April showers rained on Motley Fool Hidden Gems recommendation Buffalo Wild Wings (NASDAQ:BWLD) when it announced first-quarter results on April 26. Although revenue increased 26.4% year over year to $50.8 million, the company missed its own sales expectations of $51 million to $52 million. The stock shed 13% the next day, closing at $32.50, and BB&T Capital downgraded the stock from "buy" to "hold" (if you pay attention to that kind of thing).

For many investors, the most disappointing revelation was that same-store sales increased only 6.1% at company-owned outposts and 3.2% at franchises. That underwhelming franchise number is one to keep an eye on. Franchising is one of Buffalo Wild Wings' most profitable areas and in the first quarter it grew 34.4% to generate more than 11% for the top line. But if the company can't get that number up and offer a compelling case to franchisees, it will need to work harder to deliver on promised 20% to 25% annual unit growth.

May flowers
Pleasant tidings came on May 16 when the company announced it had signed agreements to franchise 36 locations in the New York metropolitan area, 11 in Mississippi, Alabama, and Florida, and four in Southern California. This growth will bring the total number of Buffalo Wild Wings locations to 371. The stock went up 5% on this news, from $28.35 to $29.66.

Restaurants also have a new product on the menu: Naked Tenders. These all-white-meat, unbuttered chicken strips are supposedly quite tasty, and customers will be able to dip them in new Honey BBQ sauce come June.

Going forward
Buffalo Wild Wings remains in a solid financial position with $49 million in cash and no debt. During the first-quarter conference call, CEO Sally Smith offered second-quarter earnings guidance of $0.15 to $0.17 per share on $48 million to $49 million in revenue. She also said that the company expected fiscal 2005 revenue from $215 million to $220 million, but did not offer a full-year earnings guidance. However, that won't stop me from doing a little bit of math on your behalf.

Last year, it had a net profit margin of 4.1%, up from just under 2% in preceding years. Most companies should realize greater margins as they expand and become more efficient, but Buffalo Wild Wings admits that it has "experienced some inefficiencies" recently, particularly in labor and sales costs. To make headway toward correcting these, it opened a third format in Minnesota (at 5,500 square feet instead of the 6,000 square feet of the other two formats) and is beginning to study which of the three designs offers the most bang for the buck. But because this analysis is still a work in progress, I am willing to estimate that Buffalo Wild Wings' net profit margin will be approximately 4.1% again this year (net profit margin in the first quarter was approximately 4.8%).

Using that figure, I estimate earnings from $8.81 million to $9.02 million in 2005, or $1.01 to $1.03 per share, and a forward P/E of 30. In comparison, analyst estimates range from a low of $0.97 to a high of $1.11 per share.

Odds and ends
There was very little noise on the insider front during the time period. CEO Smith exercised 10,000 options at $4.15 per stub, and senior VP Kathleen Alberga sold $27,843 worth of shares on the market for $31.32 each. Insiders hold more than 15% of total shares, and the stock trades just north of $31 per stub -- 25% off its 52-week high of $41.70.

The Fool continues to follow this Hidden Gems recommendation closely, as these recent articles by Bill Mann and Jeremy MacNealy will attest. And in this month's issue of Hidden Gems, analysts Tom Gardner and Bill Mann devote an entire page to a point-counterpoint on the prospects for this thrice-recommended Hidden Gem. For their thoughts on all things wings, take a 30-day free trial.

Tim Hanson sits near the Hidden Gems team and has to listen to it go on and on about Buffalo Wild Wings. He does not own shares of any companies mentioned in this article. The Motley Fool is investors writing for investors.