Let me state up front that I don't think that Buffalo Wild Wings (NASDAQ:BLWD) (henceforth BW3) is that bad of an investment, at least not right now. I'm sure that Ryan -- my esteemed colleague and enemy to the death today -- will point out how fast the company is growing, and how delicious those wings are. All of that is true today, but the first point may not be true tomorrow, because the second point may become irrelevant sooner than you think.

I think there are better opportunities available in the hotly contested casual dining sector, and I believe that the sector itself may be an endangered investment species. The longer your investment horizon is, the riskier I think BW3 gets.

Here's a summary of BW3 and some of its closest publicly traded competitors. I'll be referring to these numbers in the discussion below:


Market Cap (mill.)

Profit Marg.

Return on Assets

Fwd. P/E


Buffalo Wild Wings












Applebee's (NASDAQ:APPB)






Brinker (NYSE:EAT)






Darden Restaurants (NYSE:DRI)






Ruby Tuesday (NYSE:RI)






You'll notice that BW3 turns in the weakest bottom-line performance. Return on assets is also the lowest of the bunch, and the company looks overvalued whether you look at price-to-sales or price-to-earnings. Note that those are forward earnings, which gives BW3 a more attractive ratio thanks to its impressive forecast of 25% growth annually over the next five years.

For a company in its growth phase, BW3 is managing its growth rather timidly, as evidenced by the low ROA and a balance sheet devoid of long-term debt. Some debt can be a good thing for companies with large growth opportunities, and I'm wondering whether management is being too conservative, or maybe it just doesn't trust its own growth plans to work out the way they're meant to.

Red Robin, for example, is pulling more earnings out of every dollar of revenue, and growing more aggressively with a modicum of borrowed funds. And established leaders in the field, such as Ruby Tuesday and Applebee's, are sporting nearly twice the profit margins of BW3, with attractive valuations to boot.

Foolish finger food for thought
BW3 is competing against all of these excellent companies and dozens of others, as well as with locally owned and operated sports bars, fast-food chains, and barbecuing neighbors. When the novelty of those wing sauces wears off, BW3 will be just another commodity.

But none of that matters unless you believe in the prospects of the sector as a whole. With oil and gas prices at all-time highs, consumers will eventually have to cut down on those trips to their favorite eateries in favor of fewer and more economical trips to the grocery store. When the housing bubble pops, it will put further pressure on discretionary spending, because consumers' houses won't be able to act as their combined savings account and credit line anymore. BW3 stands to lose mightily when these larger trends converge. That's not a novel idea, but it's true nonetheless, and a big part of why I'm staying away from most retail stocks these days.

Buffalo Wild Wings is a Motley Fool Hidden Gems selection.

Think you're done with the Duel? You're not! Go back and read the other three arguments, and then vote for a winner.

Fool contributor Anders Bylund holds no position in any of the companies discussed here, and he doesn't like chicken wings. You can check out Anders' holdings if you like. Foolish disclosure is spicy hot and certified free of bird flu.