The past 10 years of growth have been kind to Buffalo Wild Wings (BWLD). Sales, earnings, free cash flow, and book value have all grown at over 20% annually. Even over a 5-year or 1-year period, growth is impressive.
The growth in share price has been equally as impressive. After doubling multiple times, shares currently trade near all-time highs. Has all the money already been made in BWLD shares, or has the recent pullback (down 15% in two months) provided a rare buying opportunity?
The Business
Buffalo Wild Wings operates 1,086 restaurants across the United States, Canada, Mexico, and Philippines. Approximately 588 are franchised and 498 are company-owned. Over the past five years, the store count has grown at an average 11% CAGR, with revenues growing at an impressive 23% CAGR.
Sales are heavily weighted towards the dinner hours, with almost half of all sales coming from chicken wings.
Company same-store-sales (one of the most important retail metrics) have consistently outpaced its peer average at both company-owned and franchised locations.
Growth Opportunities
Buffalo Wild Wings already has plans for opening a total 1,700 stores, a roughly 50% increase from current levels. Integral to this growth plan is new store openings in foreign countries, where the company believes it has significant franchising opportunities.
The company has also experimented with new store concepts including PizzaRev (a make-your-own pizza experience) and the Rusty Taco. Management has said these concepts are performing well and could provide the next leg of store unit growth.
Quarterly Results Have Investors Concerned With Margins
In the first quarter, Buffalo Wild Wings reported a 19.8% increase in sales. Both new store and existing stores sales were quite strong. Same-store-sales at company-owned restaurants were up 7% while franchised restaurants grew by 6%.
While sales were up nearly 20% however, earnings were only up 2.6%. Operating margins were down by 170 basis points to 9.9%. Labor costs rose by 100 basis points to 29.6% of total sales. Cost of sales meanwhile rose by 200 basis points points to 28.5% sales, driven by a 40% increase in chicken wing prices following strong demand. Wing prices for the company were $1.92/lb versus $1.36/lb a year ago.
However, there is reason to believe that margins will return. Management reaffirmed its EPS growth guidance for the year of 18%. One could argue that management had already accounted for the impact of chicken prices given their previous estimates typically targeted around 24% growth.
Additionally, BWLD struggled to manage its labor costs as they staffed all locations with Guest Experience Captains. If this proves to improve sales enough to warrant the cost, the company can reasonably expect to keep it. If it is still a cost drag, it wouldn’t be too difficult to scale back down to historical levels.
Guru Ownership
While many Gurus are last reported to have trimmed their positions, don’t be surprised to see many refill their portfolios following the dip. Most of the recent sales last quarter were at 10%+ higher prices. So while the current statistics show Guru’s selling, it’s likely that things will change once the next round of trade filings are in.
Valuation
Despite current margin headwinds, Wall Street has still kept most of its long-term growth estimates intact. EPS estimates for this year are $5.83 with a 5-year expected growth rate of 19.56% (slightly below the company’s historical average).
Using GuruFocus’ Reverse DCF Tool, we can estimate how much EPS growth is currently priced into shares. At current levels, only ~13% of annual EPS growth is priced in. This is significantly below Wall Street estimates, management targets, and the company’s long-term historical averages.
Also, despite trading at a premium EV/EBITDA for most of the past five years, this premium has eroded over the past few months. Buffalo Wild Wings now trades almost in-line with slower growing rivals such as The Cheesecake Factory (CAKE) and Brinker International (EAT).
Conclusion
While margin pressures are a primary factory to the current weak share price, these headwinds look temporary, or at least fixable. Now trading at a valuation not seen for some time, investors would be wise to consider BWLD for their portfolio.
For more ideas like this one, check out GuruFocus’ Predictable Companies List or the rest of R. Vanzo’s Articles.
