Buffalo's Wild Stock

Motley Fool Hidden Gems recommendation Buffalo Wild Wings (NASDAQ:BWLD) came out with fairly tepid earnings for the quarter, and downright gloomy guidance for the remainder of this fiscal year. For the first quarter of 2005, ending March 27, Buffalo Wild Wings turned in revenue gains of 20% over the first quarter of 2004, but only 3.2% on a same-store basis. Revenues came in light and are expected to be lower than anticipated for the remainder of the year, as the company works out what it calls "inefficiencies" -- particularly new markets.

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 (NYSE:MCD) -- is perhaps the poster child of this Icarus-like trajectory, but there are plenty of others: Krispy Kreme (NYSE:KKD) and Schlotzky's are recent examples -- and they've generated grievous losses for shareholders. Boston Market and Krispy Kreme have the bonus of accounting fraud, but there are plenty more examples: Rainforest Cafe, Planet Hollywood, even Chi-Chi'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 (NASDAQ:SBUX) has gone through at least three periods in its history in which shareholders have -- and not without reason -- questioned whether its rapid-growth strategy hadn't put the company at risk of running ahead of its headlights. Yesterday's Buffalo Wild Wings results introduced a question that, frankly, every investor in the company should have been asking all along: What will happen when this growth story hits a bump in the road?

Bump.

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 (NYSE:DRI) showed. Such a risk is real. So is, of course, the risk that a concept will suddenly find itself past its prime.

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.