Buffalo Wild Wings (Nasdaq: BWLD) reported earnings results last week to conclude its 2010. Sales for the year grew 13.1% on the back of a 12.3% increase in store count, operating margin improved by a full percent, and earnings for the year ended up 25%. Yet the company's same-store sales results have been a major overhang on the share price.
For the year, Buffalo Wild Wings saw an increase of only 0.6% in company restaurants open for more than a year. Rival Chipotle Mexican Grill (NYSE: CMG) saw a 9.4% jump in its comps. Improvements such as that have led Chipotle's stock to gain 156% over the last year, compared to Buffalo Wild's 33% gain.
A Foolish opportunity?
Pessimists argue that Buffalo Wild Wings may be reaching a plateau. It's bad enough to imagine that same-store sales growth may no longer continue, or worse yet, that the company's expansion opportunities have begun to dwindle.
Thankfully, both fears are overblown. Barring this year, the company boasts a highly respectable comparable-sales history, with growth rates closely matching those of its red-hot rival. It also far exceeds the growth of the industry in general:
Same-store sales growth
|
Company |
2006 |
2007 |
2008 |
2009 |
2010 |
|---|---|---|---|---|---|
| Buffalo Wild Wings | 10.4% | 6.9% | 5.9% | 3.1% | 0.6% |
| Chipotle Mexican Grill | 13.7% | 10.8% | 5.8% | 2.2% | 9.4% |
Initial signs suggest that 2010 was just a blip. On the conference call, management noted that the first six weeks of 2011 saw a return to same-store sales growth of 3.8%.
Besides, it's small-f foolish to read too much into one year's worth of sales data. The table below compiles several examples of companies which have reported same-store sales growth below 1% for a given year, followed by their results for the two years afterwards. The results are incongruous, and they seem to have little correlation with the long-term value of the business. After all, McDonald's (NYSE: MCD) reported an average decline of 1% in annual same-store sales between for three years from 2000, but it then continued on to become a great growth story again.
Annual changes in same-store sales
|
Company Name |
Year 1 |
Year 2 |
Year 3 |
Notes |
|---|---|---|---|---|
| McDonalds, 2000-2002 | 0.6% | (1.3%) | (2.1%) | The stock has appreciated 460% since the start of 2003. |
| Burger King, 2004-2006 | 1% | 5.6% | 1.9% | The company would run into trouble again in 2010 before being bought out. |
| Red Robin, 2008 to YTD 2010 | (1.4%) | (11.1%) | (1%) | The company has invested significantly in marketing to boost restaurant sales. |
| Sonic, 2003-2005 | 0.3% | 6.5% | 6% | The famous burger chain bounced back briskly after this sales slowdown... |
| Sonic, 2008-2010 | 0.9% | (4.3%) | (7.8%) | ... But its share price has stagnated over the last eight years. |
The Foolish bottom line
Both Chipotle and Buffalo Wild Wings will grow unit counts by 13% this year, but the market is valuing Chipotle at 47 times its earnings, while Buffalo Wild Wings trades at only 27 times. To put that in more perspective:
- Yum! Brands (NYSE: YUM) trades at 22 times earnings, and last year it grew sales by 4%. Its International division grew units by 6%, while China -- the big story -- grew units by 13%.
- Jack In The Box (Nasdaq: JACK) trades at a 19 P/E, and this year grew units by less than 1%.
Astute investors may see the relative opportunity that exists here. After all, what really matters in this industry are a good strategy, good execution, and a proven concept with high returns. Buffalo Wild Wings has all three: It is well-run, expanding into new markets, and generating a 23% return on its new store investments. And with its franchising business growing briskly, there are solid reasons to believe that margins will improve.
A year from now, Mr. Market may wake up and see what it actually has with Buffalo Wild Wings: a business with a solid history of same-store sales growth, a brand with double-digit expansion, and a continued improvement in the company's profit margins. That would certainly deserve a rich multiple.
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