"Wings. Beer. Sports. All the essentials."
That simple phrase puts fear into millions of chickens around the world. Casualties could be extreme; these poor flocks of fowl are finding themselves closer to the fateful day when they may find themselves being bathed in one of Buffalo Wild Wings'
For investors the good news was literally waiting in the wings. Several other factors contributed to the better-than-expected performance beyond the lower-than-expected fresh chicken wing prices. A favorable income tax adjustment set the fourth-quarter tax rate at 30% and made it 36% for the year -- down from 39% in 2003. The company expects a reduced rate to continue next year and estimates the 2005 tax rate to be between 36% and 37%. Earnings also included a charge of $0.04 from a compensation expense related to a restricted stock incentive program, a one-time item that we would back out of an owner earnings calculation.
All is not well, however, as wings are quickly heading back toward the record highs that were set last spring. The company paid $1.30 per pound in the fourth quarter for fresh chicken wings -- considerably lower than the $1.40 that was expected. But it projects an average cost of $1.52 per pound in the first quarter of 2005, or $0.03 per pound more than the prior-year period. CEO Sally Smith mentioned that a penny-per-pound difference in wing prices is roughly equivalent to a penny a share in earnings. Add to that another $550,000 compensation expense expected in the first quarter, and another $0.06 gets plucked out of earnings. That's a total of $0.09 of earnings that isn't being added to the company's fiscal feeding trough. So even with an estimated record $51 to $52 million in first-quarter revenues, EPS estimates are $0.24 to $0.26 per diluted share -- lower than last year's $0.27. That makes any investor want to screech "bwock!"
But let's get out our jester caps and get Foolish about this. The firm got a positive customer response to an expansion of its menu in order to lessen the exposure to chicken wing prices. A menu price increase implemented last year successfully increased margins. And the company is starting a national advertising campaign. With no debt, little change to its cash and marketable securities, and the addition of 19 company-owned stores last year, the company seems to have one eye on the customers, one eye on the employees, and one eye on shareholders. With three eyes, it makes sense why management seems to be doing things right!
But what about the overvalued stock price, you say? Well, you got me there. A trailing P/E of 50, a forward P/E of 35, and owner earnings that are still negative. That sounds like we have a company that is very richly valued. However, if we back out the cost of new store openings, you'd find that the business is valued at just 25 times owner's earnings. Pretty tasty for a company forecasting 20%-25% growth for several years.