3 Things You Didn't Know About Buffalo Wild Wings

Last week I examined Buffalo Wild Wings (NASDAQ: BWLD  ) earnings, and the 9% stock drop that followed. While Buffalo Wild Wings quarter looked good, with robust comparable sales growth of 5.2% and total revenue growth of 12%, it was the future that left investors worried. If only Buffalo Wild Wings were an "up-start" casual dining chain, such as BJ's Restaurant (NASDAQ: BJRI  ) or Texas Roadhouse (NASDAQ: TXRH  )

With 1,000 locations already, and a price-to-earnings ratio around 35, investors were concerned about a disconnect between growth opportunities and the stock price. Yet, even though the stock has bounced back, I still wouldn't bet against this chain.

Here are 3 things you may not know about Buffalo Wild Wings.

1. Buffalo Wild Wings can grow in ways you may not know about

With chains like BJ's Restaurant (NASDAQ: BJRI  ) and Texas Roadhouse (NASDAQ: TXRH  ) trading at lower P/E multiples, of 29 and 22 respectively, why should we consider Buffalo Wild Wings stock? After all, BJ's only has 146 locations, and Texas Roadhouse only has 410. With 1,000 locations many worry Buffalo Wild Wings is reaching market saturation, and that growth will slacken. 

This is a legitimate concern, but consider the following.

1. Buffalo Wild Wings is expanding outside of the U.S. 

Buffalo Wild Wings is largely based in the U.S. now, and while you may know it entered Canada in 2011, you may not know it's expanding into the Philippines. They're reaching out to the Philippines because of the rabid fan interest in sports, which is what made it a hit in the U.S., could this option work in other Asian cultures that love chicken and sports? 

How far international expansion can go, is a tough question to answer. While the connection with sports would work in many European and Latin American countries, it's unclear how the food would be received. At the very least though, Buffalo Wild Wings will continue to open non-U.S. locations. 

2. Buffalo Wild Wings recently took a minority ownership interest in PizzaRev.

PizzaRev is a fast-casual pizza shop that let's customers "craft their own" delicious wood fired pie's for under $8 a piece. It's a small-chain at the moment, primarily based in California, yet it has twelve new locations slated for this year. Starting this year franchises and locations will span from Minnesota to Utah! If this concept takes off, it certainly could contribute to Buffalo Wild Wings' growth. 

These are two ways that Buffalo Wild Wings can grow beyond its target of 1,700 restaurants in the U.S. and Canada. Yet, with 1,000 current locations, even without other paths of growth, this chain would still expand by 70%. Buffalo Wild Wings is planning on opening 95 locations this years, so simple math tells us there are at least seven more years of expansion ahead. 

2. There's more to growth than new locations

With restaurants, investors tend to be too focused on store count expansion. The fact that Buffalo Wild Wings now has 1,000 locations is really more of a blessing than a curse. Let me explain.

Buffalo Wild Wings has supplanted Hooters and other chains as a go-to place for sports and wings. Its national reach, and the fact that so many people have had a great experience, has created a brand habituation that can't be matched. When you're ready to watch the game, the chances are you'll go with the consistent experience at B-Dubs over a relative unknown. 

Going back to our two previous (lower store count) chains, the chart below shows that Buffalo Wild Wings brings in a better return on capital than either. 

TXRH Return on Invested Capital (TTM) Chart

TXRH Return on Invested Capital (TTM) data by YCharts

For every dollar that is invested in Buffalo Wild Wings, it brings back a nice percentage in earnings. Its same-store sales growth (around 5%), and higher traffic, are due to its national reach (and high store count).

Texas Roadhouse's comps didn't exceed 4%, and BJ's comp's actually declined 2.2% in its most recent quarter. These newcomers may have low store counts, but is that always a good thing? Of these three chains, which do you feel could raise menu prices without experiencing backlash? It's Buffalo Wild Wings. 

There are so many ways to grow sales besides opening new stores. With its scale, and unique experience, Buffalo Wild Wings is well positioned to get more revenue per customer, and to continue growing returns on capital. 

3. Management matters

In 1994 Buffalo Wild Wings was a fledgling chain of 35 wing-slinging sports joints without a real identity. It's safe to say, a lack of "market saturation" was not working for the company! That is when current CEO Sally Smith took over, and she has since given the chain the identity and experience that customers enjoy today. If we can agree that the Buffalo Wild Wings future will be determined by many unknowns--how PizzaRev does, international expansion, etc.--I for one am glad that Smith will be the one steering the ship. 

Foolish final take: a leap of faith worth taking

Here's the bad news. This stock is pricey, its recent results have been partially boosted by lower chicken costs, and market saturation is a legitimate concern. I just feel it's silly to focus solely on the store count. 

After-all, B-Dubs goal of 1,700 stores is just a target, could they not open more? At this point, and at this price, buying shares is taking a leap of faith. A leap of faith that management can innovate, be efficient, and execute on new concepts (like pizza).

Despite all of this, I still trust this management team over most of its peers in the ultra-competitive restaurant industry. It remains on my watch list!

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  • Report this Comment On February 17, 2014, at 10:23 AM, repete66211 wrote:

    One thing I don't have to learn about BWW: It has the WORST ads since Outback Steakhouse. Speaking of over-the-hill franchises that expanded to the point of over-saturation...

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