Buffalo Wild Wings Earnings Plunge on Higher Wing Costs, Slowing Traffic

Buffalo Wild Wings (BWLD) reported second-quarter 2017 results on Wednesday after the market closed, detailing the travails of today's difficult restaurant environment ranging from higher costs to disappointing same-store sales. And, of course, we can't forget this quarter's board shake-up, courtesy of activist investor Marcato Capital. 

Let's have a closer look at how Buffalo Wild Wings fared over the past few months, as well as what investors can expect from the casual-dining chain going forward.

IMAGE SOURCE: BUFFALO WILD WINGS.

Buffalo Wild Wings results: The raw numbers

Data source: Buffalo Wild Wings. 

What happened this quarter?

• Adjusted for non-recurring and non-cash items, Buffalo Wild Wings' earnings per share declined 50.7% year over year to $0.66.
• By contrast -- and though we don't usually pay close attention to Wall Street's demands -- consensus estimates predicted higher adjusted earnings of $1.05 per share on revenue of $513.3 million.
• Company-owned restaurant sales grew 2% year over year to $500.0 million, driven by new locations. But same-store sales at company-owned restaurants dipped 1.2% -- well below the company's expectations outlined last quarter, while also outpacing the broader casual-dining industry by roughly 200 basis points.
• The earnings drop was driven by a combination of weak same-store sales, historically high wing prices (at $2.05 per pound, up 6% year over year) for this time of year, and a shift in mix toward Buffalo Wild Wings' value offerings. As a result, cost of sales climbed 240 basis points year over year, to 32.1%.
• "Other" income was $5.9 million during the quarter, primarily due to a $5.7 million gain on the sale of Buffalo Wild Wings 45% minority interest in PizzaRev.
• Ended the quarter with 1259 total restaurants, including 626 company-owned Buffalo Wild Wings locations, 611 franchised B-Dubs locations, nine company-owned R Taco locations, and 13 franchised R Taco restaurants.
• Expanded the Blazin' Rewards program to all U.S. locations as of June 1, 2017 (up from almost 1,000 locations at the end of last quarter).
• Expanded third-party delivery to 230 company-owned restaurants (up from 180 last quarter). Takeout and delivery orders comprised around 17.6% of total company-owned restaurant revenue, up from 15.7% in the same year-ago period.
• Announced a pilot of two new small-format "B-Dubs Express" locations to appeal to consumers who prefer takeout and delivery.
• Launched a company refranchising program encompassing 82 restaurants across Canada and the United States.
• Repurchased 659,598 shares during the quarter for $100 million.
• Generated cash flow from operations of $49.9 million (down 31% year over year) and free cash flow of $32.5 million (down 9.2% year over year).
• At the company's 2017 Annual Meeting of Shareholders in early June, shareholders voted in a contentious proxy battle to appoint three of four representatives nominated by stakeholder Marcato Capital.
• Longtime Buffalo Wild Wings CEO Sally Smith announced she will retire at the end of 2017 or when her successor has been named. Buffalo Wild Wings has retained an executive search firm to help identify its next CEO.

What management had to say

Smith elaborated on Buffalo Wild Wings' tough quarter and immediate plan to help offset higher costs, stating: 

During the second quarter, we continued to work on stabilizing the business in the challenging restaurant environment. [...] As traditional chicken wing costs remain at historically high levels, we're adapting our value day on Tuesday to feature our boneless wings at company-owned restaurants. In addition, we continue to implement our cost savings plan to improve margins and profitability in areas we can control. 

CFO Andrew Ware elaborated during the subsequent conference call:

Under normal circumstances, we would have a meaningful level of testing and learning on this shift to boneless. Our very early learnings from two Tuesdays and 50 restaurants are encouraging, and we will be monitoring closely to ensure that the sales and margins achieve our intended results.

Looking forward

Given its relative underperformance in the second quarter and as it pursues its new promotional structure, Buffalo Wild Wings reduced its full-year guidance. The company now expects 2017 same-store sales to decrease in the range of 2% to 1% (down from previous guidance for growth of 1%), which should translate to adjusted earnings per diluted share of $4.50 to $5.00 (down from $5.45 to $5.90 previously).

In the end, apart from Buffalo Wild Wings managing to outperform the terrible comps of the casual dining industry as a whole, there wasn't much to like about this painful performance. And combining its freshly lowered guidance with the uncertainty surrounding the short-notice pivot of its popular Half-priced Wing Tuesday promotion to boneless, it's no surprise to see shares plunging in after-hours trading as of this writing.