Buffalo Wild Wings Vs. Panera Bread: Which Restaurant Is the Best Buy?

One restaurant innovates and forges strong strategic alliances adding to its stock's growth potential. Can you guess which one?

May 28, 2014 at 2:39PM

If you are looking for investment ideas you may want to consider chicken wing  restaurant chain Buffalo Wild Wings (NASDAQ:BWLD) and bakery-café restaurant  chain Panera Bread (NASDAQ:PNRA). However, investing legend Peter Lynch once said, "Know what you own, and know why you own it."  With that said you should always do your research to see if a company expands revenue and cash flow and retains some of that cash for reinvestment back into the business. Organizations, like individuals, need cash to survive.

The chicken wing magnet
As of the most recent quarter Buffalo Wild Wings and its franchisees operated a little over 1,000 locations.  Its sports atmosphere and product quality serve as draw for many consumers. Over the past five years Buffalo Wild Wings grew its revenue, net income, and free cash flow 158%, 178%, and 1,170%  respectively. In the most recent quarter, its revenue and net income  increased a whopping 21% and 73%, respectively. Quarterly sales and net income increases were due to same store sales increases of company owned (7%) and franchised stores (5%), the declining price of chicken, plus the addition of 101 new locations since the same time last year.

Buffalo Wild Wings' free cash flow swung from a negative $6.7 million in the first quarter of 2013 to a positive $22.4 million in the first quarter of 2014.  An increase in net income, positive contributions stemming from stock based compensation, favorable changes in assets and liabilities, most notably income taxes payable, and decreases in capital expenditures served as reasons for the recent increases in cash flow.  Buffalo Wild Wings' $80 million in cash equated to 16% of stockholder's equity. The company possesses no long-term debt  and pays no dividend.

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Source: Motley Fool Flickr by Ben Popkins 

Soup, sandwiches, and pastries
Panera Bread sells soups, sandwiches, pastries, and beverages, made out of "wholesome" ingredients such as chicken free of antibiotics and artificial trans-fat.  As of the most recent quarter Panera and its franchisees operated 1,800 locations.  Over the past five years, Panera Bread's revenue, net income, and free cash flow grew 83%, 148%, and 39%, respectively.

However, Panera Bread's fundamentals didn't fare as well Buffalo Wild Wings in the most recent quarter. Panera Bread's revenue did increase 8% during the quarter . However, most of that increase came from the opening of new stores  versus same store sales which amounted to a minuscule 0.1%. It didn't help that year over year transactions decreased 2.8%  due to a number of issues that investors don't want to see, including "operational issues impacting customer service" and "intensified competition" . Increased expenses as a percentage of revenue caused Panera's net income to decline. 

Timing of accrued expenses, payment of deferred income taxes, and increased capital expenditures served as catalysts for the recent decline in free cash flow.  On the balance sheet, Panera Bread's $101 million in cash clocked in at 15% of stockholder's equity. The company possesses no long-term debt.  Panera Bread doesn't currently pay a dividend.

Now what?
Buffalo Wild Wings, via strategic partnerships, continues to innovate with new products and experiences such as chips and beverages.  Currently the company trades at 33 times earnings, which seems a little high. Investors should expect volatility and look for opportunities to buy shares on the downswing. As for Panera Bread, investors should wait and see if its operational issues clear up in a few quarters.

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William Bias has no position in any stocks mentioned. The Motley Fool recommends Buffalo Wild Wings and Panera Bread. The Motley Fool owns shares of Buffalo Wild Wings and Panera Bread. 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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