Why You Should Beware of Buffalo Wild Wings in the Third Quarter



Buffalo Wild Wings (NASDAQ: BWLD  ) had an awesome first quarter and is slated to have an even better second quarter. While investors have every reason to be buzzed over the company's success, a painful hangover may be in store when the third quarter gets released.  That might possibly be the best thing long term Foolish investors can hope for: it will give them an opportunity to pick up cheap shares of this fantastic business. 


Source:  Buffalo Wild Wings

The spicy results
On April 28, Buffalo Wild Wings reported fiscal first-quarter results. Total revenue jumped 20.9% to $367.9 million. Same-store sales popped 6.6% at company-owned restaurants and 5% for franchise-owned restaurants. Net earnings leaped 72.9% to $28.3 million, or $1.49 per diluted share. Contributing to the fantastic gains were "significantly lower" chicken wing prices and Buffalo Wild Wings' shift in strategy to selling wings by the portion.

According to Sally Smith, president and CEO of Buffalo Wild Wings, the second quarter began nearly as strong. Same-store sales rose  5.7% at company-owned locations and 4.4% at franchised locations. Excluding the slowly effects of the timing of the Easter holiday, same-store sales rose 6.6% and 5.3% for the company-owned and franchised locations respectively. . 

Smith is calling for 25% net earnings growth for 2014. Long term Buffalo Wild Wings targets having 3,000 restaurants worldwide, or roughly triple the current size of the chain. Four hundred restaurants are targeted internationally, which means most of the expansion is expected to take place domestically. Buffalo Wild Wings only this past quarter made it into all 50 states by opening a location in Rhode Island, so it would seem that there is plenty of room to grow.


Source:  Buffalo Wild Wings

Growth by the cup
The second quarter may contain a large surprise sales lift. According to Smith, there is an opportunity to drive traffic once every four years for the World Cup. Smith stated:  

We will promote Buffalo Wild Wings as the place to watch the 2014 FIFA World Cup tournament through increased advertising spend, and we partnered with Budweiser and Heineken to create two unique games centered on the World Cup.

Buffalo Wild Wings has the added bonus this year compared to four years ago with the World Cup taking place in time zones more closely aligned with the time zones of the United States. The company itself isn't very sure just how large the impact will be since it has never been in such a great position in the second quarter.

On the cost side, the second quarter will continue to benefit from cheap chicken wing prices. According to Mary Twinem, CFO of Buffalo Wild Wings, wing prices were $1.36 per pound in the first quarter, which was 35%, or $0.74 per pound, lower than the year-ago period. This single metric helped improve the gross profit margin by 4.4%. All things being equal, every penny of that reduction goes straight to the bottom line for each restaurant.

Although current chicken wing prices have ticked up a bit to $1.41 per pound, everything points to an incredible second quarter.

Why third-quarter growth should taper off
First, the World Cup is obviously a temporary event. With the second-quarter strength, investors may be astonished and spoiled by the results and expect more in the third quarter. It will likely be too difficult to top. Second, Twinem warned during the conference call:

The second quarter of 2014 is the final quarter we'll have the year-over-year cost of sales benefit from the July 2013 [launch of weight-size portioning] .

During the question and answer session, Twinem answered that the selling by portion contributed favorably by 0.5%, so that year-over-year growth rate in the profit margin should disappear with the third-quarter report.

Finally, Twinem mentioned that wing prices tend to go up throughout the year. Smith also cautioned that while cost of sales is the lowest the company has seen in years, "those factors can change." Smith expects "things to moderate throughout the year" in terms of the unusually low wing prices.


Source:  Buffalo Wild Wings

Final thoughts
Foolish investors tend to be long-term investors, but sometimes weak short-term surprises can create great entries. While the third quarter's growth may not keep up with the pace of the first and the second quarters, the long-term Buffalo Wild Wings story still seems to be in the early innings.

Based on the current share price and analyst estimates of $5.07 for year ending December, Buffalo Wild Wings trades at a P/E of 28 with growth of 33% over last year. Keep an eye open for an overly negative reaction to either the third-quarter report in October or guidance come July, as this may provide an opportunity for a cheap entry. That is not to say that the P/E of 28 is expensive; but considering the risk of some moderation on earnings, if you can get in a bit cheaper, then all the better.

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