BWLD: DON’T MENTION THE WINGS

This may not be the best career risk management move, but BWLD is a story that we are still grappling with.  The company could be facing a staggering 20% increase in COGS during 1Q12, yet all research and commentary on the stock seems to skirt around this risk.  Are sales trends really that strong, and are they continuing to be as strong heading into 2Q, even given the drop off of the weather benefit and the slowing of the casual dining segment from February to March.

Don’t Mention the Wings

At the Telsey Advisory Group Spring Consumer Conference, Buffalo Wild Wings management had the following to say about commodity inflation:

“Commodities continue to receive a lot of attention these days. We have a long history of successfully managing our business and believe with our strategic focus on guest experience and operational excellence, our ongoing sales trends and unit level execution, and the benefit of a 53rd week, we will overcome rising commodity costs and achieve our net earnings goal.”

Here is what the company had to say on the same topic on the 4Q11 earnings call:

“We believe that with our strategic focus on guest experience and operational excellence, our ongoing sales strength and unit-level execution, and the benefit of a 53rd week, we will overcome rising commodity costs and achieve our 20% net earnings growth goal for 2012.”

Clearly there is a script that this management team is sticking to.  On the date of the 4Q11 earnings call, wing prices were up 75% year-over-year.  Now, they are up 98% year-over-year.  As our sensitivity table shows, below, based on guidance provided in the most recent 10-K, assuming a tax rate of 34% and shares out of 18.5 million, there could be a ~$0.70 impact to 2012 EPS from wing price inflation alone.  The question is, how much of an impact is consensus baking in?  Is the Street assuming blockbuster top-line and realistic COGs or are they assuming a large decline in wing prices during 2H12? 

BWLD: DON’T MENTION THE WINGS - BWLD wing sensitivity

Today at the Columbia Investment Management Association Conference, David Einhorn was quoted as saying that “Sometimes it’s a conspiracy to misinform people.  Wall Street has this agenda”.  We’re not saying that this is the case here, but we find it alarming that such a pertinent factor as commodity inflation is for BWLD over the next 3-6 months is barely being paid any attention.  The top-line story has been fantastic and we underestimated that in 4Q11’s results.  However, the lack of flow through was a worry to us then and is an even more acute worry now; inflation is only becoming more of a factor as time passes.

Perhaps the company can leverage labor, lighten up on G&A, and trim some fat elsewhere.  The reality is, however, that part of this company’s story is the growth story and G&A spending cuts may hamper growth efforts.  Labor leverage is definitely an available strategy but we do not see sufficient gains coming from that line to offset COGS significantly.

There is some risk to our bearish stance; the level of pricing that management is planning to take in the face of inflation pressures has not been determined.  Depending on how complicit consumers are with this price increase/increases, our view may change. 

The benefit of the 53rdweek is another offsetting factor.  At this point, the Street seems to be giving management 100% credit that it can manage through this period and meet investor expectations.  While the company has managed through inflation historically, investor expectations have not always been met.

Another Concept?

On another concept, management had the following to say:

We are also considering the possibility of acquiring or developing an additional concept to maintain our position as a high-growth restaurant company for the long term.”

We know never is a long time but never, in our recollection, has there been a restaurant company successfully transition from an original concept into two concepts while maintaining its growth profile concurrently.  Comments like the above statement from management make us weary.  Any transaction for Buffalo Wild Wings to acquire a growth brand is almost certain to be dilutive to EPS and the company lacks the cash flow to grow two concepts without taking on further capital.

Our EPS estimate for the year remains below consensus.  We are not satisfied that the risks to the company’s outlook are fully appreciated. 

Howard Penney

Managing Director

Rory Green

Analyst