3 Reasons Buffalo Wild Wings Stock Could Fall

B-Dubs is a great business, but investors should keep these three challenges in mind.

Aug 13, 2014 at 5:57PM

Bwld

Buffalo Wild Wings is a great business, but investors should keep three key risks in mind. Credit: Buffalo Wild Wings

Earlier this week, I offered three reasons Buffalo Wild Wings (NASDAQ:BWLD) stock could potentially rise going forward. After all, the popular beer, wings, and sports-centric restaurant chain is implementing plans for ambitious global expansion, looking forward to its biggest driver in American football season, and keeps diners happy with continuous, clever tweaks to its menu.

At the same time, however, investors shouldn't ignore potential risks to Buffalo Wild Wings' business going forward. So, in the interest of looking at both sides of the table, here are three reasons Buffalo Wild Wings stock could fall.

Costs are expected to rise
Even if Buffalo Wild Wings continues to grow sales quickly, increasing operating costs could eat into its bottom line. 

First, Buffalo Wild Wings warned during the subsequent conference call of a coming rise in hourly wages, thanks to both impending minimum-wage increases in California and Minnesota, and the expected addition of "Guest Experience Captains" at nearly 80 additional company-owned locations in Q3.

Perhaps most notable, however, is B-Dubs' cost of chicken wings, which were were roughly $78 million last quarter alone, or 21.3% as a percentage of the cost of overall sales. Buffalo Wild Wings expects chicken wing prices for the first two months of Q3 to be around $1.46 per pound, which looks relatively mild compared with the $1.71 per pound they paid around this time last year. For perspective, in 2012 Buffalo Wild Wings paid an average price for chicken wings of roughly $1.90 per pound.

To its credit, a combination of those previous high prices and an industry shift toward larger-sized birds spurred the implementation of Buffalo Wild Wings' new volume-based pricing last summer -- think, for example, of its change to snack-, small-, medium-, and large-sized portions, rather than selling specific numbers of wings. This, in turn, helps Buffalo Wild Wings adjust the number of wings people receive to better coincide with their actual cost. But even then, the strategy doesn't provide infinite flexibility, so any truly significant upticks in wing costs going forward could negatively affect profitability.

Diners are seeking faster, healthier options
Finally, beer and wings might be delicious, but they aren't exactly health food. And the recent shift in consumers' preferences toward healthier, faster options could be bad news for Buffalo Wild Wings.

Chipotle

Chipotle has grown quickly by offering healthy food through a fast-casual approach, Credit: Chipotle Mexican Grill.

Consider a prime example in the remarkable rise of healthy-burrito maker Chipotle Mexican Grill (NYSE:CMG), which grew revenue 28.6% year over year to $1.05 billion in its most recent quarter, helped by incredible comparable restaurant sales growth of 17.3%. And in keeping with its "Food With Integrity" slogan, Chipotle has won huge points with hungry fans by maintaining its steadfast "commitment to finding the very best ingredients raised with respect for the animals, the environment, and the farmers."

What's more, Chipotle also enjoys its status as a "fast-casual" restaurant chain, which strikes an intriguing balance between high-quality food and the speed at which customers receive it. Buffalo Wild Wings, by contrast, relies on its sports-centric atmosphere as a differentiator to keep diners staying longer, and then later coming back for more.

But that's also part of the reason Buffalo Wild Wings recently invested in PizzaRev, a fast-casual pizza chain that operates in Chipotle-esque fashion by cooking artisan pies in under three minutes. But PizzaRev certainly has some catching up to do: As it stands, it has only 12 locations listed on its website, including Buffalo Wild Wings' first company-owned PizzaRev, which opened in Minnesota in May.

Buffalo Wild Wings Stock Pizzarev

Buffalo Wild Wings is looking to capitalize on fast-casual fare through PizzaRev, Credit: PizzaRev.com.

It's getting harder to grow
Finally, though I've mentioned that Buffalo Wild Wings has laid out plans for significant growth, investors should keep in mind that growth needs to happen in a methodical, thoughtful manner. This is especially important when identifying increasingly sparse prime locations to prevent cannibalization and sales transfer in established markets like the United States.

In fact, the "Risk factors" section of Buffalo Wild Wings' most recent annual report admits:

We and our franchisees intend to open new restaurants in our existing markets, which may reduce sales performance and guest visits for existing restaurants in those markets. In addition, new restaurants added in existing markets may not achieve sales and operating performance at the same level as established restaurants in the market.

What's more, it remains to be seen exactly how diners in various international markets will respond to Buffalo Wild Wings as it begins expanding outside the U.S. and Canada. To be sure, I've already suggested that B-Dubs' food should lend itself well to the sweet, spicy, and saltier tastes of basketball- and soccer-loving diners in the Philippines. But investors should keep a close eye on when and where Buffalo Wild Wings next decides to make a push overseas, where it estimates it should have 400 locations over the next 10 years.

Foolish takeaway
This doesn't mean I'll be selling my own shares of Buffalo Wild Wings in the near future. To the contrary, I'm still optimistic that Buffalo Wild Wings' catalysts should propel its stock upward over the long term. But Buffalo Wild Wings also faces challenges in managing operating costs, the growing influence of its healthy fast-casual competitors, and pursuing increasingly difficult long-term growth. At this point, investors can take solace knowing Buffalo Wild Wings is working to mitigate these challenges, but investors should also keep a close eye on them going forward.

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Steve Symington owns shares of Buffalo Wild Wings. The Motley Fool recommends and owns shares of Buffalo Wild Wings and Chipotle Mexican Grill. Try any of our Foolish newsletter services free for 30 days. 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.

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