We are disappointed in the market’s reaction to Buffalo Wild Wings’ (BWLD) third-quarter results, released after the close October 28, if only because we have a very, very small “starter” position in the Best Ideas Newsletter portfolio. We typically ease into newsletter positions over time, unless we’re making a high-conviction call, and while we know we may have disappointed some that took full positions on the news of the addition of B-Dubs, we were “hoping” for an opportunity like this, to accumulate more shares of the company at a lower price. It looks like that lower price will happen, but consistent with the Valuentum Buying Index methodology, we’ll now be waiting for the stock to turn upward and for momentum to shift higher before adding. This could take a while.
It’s hard to call a quarter in which total revenue advanced 22% and same-store sales expanded to the tune of ~4% at company-owned restaurants disappointing, but that’s what we’re going to do in summing up Buffalo Wild Wings’ third-quarter results. The company that prides itself on “wings, beer, and sports” revealed a near-12% decline in net earnings during the period, something we weren’t completely expecting. There were a bevy of reasons for the earnings pressure: “a shift in the sports calendar resulting in one less week of football and fewer pay-per-view events than last year,” cost deleveraging as a result of higher labor expenses, and deal-related expenses tied to the acquisition of more than 40 franchised locations in Texas, New Mexico, and Hawaii.
Management had previously announced the acquisition of franchised locations would dent earnings expansion for the year, but now it looks like incremental expenses and transition costs associated with the transaction will be higher than expected. The team at Buffalo Wild Wings is now “anticipating single-digit net earnings growth for the year,” below the 13% growth it had previously anticipated. Internals at Buffalo Wild Wings remain healthy, however. There were 109 additional Buffalo Wild Wings restaurants at the end of the third quarter of 2015 than the same time last year, average weekly sales for company-owned restaurants increased by more than $2,000, and franchises continue to perform well, though perhaps not as well as the company-owned variety. We’re welcoming the sell-off.
Buffalo Wild Wings expects to open 50 company-owned Buffalo Wild Wings in 2016, and we think the long-term is bright for the restaurant chain. Investors can expect 30 more franchises to open up during the year in the US and another 15 locations in international markets. Buffalo Wild Wings continues to support the nascent concepts of R Taco and PizzaRev and pointed to net earnings expansion of more than 20% in 2016. The market is overreacting, but it may take some time for pure “momentum” investors to be shaken out of shares. We’ll be watching the company closely in the coming months for an opportunistic add.
Related Firms: WING