When Buffalo Wild Wings (BWLD) reported third-quarter 2015 results last month, it was obvious that investors weren't pleased. Shares of the wings, beer, and sports-centric restaurant chain dropped as much as 18% after it not only fell short of expectations on both revenue and earnings but also issued guidance for single-digit percentage growth in earnings per share for 2015 (compared with previous guidance for earnings growth of 13%).
But now more than ever, it's important for shareholders to seek perspective on the drivers behind that performance. Lucky for us, management offered just such insight during their subsequent earnings conference call. Here are five important points they discussed:
1. Franchise acquisitions will start paying off in 2016
We spent $160 million to acquire 41 franchised locations, which will provide revenue and net earnings growth in 2016 and beyond. We estimate the incremental cost had a negative $0.13 impact on earnings per diluted share in the third quarter. [...] We added nearly 2,600 new team members to our company, including 180 managers. The new team members have participated in more than 10,000 hours of training, and over 300 of our existing field team members assisted in the transition of ownership.
-- Buffalo Wild Wings CEO Sally Smith (all quotes credited to Seeking Alpha)
The costs associated with Buffalo Wild Wings' large franchise acquisition certainly hurt earnings. But this also shouldn't have been a surprise, considering management told investors during last quarter's call to expect a negative impact to earnings this year of roughly 5%, or around $0.25 per share. So with slightly more than half that amount already recognized in Q3, investors should anticipate that the remainder will be absorbed in the fourth quarter.
After that, according to Smith's comment, is when these former franchised restaurants will begin demonstrating why Buffalo Wild Wings decided to add them to the company-owned fold. Remember, company-owned locations typically achieve greater same-store sales growth, offer added flexibility for B-Dubs to roll out menu changes and companywide initiatives, and all in all tend to be more lucrative than the steady stream of franchise fees it would otherwise collect.
2. Same-store sales grew against all odds, but ...
Our same-store sales in the third quarter increased 3.9% at company-owned restaurants and 1.2% at franchised locations, despite a shift in the sports calendar resulting in one less week of football and fewer pay-per-view events than last year. We estimate this negatively affected our same-store sales by 80 basis points.
It's impressive that Buffalo Wild Wings was able to grow same-store sales despite a shortened quarter and fewer sporting events to drive traffic. But investors should also know that during last quarter's call, management foresaw these challenges and estimated they would result in a less severe 50-basis-point impact. In the end, while certainly a temporary headwind, this partly explains Buffalo Wild Wings' top-line shortfall in Q3.
3. Wing prices are still stubbornly high
Wings are a little higher than we expected them to be at this point in the year. They started to look like they were moving down right at the July earnings call, and then they moved right back up again. [O]ur two-month average now here in the fourth quarter is at $1.80, and that's higher than we would have thought we would be at.
-- Buffalo Wild Wings CFO Mary Twinem
For perspective, the price for traditional wings -- which comprised around 21% of total revenue in the quarter -- came in at $1.79 per pound in Q3, or a 19% increase from the same year-ago period. But while Twinem notes that the company had hoped prices would start coming down by now, we should also keep in mind that the current price at $1.80 per pound is down from the same year-ago period's average of $1.90 per pound. So going forward, Buffalo Wild Wings is set to enjoy more friendly year-over-year comparisons as it finally surpasses extraordinarily high wing prices that began to ramp in earnest one year ago.
4. International diners love B-Dubs, too
For longer-term growth, we're building our international presence through franchising. Our franchisee in the Middle East opened a location in Dubai in September and a second location in the Kingdom of Saudi Arabia at the beginning of October. Initial sales results show that the brand is being very well received in both countries, with opening sales volumes rivaling our better U.S. restaurants. There are currently 13 international Buffalo Wild Wings in Mexico, the Philippines, the Kingdom of Saudi Arabia, and the United Arab Emirates.
One of the most attractive aspects of Buffalo Wild Wings' business is that it translates well overseas, so investors should be encouraged to see international customers responding well to the brand in these early stages of its global expansion. And remember, those 13 locations still represent just a sliver of the 1,142 total restaurants making up Buffalo Wild Wings' base in Q3.
As such, we should expect B-Dubs' overseas expansion to accelerate from here. Smith elaborated that while it generally takes international franchisees at least a year to open their first location, development generally "increases at a more rapid pace" once those first locations open and the franchisees get a taste of just how well they perform. Next year, Buffalo Wild Wings anticipates 15 new international restaurant openings, including its first in Panama and India.
5. Other concepts are gearing up for more aggressive growth
To prepare for expansion to cities throughout the U.S., we shortened the name from Rusty Taco and created a new logo for the brand. With two R Tacos under construction, we're excited to expand our market presence, and we're actively evaluating a third company-owned market in addition to Dallas and Denver. Franchisees of R Tacos are expanding in three markets, and we're launching a more aggressive franchise sales strategy.
Finally, Buffalo Wild Wings has acquired stakes in two fast-casual restaurant concepts: recently rebranded street-taco specialist R Taco, and the so-called "Subway of pizza" in PizzaRev. For its part, PizzaRev has already begun expanding in earnest with 29 locations in five states, and it plans to open in three more states in the near future. But keeping in mind that Buffalo Wild Wings only just announced its majority stake in R Taco in August 2014, investors should keep a close eye going forward on how its soon-to-be-launched "aggressive franchise sales strategy" plays out.
We can also expect to see Buffalo Wild Wings acquire more compelling restaurant concepts with the potential for nationwide expansion. Shortly after it revealed the R Taco purchase, Smith confirmed that B-Dubs has "probably looked at 200-plus" concepts so far and intends to invest in up to seven more over the next five years. To help make good on this promise, the company had $153 million remaining of its $200 million line of credit line at the end of September.
Over the long term, these complementary concepts should keep Buffalo Wild Wings on track to achieve its goal of becoming a 3,000-restaurant business of diversified brands worldwide. For long-term investors willing to take advantage of these short-term dips surrounding quarterly earnings as they watch that massive growth story unfold, I think Buffalo Wild Wings stock at today's levels is a mouthwatering bargain.