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Buffalo Wild Wings (Mostly) Delivers On Its Promises

By Steve Symington – Feb 4, 2016 at 8:06AM

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The wings, beer, and sportscentric restaurant chain fell short of expectations, but remains happy with where it stands.

Image source: Buffalo Wild Wings.

Buffalo Wild Wings (BWLD) reported fourth-quarter 2015 results that fell short of expectations after the bell Wednesday, and at first glance, it would be easy to be disappointed. But that doesn't mean investors shouldn't be satisfied with B-Dubs' latest performance. 

Quarterly earnings climbed 24.4% year over year to $25.3 million, and rose 23.4% on a per-share basis to $1.32. Meanwhile, revenue increase 19.9% year over year to $490.2 million, including a 21.3% increase in company-owned restaurant sales to $466.4 million and a 2.9% decline in franchise royalties and fees to $23.8 million.

Breaking it down
Regarding the latter, keep in mind there were 11 fewer franchised units in operation at the end of Q4 compared to the same year-ago period, thanks to Buffalo Wild Wings' opportunistic acquisitions of 54 franchised restaurants last year. That most notably included its $160 million deal to acquire 41 franchised locations in the third quarter.

Digging deeper into the top line, revenue growth was driven almost entirely by 105 new company-owned locations in 2015; same-store sales increased just 1.9% at company-owned restaurants and rose 0.1% at franchised restaurants. That represents a further deceleration in comps growth from the already underwhelming results Buffalo Wild Wings saw during the first four weeks of the quarter, which management previously revealed came in at 2.8% and 0.8% at company-owned and franchised locations, respectively.

"Same-store sales growth in the fourth quarter [...] did not meet our expectations, although they continued to outpace the casual dining industry," stated Buffalo Wild Wings CEO Sally Smith. "We estimate the holiday shifts for Halloween and Christmas negatively affected fourth quarter same-store sales by 30 basis points." 

More specifically, Halloween was on a Saturday this year compared to a Friday in 2014, while Christmas fell on a Friday this year versus a Thursday last year. In both cases, it's worth noting Buffalo Wild Wings did say last quarter that the timing could be negative for same-store sales.

On the bottom line, Smith explained net earnings growth was achieved through a combination of increased revenue and Buffalo Wild Wings' ability to leverage food and labor costs as a percentage of restaurant sales. Cost of labor in Q4 came in at 30.9% of restaurant sales, down 20 basis points from the same year-ago period. Also, cost of sales fell 110 basis points year over year to 29.5% of total restaurant sales, helped by a 5% decline in the price per pound of traditional wings to $1.81 for the quarter. 

Also as expected, earnings were held back by an 80-basis-point increase in depreciation and amortization as a percentage of total revenue to 7.5%, primarily related to new restaurant development and franchise acquisitions, as well as $3.3 million in non-cash pretax loss on asset disposals and impairments.

On the other hand, Buffalo Wild Wings did partially offset the effects of these items by repurchasing 155,623 shares during the quarter for $25 million, leaving roughly $175 million remaining under the $200 million authorization announced in Nov. 2015.

Cooking forward
What's more, Buffalo Wild Wings expects to continue with roughly $100 million in share repurchases in 2016.

In addition, same-store sales increased 0.3% at company-owned restaurants, but decreased 1.5% at franchised locations through the first four weeks of the current quarter. But despite that trend -- and noting B-Dubs also pledged to discontinue four-week trend reporting after this quarter as it's "not predictive of quarterly same-store sales" -- Buffalo Wild Wings anticipates single-digit same-store sales growth for the full-year 2016. This assumes "modestly positive traffic," and falling food costs excluding expected flat pricing for traditional wings for the year.

Next, Buffalo Wild Wings expects to open 45 to 50 company-owned Buffalo Wild Wings in 2016, 30 to 35 U.S. franchise locations, 12 to 15 international franchises, six company-owned and four franchised R Taco locations, and continued early stage unit expansion from its burgeoning PizzaRev concept. All told, Buffalo Wild Wings expects earnings per diluted share for all of 2016 to be $5.95 to $6.20, good for 20% to 25% growth over 2015.

For perspective, that would effectively fulfill Buffalo Wild Wings' promise last quarter that, following single-digit earnings growth in 2015, full-year 2016 earnings growth was expected to "exceed 20%." Of course, 2015 earnings per share ultimately increased just two cents to $4.97, so its latest guidance just barely manages to live up to that prediction.

But while it remains to be seen how Wall Street reacts in the short term, the fact remains Buffalo Wild Wings continues to achieve healthy growth en route to its long-term goal of nearly tripling its diversified restaurant unit base to around 3,000 locations worldwide. As long as Buffalo Wild Wings remains on track to achieve that goal, investors in these relative early stages should have little about which to worry.

Steve Symington owns shares of Buffalo Wild Wings. The Motley Fool owns shares of and recommends 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.

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