Source: Buffalo Wild Wings
When Buffalo Wild Wings (BWLD) released weaker-than-expected second quarter results late last month, it was surprising at first when shares of the beer, wings, and sports-centric restaurant chain popped 14% over the next few days. Though revenue climbed 16.5% year-over-year to $426.4 million, analysts were anticipating higher sales of $429.8 million. Meanwhile, net income per share dropped 9.9% to $1.12, also below estimates for earnings of $1.26 per share.
But this also goes to show how the usual headline numbers do not always help investors truly understand what drives the business. Lucky for us, the management team spends roughly an hour with analysts after each quarterly report to elaborate on their results. Here are five important points they discussed during the most recent call.
1. Franchise acquisitions are not done yet
We don't have a set target for company-owned and franchised location mix but believe company ownership mix could increase as we continue to build new company owned restaurants and evaluate future acquisition opportunities as they are presented to us. Our purchase of franchised locations provides long-term net earnings and cash flow growth. Acquisitions also give us the ability to accelerate change through remodels and technology implementation. -- CEO Sally Smith
For perspective, in June, Buffalo Wild Wings announced that it would spend $160 million to repurchase 41 franchised locations -- and that is in addition to 16 separate franchise acquisitions this year through the end of the second quarter. Keeping in mind the company ended the quarter with a total of 1,110 restaurants (517 company-owned and 593 franchised), that will bring the percentage of company-owned locations to above 50%. This sets up the restaurant for improved financial performance, while helping it ensure a more consistent customer experience systemwide. In the end, it is no surprise the company is keeping its eyes peeled for further acquisitions down the road.
2. Second quarter was strong despite fewer events
Guest traffic at company-owned restaurants was positive for the quarter, with strong sales throughout the period, demonstrating our ability to drive traffic with fewer year-over-year sporting events. Compared to the second quarter of last year, we had Easter in the final four weekend, 14 fewer NBA and NHL playoff games, two fewer pay-per-view boxing events, and no men's World Cup. -- Smith
This is particularly impressive as Buffalo Wild Wings regularly discusses the large impact major sporting events can have on its results. Nonetheless, same-store sales during the second quarter climbed 4.2% year-over-year at company-owned restaurants and 2.5% at franchised locations. Average weekly sales also rose faster than same-store sales, showing that new locations not yet included in the comparable-store base are also performing well.
3. B-Dubs Fast Break started strong
B-Dubs Fast Break, a systemwide lunch program, launched in April and is performing well. We created the program to offer guests value, variety, and speed during their lunch hour, and supported the campaign with national and local advertising. Our goal for Fast Break is to increase our lunch sales for both ticket and traffic while improving our cost of goods sold margin. Same-store sales for our lunch day part are improving. This trend is encouraging as we believe our lunch guests can become a happy hour and dinner guest. -- Smith
As I pointed out in June, only 19% of total sales came from the lunch day part in the year leading up to the launch of B-Dubs Fast Break:
Source: Buffalo Wild Wings
That might seem small, but it still equates to over $300 million in trailing-12-month revenue. As a result, recapturing even a small slice of this low-hanging lunch fruit from competing quick service and fast casual chains could mean tens of millions in incremental sales. Better yet, as Smith notes, it should also mean higher margins overall and greater revenue for the core happy hour and dinner dayparts, as lunch diners are encouraged to keep coming back for more.
4. A three-step menu price increase is coming
To help offset rising wage rates, expected draft beer cost increases, and elevated wing prices, we are initiating menu price increases on alcohol in August, increasing Wing Tuesday and Boneless Thursday pricing in about 25% of our company-owned restaurants in September, and including an increase in pricing on our Nov. 2 menu. After these price adjustments, the cumulative impact of the menu price increases taken in the last 12 months is expected to be 3.9% in the third quarter and 4.2% in fourth quarter. -- CFO Mary Twinem
Recall when Buffalo Wild Wings last implemented a menu price increase this past November, some investors worried whether it had the brand strength to do so without losing support from consumers. Those concerns turned out to be unfounded, as same-store sales in the following quarter rocketed higher with little to no backlash from diners.
At the same time, while this three-step price increase is arguably more ambitious than before, it is encouraging that Buffalo Wild Wings appears to be cautiously approaching its latest increases so as not to shock consumers by simultaneously increasing prices of alcohol, daily specials, and the regular menu as a whole.
5. Tablet payments > tablet ordering
We've successfully tested menu order via tablet in two concept locations, and the functionality works. However, we believe the real driver to achieve guest adoption will be payment via tablet or guest device. We'll be testing both methods in the second half of 2015, and we're delaying the rollout of menu order on tablet until it is paired with payment. -- Smith
Finally, you might remember that three months ago, the company told investors tablet ordering was behind schedule, because of what Smith says the company identified as "additional development needs." As a longtime investor watching this new technology, I was disappointed, as tablet ordering holds promise to drive both labor efficiencies and incremental revenue through suggestive selling and premium gaming options.
This time, though, I am pleased that Buffalo Wild Wings has at least completed a proof-of-concept test and from that collected enough feedback to know ordering needs to be rolled out in conjunction with complementary payment functionality to be most effective. Over the long-term, tablet ordering and payment still appear to represent viable opportunities to improve this already solid business.
