BWLD – HOT QUARTER

BWLD put together a rare quarter for the restaurant industry, with food costs declining and same-store sales accelerating.  From a ROI perspective, management continues to alter the store base to improve performance by closing underperforming stores.  It was very difficult to poke holes in this quarter.

Buffalo Wild Wings announced earnings of $0.81 versus the street at $0.73.  Company same-store sales came in at +3.9%, which implies an 80 basis point sequential acceleration in two-year average trends.   Franchise same-store sales grew +1.6% in the first quarter which implies a sequential acceleration in two-year average trends of 70 basis points.  Consensus was expecting comps at 3.4% and 1.8% for company and franchise restaurants, respectively.  Net earnings grew by 40% year-over-year, far in excess of the annual guidance  of 18%.

Same-store sales

BWLD – HOT QUARTER - bwld pod 1

As discussed above, comps were impressive for the first quarter of the year and I would expect same-store sales to remain strong in 2Q.  As the chart above shows, 2Q is a relatively easy comparison on a year-over-year basis.  For 1Q, the company stated that there was 2.4% of price on the menu during the first quarter.  Management stated on the earnings call that same-store sales for company restaurants during the first four weeks of April were tracking at +5.3% versus -3.7% during the same period of 2010.  While this is encouraging, it is important to remember that the early part of 2Q10 was a low point, and the intra-quarter comparisons become more difficult as we begin to lap the World Cup.  On a year-over-year basis, April comparable restaurant sales growth included 1.9% of price. 

The limited-time offers, including burgers, that the company promoted during the quarter proved popular with customers.  A new menu, rolled out during the quarter, also helped drive sales as management noted increased popularity for several new products and sauces recently released.    

Management engaged NFL fans as the “NFL Pick ‘Em” promotion winners received a trip to the Rose Bowl.  Another initiative that helped to capture attention for BWLD was the petition the company formed to encourage owners and players to reach an agreement and save the fall football season.  Basketball fans were also engaged with heightened media presence during the NCAA basketball season.  BWLD occupied T.V. spots during every NCAA men’s championship game on CBS including the championship game on April 4th. 

Average weekly sales growth for 1Q11 grew by 7.8% year-over-year at company restaurants versus same-store sales of 3.9%.  150 basis points of that outperformance was attributed to the closure of lower-volume restaurants while the remaining 240 basis points, according to management, was due to “quality operations” in the new 2010 and 2011 company owned units. 

Operating Margins

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From an operating margin perspective, BWLD had a fantastic quarter.  As the chart above illustrates, restaurant operating margins two-year trends improved 120 basis points.  Much of this was due to the deflation in chicken wing prices as well as moderate year-over-year gains (in percent-of-sales terms) in Operating and Occupancy expenses.  Chicken wing prices for the quarter were $1.22 per pound, down 36% from the average price of $1.91 during 1Q10.  From a cost-of-sales perspective, the outlook for chicken wing prices appears favorable for – in all probability – the remainder of the years.  The boneless wing contract has been extended through March 2012.

BWLD – HOT QUARTER - chicken wing prices 426

 

The new menu boosted sales but, of course, came at a cost in terms of training expense.  However, despite this training expense and added investment in hourly labor to drive improve guest service during lunch and happy-hour, leveraging sales growth and management wages enabled the company to keep labor expenses as a percentage of sales flat year-over-year.  

Outlook


Management struck a confident tone on the call and, given the performance in 1Q and the favorable post-market reaction in the stock, it is no surprise.  Clearly, the prospect of losing any of the NFL season is a threat to BWLD’s profitability.  However, management emphasized that the 18% growth is achievable even if part of the NFL season is lost.  New markets, most notably California, are performing well and there seems to be ample runway for unit growth to continue.   The company’s cash balance is currently at $91.3 million versus $71.2 million but the company remains conservative on the topic of returning capital to shareholders.  Capex spending in the first quarter was a mere $18.7 million.  For the year, capex is due to total $120-125 million ($100m new company restaurants, $17m remodels, and $6m maintenance capex).   Lastly, the company is guiding to a 34% tax rate for 2011. 

Howard Penney

Managing Director