Our stance on BWLD remains intact; the company’s most recent quarter was strong from a comparable sales perspective but coming commodity inflation is set to change the landscape meaningfully.
Buffalo Wild Wings posted stronger comps than we were anticipating largely due to the unlimited wings lunch promotion. With the 3Q cost of traditional chicken wings having been as low as it was ($1.16 per lbs or 18% lower than 3Q10), offering such a promotion had an impact on margins that was easily offset by the incremental traffic generated. However, this strategy is unsustainable and does nothing to convince us that the stock’s current level is sustainable. The most important part of this thesis is that chicken wing prices are heading higher and will likely become a headwind half-way through the first quarter of 2012.
At the Sanderson Farms Investor Conference in New Orleans last week, there were detailed presentations given by various members of the SAFM team as well as Sue Trudell from Express Markets, Inc on the Broiler Industry and Tim Brushnan from Brock & Associates on the grain market. The most important take away from the meeting from BWLD’s perspective is that chicken (and wing) prices are most likely going higher.
The insight on the broiler industry was particularly telling; chicken wing prices are expected to move significantly higher during the winter and into the Super Bowl. While Trudell did not think that wing prices were going to reach ’09 peak levels, her company’s analysis is anticipating prices touching $1.50 and staying above 2011 levels for the majority of 2012. Joe Sanderson, giving his take on wing price trends, anticipates $1.45 per pound by the time the Super Bowl rolls around. It is also worth noting that the chicken wing prices forecasted during the presentation were “conservative” in their assumptions. It is possible that 2012 could pose significant challenges for BWLD from a cost of sales perspective.
For the first three quarters of 2011 wing prices for BWLD have averaged $1.22, $1.02 and $1.16 per pound, respectively. For context, if chicken wing prices were to average $1.50 during the first three quarters of 2012, that would represent year-over-year wing price inflation of 23%, 47%, and 29% during 1Q, 2Q, and 3Q, respectively. From a commodity perspective, 2012 is shaping up to be a very difficult year for BWLD.