One of the hottest topics in the restaurant industry is being able to do for pizza what Chipotle Mexican Grill (NYSE:CMG) has done in the fast-casual segment with Mexican food. The concept certainly makes sense. You could go to a Chipotle-like location and choose the pizza you want, pick your own ingredients and then see it get made before your eyes in three or four minutes. However, the biggest problem is execution. Well, California-based chain PizzaRev thinks it has the concept and execution down. Buffalo Wild Wings (NASDAQ: BWLD) thinks so too, and has taken a minority stake in the company.
Wings and pizza go together
In many respects, it makes sense for a wing company to want to get into the pizza business. After all, Yum! Brands' (NYSE:YUM) Pizza Hut chain has wings on its menu. Buffalo Wild Wings isn't looking to put pizza on its menu, though. The company doesn't want to take anything away from its profitable wing business. Instead, the company is looking for a second concept that it can expand. Buffalo Wild Wings will become the first franchisee of PizzaRev and will open the first franchised location in Minnesota early next year.
The PizzaRev concept starts with fresh homemade dough. Then you choose what type of pizza you want and it comes with your choice of unlimited toppings. Your pizza is then cooked in PizzaRev's revolutionary Fire-Deck oven at temperatures of over 900 degrees Fahrenheit. In under three minutes, your pizza is ready and the cost is less than $8.
Besides becoming the first franchisee of PizzaRev, Buffalo Wild Wings has made an equity investment so it is a minority owner in the chain. Buffalo Wild Wings CEO Sally Smith is also a board member of PizzaRev. PizzaRev has filed to franchise in all 50 states and has hired Mark Lyso to lead its franchise efforts. Previously head of franchise development for Sizzler and Famous Dave's, he was instrumental in taking Famous Dave's from two locations to 175.
Buffalo Wild Wings trades with a forward P/E of 26. This is pretty good for a company still growing and with no debt. The company has approximately 930 locations and hopes to expand to 1,500.
The Chipotle concept
Investors and restaurateurs point to Chipotle as a company that deserves to be emulated. The company took the simple concept of fresh, made-to-order Mexican food and turned it into a national franchise with a devoted customer base. Chipotle has defied skeptics, as a serious competitor has yet to emerge and the company continues to grow.
Chipotle is looking to grow beyond its core business of burritos and tacos. It's looking for the next fast-growth concept just like Buffalo Wild Wings is doing with PizzaRev. For Chipotle, it's at its ShopHouse SouthEast Asian Kitchens. This concept is a good fit for Chipotle in that it's similar to its Mexican Grill concept. Here, you take the food and flavors of Southeast Asia and you choose what you want in your bowl, just like at Chipotle. So far there are only two locations, but two more are scheduled to open this summer and four more by the middle of next year.
Chipotle has a forward P/E of 33. While this is higher than I would like, the company is still growing. In the second quarter, revenues grew 18.2%, comparable-store sales increased 5.5%, and earnings per share increased 10.2%.
Sells wings, pizza, and Mexican food
Even though Yum! Brands has had a few setbacks over the past few months with KFC in China, it's certainly not a company that you can count out. The company has approximately 39,000 restaurants in 125 countries under the KFC, Taco Bell, and Pizza Hut brands. Yum! Brands continues to adjust its menus and improve its operations.
The biggest overhang for Yum! Brands and its management is its KFC business in China. Last December, the company was hit with issues pertaining to its poultry suppliers in China. Then worries over avian flu emerged again. Both situations created a perfect storm for KFC and led to a 26% decline in China same-store sales in the second quarter.
Yum! Brands has been working to stem the drop in same-store sales. In July, same-store sales dropped 13%, which is somewhat of an improvement for the company. To improve relations with its Chinese customers, the company has launched a quality assurance advertising program to let them know its poultry is safe. The company also launched a value meal for wings, which are popular in China. KFC has also been advertising its protein alternatives such as shrimp and mushroom rolls.
Yum! Brands has the lowest forward P/E of these stocks at 18. This is mainly due to the company no longer being a growth play like Buffalo Wild Wings or Chipotle. For investors, the company has an annual yield of 2.1%.
I like that both Buffalo Wild Wings and Chipotle are looking to expand their restaurant portfolios with new concepts. If they can both hit winners in their second acts, the run in both companies' shares will continue. Yum! Brands offers similar menu items, but is in the fast-food segment whereas Buffalo Wild Wings and Chipotle are in the fast-casual dining segment. Furthermore, Yum! Brands' restaurants are not of the same quality as Chipotle or Buffalo Wild Wings in terms of dining atmosphere and food quality. I don't know about you, but I still would rather eat wings from Buffalo Wild Wings than from KFC or Pizza Hut. I also would rather eat at Chipotle than Taco Bell. Take it from me and also invest in what restaurant you like best.