BWLD: NOT OUT OF THE WOODS

Buffalo Wild Wings reported 1Q12 EPS of $0.98 versus $0.95 consensus but missed on the top line.  We do not believe that management’s reiterated 20% EPS growth guidance will be met and, as such, are remaining bearish on the stock. 

 

Revenue

 

1Q12 Company-Owned same-store sales came in at 9.2% which was below consensus of 10.7% and at the low end of the range of analyst estimates, according to consensus metrix.  The 9.2% comp in 1Q implies a sequential deceleration from the 12.9% same-store sales growth that management previously reported for the first six weeks of 1Q.  It is unclear how much of a benefit was derived from the weather benefit in 1Q and the extra day in February due to 2012 being a leap year.  Panera Bread also reported after the close and stated that 200 basis points of its 7.5% 1Q comp was due to the favorable weather conditions.  Gift cards also added 2% to same-store sales.

 

Revenue Outlook

 

Same-store sales during the first four weeks of 2Q12 have been growing at 6.7%.  Pertaining to the aforementioned impact of gift cards, it is worth noting that the impact of gift card redemptions tends to be seasonal – typically during the first couple of months after the holiday period.  As a result, we do not expect any significant impact from gift cards over the next couple of quarters.  Management's guidance of 6.7% for 2Q same-store sales, as the chart below highlights, implies the first sequential deceleration in two-year average trends since 4Q10.

 

BWLD: NOT OUT OF THE WOODS - bwld pod1

 

 

Margins

 

The company managed to offset higher chicken wing prices by gaining leverage over Labor, Operating, and Occupancy costs through strong same-store sales.  Cost of Sales increased by 311 basis points as a percentage of Company Sales due to higher chicken wing prices and we expect that headwind to stiffen in the second quarter as wing price inflation is likely to exceed the level seen in 1Q. 

 

Margin Outlook

 

Decelerating same-store sales trends will make leveraging the company’s fixed costs at the restaurant level more difficult going forward.  Ultimately, wing price inflation is a known headwind among the investment community but our view is that same-store sales growth will not be sufficient in 2Q or 3Q to leverage fixed costs to the extent needed to fully offset that headwind.  Don Thompson, soon-to-be-CEO of McDonald’s, offered this insightful quote on the weather impact on his company’s top line and entire P&L:

 

The mild winter weather also benefited sales and traffic…this momentum helped offset some of the headwinds and margin challenges we're facing, due to pressures like commodities that we've mentioned before.

 

The question from here is whether or not the company can “manage through” elevated COGS in the next quarter. 

 

 

Conclusion

 

We think that Buffalo Wild Wings got out of jail this quarter.  The stock did sell off on the release but we believe that negative estimate revisions are still ahead and there is further downside in the stock.  If wing prices remain elevated, we believe management will be forced to revise full year guidance to the downside, also.

 

Howard Penney

Managing Director

 

Rory Green

Analyst