Motley Fool Hidden Gems
recommendation Buffalo Wild Wings
Most disconcerting were the company's projections of 4%-5% same-store sales growth for the remainder of the year at company-owned stores (about one-third of total store count), and an even lower 2%-3% growth at franchise locations. This comes on the tail end of last year's double-digit growth for both company and franchise stores.
The stock market clearly did not like what it heard, and Buffalo Wild Wings shares got shellacked for more than 15% today.
Investors feel like they've seen this story before: A hot franchising concept spreads quickly, with great fanfare and a premium market valuation, only to collapse because the company has grown too fast without doing the necessary blocking and tackling needed to ensure long-term success of the new outlets.
Boston Market -- now owned by McDonald's
But past isn't necessarily prologue. Want to know another company that has had trouble with its franchise network? McDonald's, for one. And Starbucks
So the question becomes: Are these really "inefficiencies" that the company can wring out, or is this the first sign of the wheels coming off for a high-growth fad? Having the right answer is everything. To my mind, the clues point to the former being the case. Buffalo Wild Wings' legacy markets turned in solid results, while its new stores struggled to find their footing. This isn't a question of saturation; it's a question of brand awareness in less mature markets. Buffalo Wild Wings has shown an ability to create (and then recreate, as it transitioned from its old BW3 identity) awareness and identification among the public with its brand and its experience.
Unfortunately, these things are not knowable in advance. I suspect that has a great deal to do with the company's rapid stock market plunge today. I find that puzzling. It's as if investors writ large assume that because something has not happened, it isn't likely to happen. But every, every, every franchisor, and every, every, every restaurant concept hits bumps in the road. It happens. It always happens, even with mature companies, as last year's struggles at Darden
I'll be honest, and I part ways a bit with Tom Gardner here: As a function of current operations, at $36, I found Buffalo Wild Wings stock to be quite expensive. We don't require, nor do we even find any merit in, having official "views" on individual companies here at The Motley Fool. As such, I suppose that the sudden punishment of the company's stock makes some sense: Management isn't walking on water any more. But there is nothing, and I mean nothing, in the current report nor the annual projection that suggests that Buffalo Wild Wings has suffered any permanent damage.
To that end, I think investors have suffered as a result of taking on a little quotational risk. It happens. It happens every single day, and it will happen many times to every single person who ever buys a stock.
Bill Mann holds shares of McDonald's. The Fool has a disclosure policy. Bill is the guest analyst for a four-month stint at Hidden Gems, the Motley Fool's small-cap newsletter. A free 30-day trial is, well,FREE.