Tuesday, November 4, 2008

Focus Stock: Time to Order Buffalo Wild Wings?

Focus Stock: Time to Order Buffalo Wild Wings?

Buffalo Wild Wings (BWLD; recent stock price, $28), the growth-minded operator and franchiser of Buffalo Wild Wings restaurants, has excellent long-term growth prospects, in our view. We think the company may gain market share from less efficient or less conservatively financed competitors during a recessionary economic environment, as it will likely continue its aggressive expansion plans. Furthermore, growth is likely to continue to be financed with cash from operations, and we expect Buffalo Wild Wings to remain debt free under current expansion plans.

Our 5 STARS (strong buy) recommendation was prompted by the recent sell-off in the shares following third-quarter earnings that were below our expectations. However, the shortfall in earning per share relative to anticipated profits had very little to do with poor operating performance, by our analysis. In fact, much of the difference was due to higher management bonuses and stock compensation expenses as a result of what we view as relatively exceptional performance; same-store sales at company-operated restaurants rose 6.8% in the third quarter, and average weekly sales increased 10.1%. As our long-term outlook for the company remains intact, we view the recent sell-off as a particularly compelling buying opportunity.


Minneapolis-based Buffalo Wild Wings owns and operates, as well as franchises, a chain of restaurants serving a menu comprised of its Buffalo-style chicken wings and a variety of signature sauces, along with an array of alternative menu items. The Buffalo Wild Wings restaurant concept is that of a neighborhood restaurant and bar, with the feel and atmosphere of a sports bar. Locations also offer counter and takeout service options similar to those found in a typical quick casual restaurant.

From the first restaurant opened in 1982 in Columbus, Ohio, and subsequent to the company's initial public offering in 2003, the restaurant chain has grown to about 550 locations. Slightly more than half of its restaurants are located in six Midwestern states of Ohio, Michigan, Indiana, Illinois, Wisconsin, and Minnesota, along with Texas. As of mid-2008, we would characterize the company's presence geographically as under-penetrated in the Pacific and Mountain regions, as well as in New England.

We view the Buffalo Wild Wings concept as a hybrid casual dining/quick casual concept, with an added sports bar emphasis. Standard & Poor's estimates that sales of commercial eating and drinking places in the U.S. will increase 2.3% in 2008 and 1.2% in 2009.

According to the latest information available from the company, wings account for 23% of average restaurant sales, boneless chicken items such as chicken sandwiches and tenders 14%, alcohol 28%, and all other food and beverage items 35%. Bar offerings include approximately 20 domestic and foreign beers, as well as wine and liquor. Kitchen operations have been designed in an assembly line style and can be staffed typically with unskilled hourly workers who, according to the company, require only basic training before reaching full productivity.

Of the company's 535 locations as of September 2008, 187, or 35%, were company-operated. The land and buildings are leased for nearly all these locations. Most of the restaurants range in size from 4,500 square feet to 6,500 square feet. Average cash investment in 2007 was $1.4 million, exclusive of $180,000 of pre-opening costs, on average. Restaurants are typically located near retail centers and other high traffic destinations, such as big box retailers and multiplex theaters.

The remaining 348 locations were franchised. Franchisees may initially enter into a franchise agreement or an area development agreement. Initial franchise fees for the first location are $42,500 but then may vary from $12,500 to $32,500 per location depending on a variety of factors, including proximity of new restaurants to the franchisee's existing locations.

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