Buffalo Wild Wings: Was the Reaction Right?

Buffalo Wild Wings lost more than 10% of its value after reporting earnings, but should it have traded higher?

Feb 10, 2014 at 8:15AM

Shares of Buffalo Wild Wings (NASDAQ:BWLD) soared after the company initially reported earnings last week, only to fall by double digits in the session that followed its after-hours announcement. Given the fundamental falloff from companies like Darden Restaurants (NYSE:DRI), and the rarity of growth from peers like Chuy's Holdings (NASDAQ:CHUY), is Buffalo Wild Wings now a buy?

One sector but three segments
Before going further, there is one fundamental fact to understand: The restaurant sector is no longer one entity.

Today, restaurants are separated into three segments. There's fast-casual, which consists of fast-growing companies like Chipotle, Panera Bread, and Potbelly. Then there's fast-food such as McDonald's and Yum!, which are obviously challenged. Finally, there are sit-down restaurants like Darden and Buffalo Wild Wings, also a much-challenged space.

Yet despite this challenging environment and the consumers gravitating to restaurants that provide the quality of dine-in with the speed of fast food, Buffalo Wild Wings has proven itself to be one of the last remaining true growth companies in its space.

Take Darden, for instance: This is a company that's constantly on the brink of a breakup. Darden has industry-low margins due to an excessive cost structure; it has $5 billion in liabilities and is undergoing numerous changes. Most notably, after years of discussion and speculation, Darden is going to rid itself of Red Lobster via a spinoff or sale. Then, the rest of the company remains in question, as many believe its property holdings will be rolled into a REIT.

Still, the driver behind this decision is same-store sales that are falling off a cliff, and while Darden may be an extreme case, lower traffic and falling sales have been largely a consistent throughout this dine-in space.

The dine-in exception
Buffalo Wild Wings is bucking the trend of dine-in restaurants, and this was seen in its fourth-quarter earnings report.

The company reported revenue growth of 12.4%, which includes same-store sales growth of 5.2%. The company's cost of sales also declined 40 basis points, another fundamental metric that's bucking the trend of the overall segment.

With that said, Buffalo Wild Wings also spoke of plans to expand internationally and to implement new store concepts, which could drive growth further.

Essentially, Buffalo Wild Wings is an exception in this challenging environment.

But what about Chuy's?
Of course, there are a few other companies like Buffalo Wild Wings that continue to grow, such as Chuy's.

Yet, there are still facts that make Buffalo Wild Wings more impressive. For one, Chuy's has top-line growth of 19%, but its same-store sales gain is just 3.1%. Chuy's is a smaller company with just $200 million in total revenue -- Buffalo Wild Wings is six times larger -- therefore it has managed to grow by simply expanding stores combined with a very conservative same-store sales performance.

Buffalo Wild Wings, on the other hand, is large and well established but is growing its existing stores at a faster rate than Chuy's, which is very impressive.

Essentially, as a company grows larger, existing store growth becomes harder. Yet Buffalo Wild Wings, with its "wings, beer, and sports" approach, has found a niche market and a loyal customer base. Chuy's, on the other hand, is just another Tex-Mex restaurant, hoping to perform like Chipotle, but it is not.

Why the fall?
So the million-dollar question might be why Buffalo Wild Wings fell by double digits after its earnings. Clearly, the company had a strong report, and it was trading higher in after-hours. What happened?

Honestly, it's hard to explain. The company might face higher expenses with labor and chicken wings, but not in the immediate future, and if you look at the fourth quarter, both areas worked very well in the company's favor.

As a result, the stock loss might be value-related, as Buffalo Wild Wings has soared more than 450% in the last five years. Thus, investors might be taking profits.

While this is likely, investors should note that at 34 times earnings, Buffalo Wild Wings is not as expensive as companies like Chuy's, which trades at 51 times earnings. Therefore, Buffalo Wild Wings might continue to fall, but if you look at the fundamentals, it appears that the stock's initial post-earning gains were the correct reaction.

Thus, it would seem that if such growth continues, and expenses are held in check, Buffalo Wild Wings' loss should prove to be an excellent buying opportunity long-term.

Whet your appetite for earnings: Start investing today
Millions of Americans have waited on the sidelines since the market meltdown in 2008 and 2009, too scared to invest and put their money at further risk. Yet those who've stayed out of the market have missed out on huge gains and put their financial futures in jeopardy. In our brand-new special report, "Your Essential Guide to Start Investing Today," The Motley Fool's personal finance experts show you why investing is so important and what you need to do to get started. Click here to get your copy today -- it's absolutely free.

Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends and owns shares of 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information