The Super Bowl is fading in the memories of all (except, perhaps, Gisele Bundchen). Passing into history with it is the day that Americans purportedly eat more chicken wings than any other.
So perhaps it's all downhill from here this year for Buffalo Wild Wings Inc. , a chain of 800-plus restaurants that specializes in that particular foodstuff. Adding to the concern is record-high wholesale prices for chicken wings, obviously a key menu item.
You would be wise, however, to be chicken about betting against the company. It crushed sales expectations in its recent fourth-quarter earnings announcement and said revenue has been accelerating even more so far in 2012. Although it has a large footprint, it has even more room to grow.
And despite a 20-per-cent jump in the share price to new 52-week highs, the stock still trades at a forward price-to-earnings multiple of 26 – not cheap, but an eminently reasonable valuation for a restaurant chain with industry-leading metrics and no sign of slowing down.
How hot is Buffalo Wild Wings? Its fourth-quarter earnings per share jumped almost 33 per cent, beating expectations. Total revenue gained even more. Its same-store sales – revenue from restaurants open at least one year – gained 8.9 per cent. So far in 2012, its same-store sales increase is a whopping 12.9 per cent.
The company has 827 company-owned and franchised locations in the U.S. and Canada, with plans to grow to 1,500 over the next five to seven years. Sound aggressive? Consider: The company has more than 300 restaurants in just five states: Texas and slow-growing Illinois, Indiana, Michigan and Ohio. There are just four in Canada (with a London, Ont., location coming next week and hopes for more in the Greater Toronto Area and in Calgary in coming months).
The popularity of chicken wings, one assumes, is not restricted to U.S. Midwesterners. But to be fair, the menu at Buffalo Wild Wings is a bit broader, with sandwiches, burgers, appetizers, and, importantly, beer. (Little of the menu qualifies as low-fat fare, with most entrée topping 30 grams of fat; there is even a salad with 60 grams of fat. "It's a restaurant where the healthiest thing on the menu is beer," a friend joked to me.)
Instead of thinking of the chain as a wing restaurant, think instead of it as one of North America's largest and fastest-growing sports bars. (The company is eagerly anticipating next month's NCAA basketball tournament.)
Chief executive officer Sally Smith told Jim Cramer of U.S. business channel CNBC (a long-time advocate of the company) that traditional bone-in wings make up just 20 per cent of the chain's revenues, down from 40 per cent a few years ago – an argument in favour of the chain managing its costs.
Wholesale wing prices were actually down, year over year, in the fourth quarter; it was the cost of other parts of the menu that prompted a rise in cost of sales to 29.4 per cent of revenue, up from 28.8 per cent in the prior year.
But by a small reduction in operating expenses, plus shaving 0.6 percentage points from its occupancy costs, in part from a shift to larger, more efficient locations, the company maintained its restaurant-level operating margin.
"We have a lot of different levers we can pull when wing prices are high," Ms. Smith told Mr. Cramer. "Managing wing costs is part of managing our business."
They will need that skill now. Analysts Brad Ludington and John Dravenstott of KeyBanc Capital Markets, who have a "hold" rating on the shares because of their wing concerns, note that company management acknowledged that wing costs averaged $1.89 (U.S.) a pound in the first two months of 2012, a 55-per-cent increase from the full first-quarter 2011 price of $1.22 a pound.
If the trend persists, the KeyBanc analysts say, Buffalo Wild Wings management will consider price increases in the second half of the year. For now, the KeyBanc analysts are forecasting earnings per share of $3.24 for 2012 – close to the consensus view of all the analysts following the company, a number of whom have now raised their target price to $100, roughly 17 per cent above current levels.
That earnings expectation translates to a 26 P/E, which puts Buffalo Wild Wings in the middle of the pack of a group of nearly two dozen high-growth North American restaurant chains. With the company projecting 20-per-cent EPS gains in 2012, with the prospect of more to come, Buffalo Wild Wings critics risk eating more crow.
Special to The Globe and Mail
David Milstead