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When buffalo fly
Today, we'll recap the news from Buffalo Wild Wings'
Smith led off with a short history of the company. Since I'm sure most of you know all about BW3 from its status as a Motley Fool Hidden Gems pick, we'll skip past that to scrutinize the execs' comments about their business model -- and how it might be evolving.
Present and future
As you already know, BW3 is a story of growth. From its humble beginnings as a college-town hangout in 1982 Ohio, the eatery evolved into a 447-restaurant monster over the next 25 years. It's now pedal-to-the-metal for 500 shops by year-end, and it's aiming to blanket the continental U.S. with 1,000 or more locations before 2015.
Much of this growth, of course, has come from expansion through franchising -- permitting entrepreneurs outside the company to use the firm's name and sell its trademark menu, paying a license fee for the privilege. Smith cites the franchise business model as a key element of BW3's plan to maintain 15% annual store-count growth, 20% revenue growth, and 25% earnings growth for the foreseeable future. Limiting the amount of capital that the company must spend to open a new location (because the franchisee pays the cost of opening a new store) allows BW3 to get bigger faster than it might by using only its own resources.
For examples of how franchising can help a company's bottom line, you need look no further than the results at Yum! Brands
To franchise or not to franchise
Still, there's no denying that franchising has worked well for Buffalo Wild Wings so far, powering earnings growth and helping to drive the stock up 156% over the last year. CFO Twinem credits the firm's 20%-plus annual revenue growth over the last five years to strong sales at company-owned restaurants, plus franchising royalties. In the last reported quarter, both company-owned and franchise locations boasted positive same-store sales, even as the restaurant industry overall saw comps slump.
That said, when you stack company-owned sales numbers up against franchisee performance at BW3, a pattern emerges. According to Twinem: "Our same-store sales for our company-owned locations in 2006 were 10.4%, and in first quarter were 8.7. Our franchise locations were 6.1% in 2006 and 3.3% in the first quarter." Moreover, among new stores opened since 2002, Twinem observes that "average weekly sales of our company-owned locations has grown by over 30%," while franchise average unit volumes have grown 29%.
Long story short: While BW3's franchisees are outperforming the industry, they're still lagging their corporate cousins. As good as it already is, is BW3 currently living up to its full potential?
A change in the menu?
Smith continues to voice support for the franchise business model, noting: "From an ownership mix, we're currently about 32% company-owned, we're about 68% franchised, and we anticipate that our growth for the next several years will be similar to that."
But in a July 2006 interview with Motley Fool Hidden Gems co-advisor Tom Gardner, I now think we hear the faintest suggestion that management wants to bring more of its business under headquarters' wing, so to speak. Said Smith back then: "The company is 70% franchised and 30% company-owned, and that has been the ratio we have had for a while. As we go forward, because we have that cash, we have that ability to open maybe a higher percent of company-owned, but we have franchisees that are still building in their territory or they have been successful in one territory and want to go somewhere else in the country [emphasis added]."
The drop in business mix from 70% franchised to 68% may not seem like much. But in May, management announced that it will be buying nine of its franchised restaurants in the Las Vegas area. To paraphrase the old saying: 2% here, and 2% there -- pretty soon you're talking real change in how Buffalo Wild Wings makes money.
Chipotle is also a Rule Breakers recommendation.
Fool contributor Rich Smith does not own shares of any company mentioned in this article, but looking at how well the Chipotle and Buffalo Wild Wings recommendations have turned out for Hidden Gems members, he kind of regrets that. (Take a free trial to the service, and check out the double-digit returns.) The Motley Fool's disclosure policy is finger-lickin' good.