Buffalo Wild Wings Inc (NASDAQ: BWLD) -- the maker of chicken wings flavored in sauces ranging from Asian Zing to Mango Habanero -- reported 2015 earnings on Feb. 3. While full-year results were mild, fourth quarter results revealed momentum. For 2015, diluted earnings per share grew 0.4% to $4.97 (impeded, in part, by a $160 million, 41 store franchise buyout), and fourth quarter diluted earnings per share grew 23.4% year-over-year to $1.32 with revenue up 19.9%.
Management indicated that this momentum had stalled slightly during the first four weeks of the current quarter as same-store sales have fallen by 1.5% at franchised restaurants and increased a mere 0.3% at company-owned locations. Comparatively, in the same quarter last year, same-store sales for the wing maker increased by 12.4% and 12.7% for franchised and company-owned restaurants, respectively.
Looking ahead, management cast aside the current quarter slog and provided earnings growth guidance of 20% to 25% for 2016 with corresponding earnings per share of $5.95 to $6.20. Given that 2015 diluted earnings per share were up only 0.4% compared to 2014, this increase, if achieved, will make up lost ground for the company as it has averaged earnings growth of 20%-plus in three out of the previous four years.
Buffalo Wild Wings plans to achieve this growth by expanding its footprint with as many as 100 new locations, an increase of 8.5% over its existing restaurant count of 1,175. Management also announced a $100 million share buyback program in the earnings call and unlike last year, 2016 will not see an earnings-dinging, franchise buyout. Still, management indicated that 2016 same-store sales growth will be in the single digits (3.35% in 2015), and restaurant traffic will experience only modest increases.
So, where else will earnings growth come from in 2016?
Deflationary food costs.
A portfolio of pretzels, burgers, and beer
Buffalo Wild Wings management cited low food prices (outside of traditional chicken wings) in the earnings call as part of the catalyst for earnings growth in 2016. Traditional wings accounted for 21% of 2014 restaurant sales, with other food items and beverages, both alcoholic and non-alcoholic, making up the remainder. Alcoholic beverages represented 21% of sales that year. After netting out an estimate of non-alcoholic beverage sales, approximately 50% of the company's food menu items will be susceptible to deflationary input pressures in 2016.
Outside of traditional wings, the company also sells boneless wings, nachos, mozzarella sticks, quesadillas, soft pretzels, burgers, and other sports bar staples. In order to gauge the promise of this deflationary lift for earnings growth, we must ask: How intense and how long will low food costs persist in 2016?
A subdued food processing industry
Although it is difficult to nail down precisely who supplies Buffalo Wild Wings with food (management indicates in its 2014 annual report that they negotiate directly with a number of independent suppliers for its supply of food and other products, but they do not mention specific names), food price deflationary pressures can be gleaned from the outlook for the food processing industry and by reviewing the prospects of its larger producers.
According to Value Line, prices for corn and soybean meal dropped by approximately 20% in 2015, and the USDA expects stockpiles of these goods to stay at an escalated level in 2016 which should keep prices down. The oilseed, corn, and wheat processor Archer Daniels saw its 2015 third quarter sales drop by approximately 9% due to robust crop supplies from South America and weak North American exports, which were impeded by a strong dollar. This trend is expected to continue throughout 2016.
Also, Pilgrim's Pride and Sanderson Farms, both chicken producers, are citing low prices due to high production and weak export demand. Although Buffalo Wild Wings said that the deflationary pressures would fall outside of its traditional wings, these lower prices should benefit the input cost of the company's boneless wings and other offerings.
Additionally, in its producer price index for 2016, the USDA is projecting that wholesale beef and soybean prices will increase by 0% to 1%, fats and oils will increase by 1% to 2%, and farm level wheat will decrease by 1% or remain flat. To put this in context, from 2014 to 2015, beef grew at an average price of 11.3%, soybean decreased by an average of 18.6%, fats and oils shrank by 6.1%, and farm level wheat decreased by 13.1%. Outside of beef, these other foods are depressed and it appears they will remain that way for 2016.
The key ingredients of corn and wheat tie directly to Buffalo Wild Wings menu offerings such as its Ultimate Nachos, which include "warm corn tortilla chips" and its breaded offerings like mozzarella sticks and soft pretzels. Soybean meal is used as a protein source in animal feeds for beef, milk, and butter among others and ties directly to Buffalo Wild Wings' burgers.
Flight of the buffalo
In striving for earnings growth of 20% to 25% in 2016, it will be necessary for the maker of Bourbon Honey Mustard chicken wings to realize strong revenue from new stores, maintain or increase its single digit same-store sales growth, execute its $100 million share buyback program, and maintain margins. In particular, gross margins will be the recipient of a white knight in the form of lower input prices. It appears that these trends will last well into 2016 based on the outlook of the food processing industry overall and the headwinds that face its larger producers specifically. This trend should serve as support for the company's plan to hit earnings growth targets this year and ultimately, you will believe that a buffalo can fly.