Buffalo Wild Wings Inc.'s (BWLD, Financial) downturn started after reaching its all-time high in September 2015. Since then, the stock price has continued moving downward at a strong rate and is down over 45% from its all-time high.
Shares of the restaurant and sports bar franchise dropped 11% on July 27, the day after it reported disappointing second-quarter results. For the second quarter, the company logged earnings per share of 66 cents, missing the analysts' estimates by a wide margin of 39 cents. Revenue came in at almost $500 million, again missing the consensus by $13.29 million.
Despite the miss, revenue grew 2% year over year. Over the past 12 quarters, the company has managed to report positive revenue growth, but it has slowed considerably. In the most recent quarter, same-store sales plunged 1.2% for company-owned restaurants and 2.1% for franchised stores.
The company’s disappointing performance was driven by increased wing prices, negative same-store sales and a mix product shift toward its value offerings. Traffic during the quarter, however, outperformed the casual dining industry by 200 basis points due to the continued execution of its sales initiative.
In addition, Buffalo Wild Wings’ profit margins continue to fall at a considerable pace. Historically high wing costs sank restaurant level margins by 140 basis points.
The company is acting in accordance with an activist’s plan to shift toward a more franchise-centered model to enhance margins and decrease risk. In the first half of this year, the restaurant chain added five new company-owned locations owned and nine new franchised restaurants.
Furthermore, its R Taco concept extended from 15 stores to 22 during the same period, comprising six new franchised restaurants. On the other hand, the PizzaRev brand shut both of its company-owned test locations. In all, the company ended the quarter with a total restaurant count of 1,259, consisting of 626 company-owned locations, 611 franchised locations and 22 R Taco locations.
Apart from this, the company also announced last month it will be selling 83 company-owned restaurants to franchisees this year.
Since the trend in consumers dining at home continues growing with each passing quarter, the company expanded third-party delivery service to 230 company-owned locations, up from 180 locations in the prior quarter. Takeout and delivery orders covered nearly 18% of overall company-owned restaurant revenue, up from 15.7% a year ago.
The company’s management also detailed it will add a delivery ordering option to its mobile app later this year, allowing consumers to order directly from its app while decreasing the commissions it pays to third-party delivery services.
Most significantly, the company produced operating cash flow of nearly $50 million, representing a year-over-year decline of 30%. Free cash flow came in at $32.5 million, down approximately 9% year over year.
Summing up
Buffalo Wild Wings continues to disappoint shareholders, and it is not likely it will find its way into the green anytime soon. In 2016, chicken wing prices were surprisingly mild, but wings are unusually high in demand now. Prices are likely to remain at or near record highs in the forthcoming quarters, which is bad news for the company going forward.
The company is taking several steps to improve its financial condition, but it cannot be certain these moves will reap fruitful results in the upcoming quarters. It is generally a bad idea to continue growing the store count while both profit margins and traffic are plunging.
Although Buffalo Wild Wings’ stock price is down nearly 30% year to date, I would recommend investors watch the stock from the sidelines until conditions improve.
Disclosure: No position in the stocks mentioned in this article.
