Credit: Buffalo Wild Wings.
When Buffalo Wild Wings (BWLD) reported first-quarter results last week, the market was left with a terrible taste in its mouth. Despite the fact B-Dubs' quarterly revenue climbed 19.8% year over year, to $440.6 million, shares of the beer, wings, and sports-centric restaurant chain plunged nearly 13% the following day.
For that, investors can thank the fact that analysts were anticipating higher sales of $451.9 million. Worse yet, Buffalo Wild Wings' earnings only climbed 2.6% over the same period, to $1.52 per share, which was also below expectations of $1.63 per share.
During Buffalo Wild Wings' subsequent conference call with analysts, however, management offered several useful insights to help investors understand what's driving these results. Here are five important points covered during this quarter's call:
1. Why labor costs were higher than expected
We had guided that [cost of labor as a percent of restaurant sales] would be about 50 basis points over last year. We ended at 90. We were on track as it related to our expectation of the additional guest experience captain expense. Where we were off on our guidance is that the bonus expense and the related payroll taxes to that were higher than we anticipated. I think that was a reflection of the strong same-store sales we had in January and February. -- CFO Mary Twinem
Ironically, it appears Buffalo Wild Wings was a victim of its own success. First, it's comforting knowing B-Dubs correctly warned investors of higher payroll due to the now-complete implementation of higher-paid "Guest Experience Captains" at all company-owned locations. But strong same-store sales early in the quarter also drove higher-than-expected bonuses -- and consequently, payroll taxes -- which explains the miss on labor costs. That's fair enough, as there's nothing wrong with making sure employees are properly compensated for their performance.
2. Wing costs are high, but already falling
It is our assumption that wings will be lower in the second half than they were in the first half. We have seen them fall as we go through the second quarter. We're at $1.77 on a blended for the first two months, so now we're only 25% higher than prior year, whereas in the first quarter, we were 41% higher. So we do believe that they will go lower as we go through the second half of the year. [...] It is a year where our growth comes in the second half of the year. -- Mary Twinem
Next, Buffalo Wild Wings made no mystery of the primary culprit behind its sluggish earnings growth: Wing costs skyrocketed 41% year over year, to $1.92 per pound -- albeit up from what CEO Sally Smith described as an "unusually low price" in last year's Q1.
According to Twinem's comments above, prices are already trending downward and should only continue lower through the second half of the year. That's why, despite the miss relative to Wall Street's models, Buffalo Wild Wings was comfortable reiterating its previous guidance for full-year 2015 net earnings growth of 18%, or $5.84 per share.
3. Franchise acquisitions are picking up
There are several upcoming transactions that will use a portion of our cash balance. We're finalizing the purchase of two single-unit deals in the second quarter, and we recently announced we exercised our right of first refusal to acquire nine existing and three Buffalo Wild Wings restaurants under development. In addition, we're aware of other potential franchised acquisitions in our system. -- Mary Twinem
One of the ways Buffalo Wild Wings creates shareholder value is by using excess capital to make acquisitions. That occasionally means acquisitions of complementary new restaurant concepts, including taking stakes in upcoming fast-casual chains Pizza Rev and Rusty Taco in 2013 and 2014, respectively.
But Buffalo Wild Wings has also been strategically buying back franchised locations to bring them into the company-owned pool of restaurants. After all, company-owned locations are generally more profitable, and at the same time, make it easier to consistently roll out best practices and new marketing.
However, investors shouldn't expect these acquisitions to have an immediate effect on Buffalo Wild Wings' results. Twinem noted later in the call that the 12 franchises to be acquired through the right of first refusal likely won't close until "late in the year, so the impact is minimal."
4. Why B-Dubs (mostly) declined to show the "fight of the century"
Looking at events for the rest of the quarter, we have the women's World Cup taking place in Canada beginning in mid-June, and there is the Mayweather-Pacquiao fight this upcoming weekend. Due to the significantly increased cost of the fight, we will be airing the fight only in a handful of company-owned locations and will be charging a cover. -- Mary Twinem
Buffalo Wild Wings regularly discusses the positive impacts big sporting events can have on its quarterly results. So it seemed shocking at first that the chain would opt not to show hungry boxing fans the so-called "fight of the century" between Floyd Mayweather, Jr. and Manny Pacquiao.
In separate interviews, Sally Smith confirmed the fight would have cost Buffalo Wild Wings somewhere in the range of $5 million to $6 million to air. That's more than twice what it has paid for any other fight, and even more money than B-Dubs spent to secure naming rights on the Buffalo Wild Wings Citrus Bowl this past New Year's Day. Smith also pointed out their restaurants would likely be full of customers there to watch other Saturday evening events, anyway.
In retrospect, their decision to pass seems like a brilliant move given many viewers' disappointment with the bout. The New York Times called it "far from electrifying." And given its "century" billing, The Wall Street Journal noted, "It's a good thing we have 85 years to top it."
5. Tablet ordering is behind schedule
We will be in a two-market test for tablet menu order in the third quarter, which is behind our initial timeline as we have identified additional development needs. Our guests place great emphasis on speed of service and to help our servers take orders more efficiently, we have begun a two-market test on server handheld devices. -- CEO Sally Smith
Finally, last quarter Buffalo Wild Wings set a goal of fully implementing tablet-based ordering at all company-owned restaurants by the end of 2015. That was great news, as the company pointed out their tabletop tablets have the potential to not only drive labor efficiencies, but also generate incremental revenue through suggestive selling, and -- to a lesser extent -- premium gaming options.
Unfortunately with the small-scale test set to begin in Q3, it appears that the 2015 time frame no longer applies. It's encouraging, though, to know that Buffalo Wild Wings has begun a separate test for similar server handheld devices.
It's hard to blame the market for taking a step back from Buffalo Wild Wings stock given its near-term weakness. Wing prices are high, labor costs rose more than they anticipated, and revenue didn't quite live up to expectations.
However, remember that Buffalo Wild Wings is still solidly profitable with plenty of growth ahead. It ended the quarter with more than 1,080 locations in four countries, but ultimately maintains a goal of reaching at least 3,000 restaurants globally over the long-term.
If you're willing to take advantage of this pullback and watch that growth come to fruition, I'm still convinced that Buffalo Wild Wings can handsomely reward opportunistic investors going forward.
