BWLD – BEAR IN BULL MARKET

It’s difficult being bearish on a stock when the stock has been moving in a bullish trend with major indices hitting three-year highs and speculative growth stocks catching a bid.

 

U.S. spending habits seem to be positive for consumer stocks currently but elevated gas prices are impacting confidence.  Last Friday we saw the University Of Michigan Index Of Consumer Sentiment unexpectedly fell in March, coming in at 74.3 versus 75.3 in the month prior expectations of 76.  Looking at the price action of stocks of consumer facing companies, it is clear that certain segments of retail are doing very well.  Preliminary reports of AAPL’s new iPad sales are positive and the company’s stock is now up 45% for the year.  Homebuilder stocks are hitting highs not seen since 2008 and high-end retailers from Lululemon (LULU) to Harley Davidson (HOG) are hitting multi-year highs.  Restaurants, too, are seeing their stock prices surge.  YUM, MCD, CMG, and SBUX are some of the strongest stocks in the space.  BWLD can be included in that group but stands alone in that none of the other restaurant companies are facing protein cost inflation of 50% or more in 2012. 

 

Looking at the recently filed 10-K, we see that BWLD offers the following statement on chicken wing prices’ impact on the company’s P&L: “A 10% increase in the chicken wing costs for 2011 would have increased restaurant cost of sales by approximately $3.8 million”.  The 2010 10-K had a similar statement except the impact was $3.9 million.  If we assume a similar sensitivity in 2012, a tax rate of 34%, and shares out of 18.5m, then the table below offers us an idea of what kind of an impact wing price inflation may have on BWLD EPS in 2012. Assuming that 2012 wing price inflation will be +50%, which is certainly in play if not conservative, implies a $0.68 impact to BWLD’s EPS. 

 

BWLD – BEAR IN BULL MARKET - BWLD wing sensitivity

 

BWLD – BEAR IN BULL MARKET - chicken wings

 

 

Another potential cost headwind is labor.  Given the minimum wage hikes that were brought through Arizona, Colorado, Florida, Ohio, and Washington, we believe that a significant increase in labor costs could further impact the company’s P&L.  18.2% of the company-owned Buffalo Wild Wing restaurants are in those markets.

 

BWLD – BEAR IN BULL MARKET - bwld min wage

 

 

Despite impressive same-store sales trends over the past month and favorable weather conditions in Buffalo Wild Wing’s markets, EPS estimates have not increased for the full year and have even declined for 3Q12. 

 

BWLD – BEAR IN BULL MARKET - bwld consensus EPS

 

 

In order to avoid wing price inflation having a significant impact on wing price inflation, three things need to happen:

  1. The company needs to raise prices without hurting demand (higher gas prices are not helping)
  2. Management needs to cut G&A without impeding growth in the future
  3. High single-digit same-store sales are needed for the remainder of the year

 

In our view, the probability of all three of these factors working out in the company’s favor is not high.  Expectations for the company’s same-store sales trends are extremely high with 1Q consensus at 10% for 1Q and 6.5% for FY12. 

 

In short, BWLD’s stock price now anchors largely on one factor: the top line.  How rapidly and sustainably the company can grow the top line is going to be crucial for BWLD this year.  The new TV and radio spots, along with the digital advertising campaign and increased presence during March madness will help in the near-term. 

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 

 

 

 


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