Despite higher input costs and expenses, chicken wings-and-beer joint Buffalo Wild Wings (NASDAQ:BWLD) gave investors a strong fourth quarter earnings report that caused its stock jumped nearly 13% and hit an all-time record high price of $195.83 per share. Maintaining 18% earnings growth guidance and recording double-digit same restaurant sales growth through the first five weeks of the first quarter has a way of doing that.
Yet smart investors would be, well, smart to consider the following as the three biggest threats that could upset those well-laid plans:
- Continued input cost volatility
- Fewer high-profile sporting events
- Dilution of the concept through too many brand extensions
By themselves, the sports, food, and beer arena should be able to make its numbers. In combination, though, they could cause this high-flying stock to return to earth.
Continued input cost volatility
Although B-Dubs has handled rising wing prices with aplomb, raising its own prices 3.4% last year in response without ruffling any feathers, it's also implemented several initiatives to mitigate their effects, including the volume pricing scheme that gives customers the same weight of chicken though it may mean fewer wings, and now entering into a contract with its supplier to put prices into a range so that if prices soar once more, it will save money.
The risk, of course, is if prices fall sharply. Significantly lower prices will result in the chain paying higher costs than it otherwise would. B-Dubs doesn't foresee that happening; rather it sees prices easing back so it sees a low probability of getting trapped in paying more. But if beef and pork prices return from their stratospheric trip, that could very be the case.
Additionally, labor costs are rising, particularly now that Wal-Mart (NYSE:WMT), the country's largest employer, has raised the pay of a half-million full- and part-time workers. Moreover, nearly two dozen states have implemented minimum wage increases, including wages for tipped workers, starting January 1.
B-Dubs also completed adding Guest Experience Captains at all company-owned restaurants last year, and will begin rolling it out to franchised operations this year. With the restaurant acquisitions it made, it's expecting labor costs to be at least 50 basis points higher in the first quarter than the 30.5% rate it recorded a year ago.
Then there's the rising cost of regulatory compliance, such as with the new Obamacare employer mandate that went into effect at the beginning of the year. For large employers with 50 or more full-time employees, businesses have to provide health insurance or pay a monthly fee per full-time employee.
Any additional mandates, whether for health care or otherwise, could see B-Dubs costs rise and force it to raise prices more. That could have an adverse impact on sales.
Fewer headline sporting events
Last year had a number of high profile sports gigs beyond the usual annual events like football's Super Bowl and baseball's World Series. For example, there was also the Winter Olympics in Sochi, Russia, and the FIFA World Cup in Brazil. Even though they didn't necessarily provide as big of a boost as was expected, they did help drive comparable sales higher.
But there's not even that potential lift this year. While this year's Super Bowl saw some good traffic at Buffalo Wild Wings, and we're approaching the annual college basketball championship March Madness games, there's still a dearth of extraordinary sporting events. In the second quarter B-Dubs is going to go up against comps that got a boost last year from the World Cup and without that same kind of motivation by the sporting public it could serve as a damper on traffic.
The company invested a lot in technology to make sports event viewing an immersive experience. From big screen TVs and its new stadia design, to tablets and mobile apps, B-Dubs has spent a lot of money to draw in fans to watch their favorite games. Without any big events happening though, those costs will weigh on performance, though over time they will even out and should provide a return.
Peter Lynch called it "diworsification"
Perhaps the greatest risk for the wings-and-beer palace is its determination to become an amalgamation of restaurant brands. Rather than do just one thing and do it well, Buffalo Wild Wings has visions of building an empire.
As my Foolish colleague Steve Symington recently detailed, B-Dubs invested an additional $3 million in the fast-casual PizzaRev chain during the second quarter last year and acquired a fancy taco shop, Rusty Taco, in August. He quotes CEO Sally Smith musing that she plans "to invest in up to seven more during the next five years."
That has the very real potential of derailing Buffalo Wild Wings growth trajectory. So many disparate concepts, even if they're all of the "long-term sustained growth" variety Smith maintains she's searching for, become problematic. Different restaurant concepts have individual needs and management may end up becoming distracted by them.
Darden Restaurants is looking to spin off its specialty restaurants that currently house a steakhouse, a seafood restaurant, a casual American fare chain, and something called a "casually sophisticated fresh grill." Outback Steakhouse owner Bloomin' Brands just sold its Asian-Pacific-themed seafood chain Roy's.
A pricey stock, too
Buffalo Wild Wings has done a remarkably good job of overcoming obstacles thus far, and a volatile chicken market could end up imposing higher input expenses even as it continues to deal with higher labor costs. Coupled with the potential for a slowdown in traffic while trying to grow an empire could prove a hurdle too high.
The stock trades at 40 times earns and over 26 times estimates, and while it is expected to generate sufficient free cash flow to finance its expansion plans, it's still not a cheap stock by any means and investors might want to wait for the market to clip its wings a bit before jumping in.
Follow Rich Duprey's coverage of all the restaurant industry's most important news and developments. He has no position in any stocks mentioned. The Motley Fool recommends Buffalo Wild Wings. The Motley Fool owns shares of Buffalo Wild Wings. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.