three have had a good run, outperforming the S&P index by a good margin.

Sonic reported system-wide comps gain of 2.2% in its first quarter. Healthy comps gain at both company-owned and franchised restaurants indicate that the company’s strategies are working brilliantly. Looking ahead, around 15% growth in EPS is targeted by Sonic throughout fiscal 2014. The new stores and higher traffic are expected to be the main growth drivers for the company. The installation of new point-of-sale and point-of-purchase systems by Sonic is expected to drive sale upwards and also drive up margins .

Sonic has a network of more than 3,500 stores around the country, and yet it has very low visibility in California. Sonic aims of signing a new franchise agreement with one of its existing partners that will bring 10 new stores to California over the next seven years, with the first two to open by August 2015. This is only as small part of an overall effort to hit 300 stores in the state by 2020, and going forward is a long-term growth driver.

The domestic comps of Domino’s Pizza gained 5.4%, with company-owned units and franchises rising 4.6% and 5.5%, respectively. This can be considered an achievement considering the fact that the industry as a whole witnessed a weak 2013. Domino’s reported a 6.9% year-over-year increase in revenue to $404.1 million on the back of strong comps.

Domino’s has the robust international presence with a store count of 5,627 stores versus 4,939 stores domestically. This diversification strategy insulates it from the weaknesses arising out of regional economic headwinds. Further, Domino’s has been a pioneer in the restaurant industry for online ordering, including mobile. About 35% of orders for Domino’s come in over digital means and is very popular among consumers, allowing it to generate more revenue through online orders.

Takeaway

All three companies have performed decently in weak consumer spending scenario and are targeting further growth going forward. Buffalo Wild Wings is the most impressive of the three due to its robust growth, while Sonic and Domino’s are more stable picks. Hence, investors planning to invest in this industry can bet upon any of these three stocks, and this is why they deserve a closer look.


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