Valuentum Exclusive Analysis for the Discerning Investor

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Best idea Buffalo Wild Wings (click ticker for report: BWLD) reported second quarter results Tuesday afternoon. Revenue was in-line with the Street’s expectations, growing 29.7% to $238.7 million. Earnings growth was not nearly as strong, growing 6.9% to $0.62 per share (shy of expectations). Net income growth was a little stronger, increasing 9.3% to $11.7 million. Though results were slightly disappointing, our fair value estimate remains unchanged.

Buffalo Wild Wings continues to post strong same-store sales expansion, with company-owned same-store sales growing 5.3% and franchise-owned same-store sales growing 5.5% during the period. Still, profitability languished as a result of higher chicken wing costs. Unfortunately for the firm, due to a nationwide draught, corn prices continue to climb, meaning chicken wing cost pressures likely won’t moderate this year. Last year’s chicken wing prices were also at their lowest since 2003, so the company will continue to face tough earnings comparisons.

Nevertheless, the firm still generated over $24 million in operating cash flow during the second quarter and has generated nearly $10 million in free cash flow year-to-date. CEO Sally Smith also stated that the firm intends to open 70 new company-owned and franchise-owned restaurants during the remainder of 2012. The firm also plans to purchase 9 franchise-owned restaurants in the third quarter of 2012. Buffalo Wild Wings has an agreement to open 22 new restaurants across 6 countries in the Middle East over the next several years, though we’re not sure how well the wings-and-beer concept will perform overseas.

Though the firm doesn’t provide much in the form of revenue guidance, it did suggest it can grow earnings 15-20% for 2012. Buffalo Wild Wings has some great catalysts during the remainder of the year, including the Olympics during the third quarter, which could help drive incremental traffic growth during a traditionally slow period. The NFL season should also continue to drive growth in the fourth quarter, as we do not expect the league’s popularity to suffer at all. If anything, exciting new players like Andrew Luck and Robert Griffin III, coupled with the return of Peyton Manning, should drive more interest in the league. Prohibitively high ticket prices could make going to Buffalo Wild Wings a relatively more attractive option.

Though the shares have dropped following its earnings report, the firm still is trading within our fair value range at current levels. If shares fall below the lower end of our fair value range, which is $62-$104, we might look to add to our position in the portfolio of our market-beating Best Ideas Newsletter (but only on improving technicals at that time).