Things sure got messy for restaurant operator Buffalo Wild Wings (NASDAQ:BWLD)yesterday, with the stock falling as much as 6% following disappointing fourth-quarter and full-year 2012 results.
So what happened?
Revenue for the fourth quarter grew a whopping 37.8% year over year to $303.8 million, thanks largely to B-Wild's solid 5.8% same-store growth at company-operated restaurants. That beats even Panera Bread's impressive 5.1% over the same period, and absolutely destroys both the 3.8% domestic growth achieved by burrito maker Chipotle Mexican Grill and the 3% offered by Pizza Hut operator Yum! Brands.
This is particularly impressive given the fact Buffalo Wild Wings has used a combination of subtle menu changes and price increases to partially offset the negative effect of record-high wing prices. B-Wild's customers, then, don't seem to mind paying up for good food in a great atmosphere.
Unfortunately, despite the huge revenue growth, higher wing costs continued to eat into the bottom line as cost of sales rose to 32% in the most recent quarter. As a result, the company only managed to increase year-over-year net earnings by 22.3% to $16.7 million.
Hiding in plain sight
Should investors be disappointed that earnings haven't kept up with revenue growth? Absolutely.
Is this reason enough for long-term investors to turn their tails and run? Absolutely not.
The thing is, none of this should have come as a surprise since management has repeatedly warned investors to expect wing prices to continue rising through at least the first half of 2013. In fact, during last quarter's conference call, CFO Mary Twinem even called out fourth-quarter wing costs to the penny at $2.07 per pound. On a more encouraging note, Twinem also reiterated that the industry expects to see some moderation in costs during the latter half of 2013.
In the meantime, while it would be great for business if wing prices came down sooner rather than later, the company is actively working on bringing down its cost of sales by optimizing supply chains and carefully weighing further price increases.
In addition, given its continuing strong cash flow from operations and with cash and equivalents remaining of $30.9 million at the end of 2012, management reiterated their plans for opening at least 60 new company-owned and 45 franchised locations by the end of this year. When all is said and done in 2013, then, the company should be able to increase its total restaurant count by around 12%.
Put on your bib and stay awhile
In the end, the fact remains Buffalo Wild Wings is still solidly profitable and has plenty of room to grow in both domestic and international markets. When (not if) the wing maker can once again lower its cost of sales back down to the 30% range, patient shareholders will be handsomely rewarded.