College basketball's popular tourney, more affectionately known as March Madness, is once again set to begin which is good news for sports-oriented restaurant chain Buffalo Wild Wings (NASDAQ:BWLD). The company has put most of its eggs into catering to sports-crazed fans, which included inking a multi-year marketing partnership with the NCAA in 2012 to position itself as an official sponsor of the aforementioned tourney. While Buffalo Wild Wings remains on a fast growth trajectory, its recent quarterly update was slightly below expectations on the top line which led to a short-lived stock price sell-off. So, is Buffalo Wild Wings a good bet at current prices?
What's the value?
Unlike some sit-down restaurant operators that have struggled with stagnant customer volumes like Darden Restaurants, Buffalo Wild Wings has leveraged consumers' insatiable demand for sports to create a thriving chain of sports-oriented bar and grills which recently topped 1,000 locations nationwide. The company's ability to successfully link wings, beer, and watching sports in the minds of its customers has positioned its restaurants as popular gathering spots, a trend that it has facilitated with open layouts and a bevy of televisions which cover every line of sight. More importantly, the universal love of sports seems to present favorable future growth opportunities in international markets for Buffalo Wild Wings, and this is an area that the company has only begun to tap.
In fiscal 2013, Buffalo Wild Wings has remained on the fast track as it reported a 21.7% increase in its top line, aided by a comparable-store sales gain and a double-digit expansion of its overall store base. Despite higher restaurant management costs which were due to efforts to enhance customer experiences, the company was able to maintain operating profitability in-line with the prior year, thanks to a notable decline in average chicken-wing prices. As a result, Buffalo Wild Wings continued to generate healthy operating cash flow during the period which will power its plans for another double-digit increase in its store base in 2014.
Looking for cheaper themes
While Buffalo Wild Wings remains the king of wings, there is a growing list of challengers in the space that includes fast food kingpin McDonald's, which entered the category with its new Mighty Wings offering last September. Buffalo Wild Wings' results to-date seem to have been relatively unaffected by its competitors' forays, but rising competition will likely lead to higher future marketing expenses for the company which will put pressure on its underlying profit growth. As such, Buffalo Wild Wings' relatively high valuation, evidenced by its 30-plus P/E multiple, should give investors some pause and lead them to search for greater value elsewhere in the themed-restaurant space.
One good alternative would be Cracker Barrel Old Country Store (NASDAQ:CBRL), a hybrid restaurant/retail concept that has leveraged consumers' nostalgia for the U.S.' country-western heritage into a national base of stores. The company has also taken advantage of an increasingly mobile customer base by predominantly placing its stores near high-traffic freeway exits and travel spots.
While Cracker Barrel has a lower restaurant margin than Buffalo Wild Wings, it benefits from lower-cost word-of-mouth advertising which has allowed the company to generate a comparable level of operating profitability. It also has a valuable retail operation that extends its restaurant's brand into the at-home market, a focus area for the company evidenced by product partnerships in the area that include a recent deal with meat-processing giant Smithfield Foods.
Another good alternative in the space is Bloomin' Brands (NASDAQ:BLMN), a diversified restaurant operator that has leveraged interest in the Australian way of life to build a global chain of steakhouses that span nineteen countries. Despite a generally down year for the sit-down restaurant business in 2013, according to data provider Knapp, Bloomin' Brands posted a comparable-store sales gain for its core Outback Steakhouse franchise as well as varying gains for each of its other concepts. While the company's Outback Steakhouse concept may be approaching its upper limit in terms of its overall store base, its fast-growing Bonefish grill seafood concept looks capable of powering future profit growth and higher shareholder value.
The bottom line
Buffalo Wild Wings will undoubtedly be a popular dining choice for sports-crazed fans during this year's edition of March Madness. Given the growth expectations baked into its current stock price, though, prudent investors should look elsewhere for restaurant sector opportunities, starting with growing franchises like Cracker Barrel and Bloomin' Brands.