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Why Buffalo Wild Wings Popped Despite Bland Earnings

By Steve Symington - Jul 28, 2015 at 7:21PM

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B-Dubs may have missed expectations, but investors are still cheering its results. Here's why.

After climbing 1.6% in Tuesday's regular session, shares of Buffalo Wild Wings (BWLD) jumped more than 11% in after-hours trading following the company's weaker-than-expected second-quarter results.

The headline numbers
Quarterly revenue rose 16.5% year over year to $426.4 million, including a 17.1% increase in sales at company-owned locations. Same-store sales also rose 4.2% year over year at company-owned restaurants, and 2.5% at franchised restaurants. Meanwhile, net earnings fell 9.2% over the same period to $21.5 million, and earnings per diluted share decreased 9.9% to $1.12. Analysts were expecting more on both fronts, with consensus estimates calling for revenue and earnings of $429.8 million and $1.26 per share, respectively.

Buffalo Wild Wings CEO Sally Smith blamed the shortfall primarily on rising food and labor costs:

Solid sales performance in the second quarter was offset by a challenging cost environment. [...] The price per pound for traditional wings was 26% higher than the prior year. Labor as a percentage of sales increased due to higher wage rates and benefits costs and the addition of Guest Experience Captains at all company-owned restaurants that was completed in the fourth quarter last year.

Why so spicy?
But this doesn't sound like great news. So why are shares up so much right now?

For one, it helps that Buffalo Wild Wings stock was still down nearly 7% since Buffalo Wild Wings' rough first-quarter report three months ago. At the time, the company said cost of sales had jumped 28.9% year over year to $125.7 million, primarily because of an even more extreme 41% increase in the price per pound for traditional chicken wings. Consequently, this quarter's 26% increase in wing prices represents an encouraging deceleration and probably stemmed from the April start of new modified pricing agreements designed to narrow the price B-Dubs pays for its flagship menu item. Sure enough, cost of sales in Q2 climbed a much more modest 21.7% year over year to $117.8 million. 

On the labor side, patient investors also know Guest Experience Captains' primary aim is ensuring that customers enjoy a superior dining experience. This is a big reason Buffalo Wild Wings' same-store sales continue to show such strength, even after the company implemented a 3% menu price increase at the end of November. Over the long term, the benefits of having Guest Experience Captains far outweighs the short-term concerns of paying them more for their work.  

In addition, Buffalo Wild Wings confirmed that its massive $160 million acquisition of 41 franchised units is expected to close next month. For perspective, as of the end of the quarter, 517 of the total 1,110 Buffalo Wild Wings locations were company owned, which means the move will increase the size of Buffalo Wild Wings' company-owned restaurant base by nearly 8%. And considering growth in both revenue and same-store sales at company-owned locations is already handily outpacing that of franchises, suffice it to say investors are happy Buffalo Wild Wings is one step closer to achieving a more attractive performance profile.

On to the next course
Bringing those franchised locations into the company-owned fold will come with another temporary cost. "This acquisition is expected to decrease net earnings in 2015 due to the timing of the closing, increased depreciation and amortization of the reacquired franchise rights, and $5 million in transition costs."

As a result, Buffalo Wild Wings revised its expected net earnings growth goal for 2015 to 13%, or to $5.59 per share, down from its previous goal of 18%, or to $5.84 per share. Analysts, on average, were expecting higher fiscal 2015 earnings of $5.77 per share -- though it's fair to say that expectation didn't fully price in the negative effects of the franchise acquisition.

Finally, Buffalo Wild Wings is excited to enter its self-proclaimed "favorite time of the year": American football season. Smith noted that Buffalo Wild Wings' restaurant teams are already gearing up to host fantasy-football draft parties and further promised that "we will air new advertising focusing on the great football environment our restaurants offer." Assuming these new ads continue to flow from B-Dubs' new creative agency, TBWA\Chiat\Day -- which was the mastermind behind Buffalo Wild Wings' brilliant March Madness campaign earlier this year -- that promise bodes well for Buffalo Wild Wings' brand as hungry fans of the gridiron come out in force.

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