Here's Why Buffalo Wild Wings Is Earning So Much for You

Margins matter. The more Buffalo Wild Wings (Nasdaq: BWLD  ) keeps of each buck it earns in revenue, the more money it has to invest in growth, fund new strategic plans, or (gasp!) distribute to shareholders. Healthy margins often separate pretenders from the best stocks in the market. That's why we check up on margins at least once a quarter in this series. I'm looking for the absolute numbers, so I can compare them to current and potential competitors, and any trend that may tell me how strong Buffalo Wild Wings' competitive position could be.

Here's the current margin snapshot for Buffalo Wild Wings over the trailing 12 months: Gross margin is 27.0%, while operating margin is 9.5% and net margin is 6.4%.

Unfortunately, a look at the most recent numbers doesn't tell us much about where Buffalo Wild Wings has been, or where it's going. A company with rising gross and operating margins often fuels its growth by increasing demand for its products. If it sells more units while keeping costs in check, its profitability increases. Conversely, a company with gross margins that inch downward over time is often losing out to competition, and possibly engaging in a race to the bottom on prices. If it can't make up for this problem by cutting costs -- and most companies can't -- then both the business and its shares face a decidedly bleak outlook.

Of course, over the short term, the kind of economic shocks we recently experienced can drastically affect a company's profitability. That's why I like to look at five fiscal years' worth of margins, along with the results for the trailing 12 months, the last fiscal year, and last fiscal quarter (LFQ). You can't always reach a hard conclusion about your company's health, but you can better understand what to expect, and what to watch.

Here's the margin picture for Buffalo Wild Wings over the past few years.

Source: S&P Capital IQ. Dollar amounts in millions. FY = fiscal year. TTM = trailing 12 months.

Because of seasonality in some businesses, the numbers for the last period on the right -- the TTM figures -- aren't always comparable to the FY results preceding them. To compare quarterly margins to their prior-year levels, consult this chart.

Source: S&P Capital IQ. Dollar amounts in millions. FQ = fiscal quarter.

Here's how the stats break down:

  • Over the past five years, gross margin peaked at 27.0% and averaged 25.9%. Operating margin peaked at 9.5% and averaged 8.9%. Net margin peaked at 6.4% and averaged 6.0%.
  • TTM gross margin is 27.0%, 110 basis points better than the five-year average. TTM operating margin is 9.5%, 60 basis points better than the five-year average. TTM net margin is 6.4%, 40 basis points better than the five-year average.

With TTM operating and net margins at a five-year high, Buffalo Wild Wings looks like it's doing great.

Over the decades, small-cap stocks like Buffalo Wild Wings have provided market-beating returns, provided they're value-priced and have solid businesses. Read about a pair of companies with a lock on their markets in "Too Small to Fail: Two Small Caps the Government Won't Let Go Broke." Click here for instant access to this free report.

Seth Jayson had no position in any company mentioned here at the time of publication. You can view his stock holdings here. He is co-advisor of Motley Fool Hidden Gems, which provides new small-cap ideas every month, backed by a real-money portfolio. The Motley Fool owns shares of Buffalo Wild Wings. Motley Fool newsletter services have recommended buying shares of Buffalo Wild Wings. Motley Fool newsletter services have also recommended writing covered calls in Buffalo Wild Wings. 

Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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  • Report this Comment On February 29, 2012, at 8:48 AM, pondee619 wrote:

    Please reconcile this article with "Why Buffalo Wild Wings' Earnings May Not Be So Hot

    By Seth Jayson February 21, 2012" Does the recent high in net and operating margins negate your concerns about BWLD's low free cash flow?

    Might BWLD's earnings not be so hot or is BWLD earning us SO much?

    According to Rex @ "Buffalo Wild Wings' Spicy Growth By Rex MooreFebruary 24, 2012": "You can never base an entire investment thesis on one or two metrics". Yet all we get from your articles is one metric.

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3/27/2015 2:54 PM
BWLD $182.01 Up +0.70 +0.39%
Buffalo Wild Wings CAPS Rating: ****