PICTURE A HOOTERS
restaurant. Now, keep the sports theme, but take away the creepy vibe of obligingly unconcealed waitresses pretending that every Bill, Jed or Jacob with a beer buzz is the first one clever enough to use the restaurant's name as a double-entendre. Also, make the chicken wings better meaty, crispy, generously sauced and, for the love of Buffalo, not breaded. How hard could it be to create the perfect wing joint?
Minneapolis-based Buffalo Wild Wings is trying. It wants to be the place where sports fans catch the big, ubiquitously displayed game and where young singles can meet, starry-eyed and sauce-smeared, over a game of video trivia. The performance of the company's stock, up 37% since its Nov. 20, 2003, initial offering, suggests that it's doing something right. How do the shares, and the wings, measure up for those looking for an investment and/or meal today? We'll look into that in a moment, since Buffalo Wild Wings turned up recently in our Rocket Fuel screen.
Our Rocket Fuel screen looks for stocks that are rising, and fast. Does that sound simplistic, even a bit indulgent? If so, you've got the idea we cast a lenient net, scooping up any high-risers that our regular value-biased screens have missed. We then pick one stock out, figure out what's fueling its gains and try to determine whether they're likely to continue.
Jill Simmonds and her husband Tim visit the Abilene, Texas Buffalo Wild Wings about twice a month, but she's ho-hum on the fare. "I'd opt for a Chili's, to be honest, but then I'm not a big wing fan," she says. "Tim's from Canada, though, so he likes Buffalo-style wings." Mrs. Simmonds says that when she does eat wings she usually chooses one of the restaurant's other sauces there are 12, including Caribbean Jerk, Spicy Garlic and Teriyaki. She describes the wings themselves as "not the meatiest I've seen, but not like chewing on a bone, either" and calls the crowd "total college."
About 30% of Buffalo Wild Wings' trailing 12-month sales of $137 million came from wings. Beer contributes another 30%. Other menu items include chicken legs, white-meat boneless "wings" and a standard roster of wraps, salads and burgers. The company has 256 restaurants fewer than its closest rival, privately held Hooters, which has 329 locations and annual sales of $670 million. Buffalo Wild Wings owns and operates 88 of its restaurants; the rest are franchised. Franchisees typically pay a fee of $40,000 to open their first restaurant, then pay an ongoing 5% of sales as a royalty and another 3% in advertising costs.
First-quarter results, reported on April 22, showed total sales company-owned restaurant sales plus franchise fees increasing 36% year-over-year to $40.2 million. Same-store sales rose 11%. Earnings jumped to $2.3 million from $690,000, but the number of shares more than tripled as a result of the IPO. Still, per-share earnings of 27 cents marked a 23% year-over-year increase and topped analysts' estimates by nine cents. The company credited the sales growth to effective promotional activity and to "strong traffic" during the Super Bowl and the NCAA basketball tournament.
Management issued second-quarter guidance for sales of $38 million, same-store sales growth of 5% to 7% and earnings of 10 cents to 13 cents a share. Second-quarter results are expected to be reported on Thursday.
John Beisler, an analyst with New York-based brokerage Whitaker Securities, was impressed by Buffalo Wild Wings' ability to cut costs during the first quarter to offset higher prices. "BWLD has posted margin gains in an environment where its primary item chicken wings have experienced a significant increase in price," wrote Beisler in a July 20 research report. He blames the higher prices on "high-protein diets, which have driven demand for chicken overall" and notes that chicken-wing costs cannot be hedged. Wholesale chicken wings fetched $1.50 a pound during the first quarter, a year-over-year increase of about 50%.
About the company in general, Beisler notes that he's "positive about the concept and its long-term prospects" and believes there's plenty of room for expansion, since the restaurants are "under-penetrated relative to other casual dining chains." But he adds that shares are "fully valued at these levels" and advises investors to "wait for a more attractive entry point." (Beisler doesn't own shares of Buffalo Wild Wings; Whitaker Securities doesn't provide investment-banking services.)
There's reason to believe, though, that shares are, if not as much of a bargain as Buffalo Wild Wings' Tuesday night 30-cent wing special, still fairly cheap. They trade at 37 times projected 2004 earnings a bit rich compared with the average price/earnings multiple of 19 for restaurants. But analysts predict that the company will boost earnings by 27.5% annually over the next five years, faster than the group's 12.7%. That gives shares a price/earnings-to-growth ratio of 1.37, lower than peers' 1.49 and the Standard & Poor's 500 index's PEG of 1.54.
The stock, then, looks somewhat cheaper than those of most restaurants. Shares of Buffalo Wild Wings have taken flight over the last nine months, but considering their growth prospects, investors thinking about taking a nibble now have little cause to be chicken.