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Conclusion: Results were slightly ahead of expectations but commentary indicated that current trends are sluggish.  However, on a two-year average basis the early trends in the fourth quarter continue to demonstrate acceleration on a two-year basis.

BWLD’s 3Q10 earnings came in at $0.47 per share, better than both my estimate of $0.45 per share and the street’s $0.44 per share estimate.  Company-owned same-store sales grew 2.6% in the quarter relative to the street’s 1.8% estimate, implying a 35 bp acceleration in two-year average trends.  Given the strong top-line trends and favorable food costs, which declined 185 bps YOY as a percentage of sales, restaurant-level margins improved about 110 bps YOY (putting BWLD in the Nirvana quadrant of our restaurant sigma chart).  The decline in the cost of chicken wings (down 15% YOY) drove the majority of this YOY food cost favorability.  The company’s reported tax rate of 30.4% came in lower than I was modeling and added about $0.02 per share relative to my numbers.

Although the company reported that company-owned comparable sales declined 0.7% during the first four weeks of 4Q10, this points to a 90 bp increase in two-year average trends since the end of 3Q10 as the company was lapping a difficult +5.9% comp from the first four weeks of 4Q09.  To that end, the low end of management’s 4Q10 comp guidance of “at least flat” is somewhat disappointing as the comparisons get easier for the balance of the quarter and a flat comp in 4Q10 implies a 40 bp slowdown in two-year average trends from 3Q10.  Same-store sales growth at franchisees slowed about 40 bps during the third quarter on a two-year average basis and trends during early 4Q10 remained in line with 3Q10 results.  And, the company’s FY11 EPS guidance of over 18% growth falls short of BWLD’s more typical 20%-plus range.  On the earnings call, management explained that earnings growth will be limited somewhat by higher YOY preopening expenses and increased investment internationally.  Management said its FY11 forecasts are still preliminary, however, and for now, they are being conservative, but they will give more guidance on expected earnings growth come their 4Q10 earnings call.

Relative to expected food costs in FY11, the company has extended its contract on boneless wings (represented 19% of 3Q10 sales) through March 2012 at prices about even with 2010 levels.  Although traditional wing costs (represented 21% of 3Q10 sales) have proven extremely favorable during the last two quarters and should continue to benefit margins in 4Q10 (about $1.51 per pound versus $1.78 in 4Q09), management said prices continue to fluctuate monthly and are one of the biggest unknowns relative to the company’s current commodity outlook.  That being said, the company currently expects traditional wing costs to be beneficial to margins on a YOY basis and is planning to implement a menu price increase in January, resulting in a cumulative 2% menu price increase for 1H11.

BWLD – FIRST LOOK - bwld sigma

Howard Penney

Managing Director