BWLD: The Costs Add Up

Buffalo Wild Wings (BWLD) just reported a dismal third quarter for the year, missing consensus estimates and falling more than -11% on the open on Wednesday. We believe the stock can soon trade below $70 as the two pillars to our bear case strengthen: input costs are rising and so is the cost of growth. We expect earnings revisions from the Street, which remains at $3.21 for FY12.


Below is a slide from our January 19th conference call outline on BWLD showing our $3.05 estimate which was ill-timed.


BWLD: The Costs Add Up  - image010




Takeaway: WYN reported an in-line quarter but performance was driven by timeshare. 2013 guidance was a little better than consensus.

“The third quarter was highlighted by exceptional performance from our Hotel Group.  Our timeshare business delivered another quarter of solid performance and I’m pleased with the ability of our exchange and rentals group to mitigate the impact of economic headwinds in Europe. Our share repurchase program continues to reduce our share count and contribute to strong adjusted EPS growth.” 


- Stephen P. Holmes, chairman and CEO



  • Each of their business units exceeded their expectations. 
  • In the hotel group, fundamentals continue to improve, albeit at a slower pace. RevPAR growth seems to be moderating. However, opportunities seems to be accelerating for them
  • Strong hotel and timeshare growth in Brazil today which presents a great opportunity for WYN
  • Making excellent progress on Apollo.  Relaunching the Wyndham Hotel and Resorts website in August. Room nights from initiatives are up 17% YoY
  • Exchange and rental business: 4 of 5 of their European business had increases in their transaction volume without significant discounting.  They entered Croatia in 2004 selling just 200 weeks and today they have already sold 30,000 weeks YTD and are the market leader.
  • In August they expanded their vacation rental business in the US by acquiring a business at the entrance of Smoky Mountain Rocky Park
  • Delivered several web enhancements to Chinese website and increased online booking functionality. On track to reduce phone transactions by 30% and have a goal of 40% by 2015.
  • In September they acquired Shell Vacations in WVO: immediately accretive to earnings
  • The demographic for VOI is shifting towards younger and more single owners too.  Median household income: $74k, 68% don't have children, 89% own their homes. 
  • Used the majority of their FCF this year for share repurchases
  • Shell will increase their VOI EBITDA by 10% and expect it to add a few pennies to 2013 EPS.  Unlevered return of 20% above hurdle rate.
  • Excluding higher inter-segment fees, Lodging EBITDA would have increased by 21% YoY. International RevPAR decreased 5% reflecting a mix effect due to growth in Asia which is their lowest absolute RevPAR region due to other international destination.  Compounding this is that their lower end brands like Super 8 are growing faster than their higher end brand.  SS international RevPAR was up 2% in constant currency.
  • 11,500 rooms opened in the quarter - driven by chunky deals like the HPT group
  • Emerging markets account for 28% of the portfolio
  • Exchange and rental business:  both revenue and EBITDA was flat ex. FX. 
  • VOI: VPG increase resulted from better close rates and yield management
    • 20,000 new owners entered the system this year and they are on track to meet their goal of 27,000
    • WAAM 2.0:  reflected sales of a project in Orlando
    • Provision for loan loss reflected higher sales and challenges in porfolio performance due to higher loan balances and fraud that they have already discussed
    • Excluding intersegment fees, EBITDA for the segment would have been up 7% YoY
  • New facility: Overall debt levels are unaffected
  • Expect High single digit EBITDA growth in Lodging and mid-single digit growth in VOI and rental and exchange
  • 4Q guidance:
    • Assumes 143MM shares
    • EPS guidance:
  • Driver guidance: 
    • RevPAR to come in at lower end of guidance
    • Tour and VPG to come in at the higher end of guidance
  • Full 2013 guidance will be given on their Feb call 


  •  Upside to FCF go higher due to acquisitions? 
    • Will likely be over $700MM this year and higher next year.  Don't want to create expectations that are too high.
    • All the acquisitions that they have done are FCF positive and should be additive
  • Portfolio issues (VOI): 1) high balance loans tend to have higher default rates- they are tightening underwriting standards which should help in the future on the large balance loan situation. 2) Default fraud activity: bit of a Wack-a-mole issue - but feel like they have addressed the issue and see some improvement in that arena over the next few months
  • Contribution of WAAM 2.0: no margin differential between WAAM 1.0 and 2.0.  WAAM 2.0 is just in time inventory wise. It will be accounted for as gross VOI sales vs. commissions on WAAM 1.0
  • VPG improvement: better close rates and better volumes
  • Shell aquisition did not impact their ability to buyback stock
  • Flow through on timeshare was a little lower than the normal rate/ margin.  Partly due to the higher inter-segment fee and the higher provisions for losses.
  • Provisions on loan losses:  if the remediation plans they have in place work, then there should be some moderation over time. 
  • Inventory didn't decrease because they added some with the acquisition of the Shell business
  • 3Q is a big quarter for lodging bc of strong leisure travel (which is where they are concentrated).  There were some shifts in leisure travel vs. last year but it wasn't massive and it's hard to tell how much of that is due to Apollo. They are getting good feedback from franchisees like - Tripadvisor on their website.
  • HPT was a big driver of room growth QoQ.  Pipeline is down a bit because they had some strong openings in Asia. Also looking at some large conversion opportunities. Even though RevPAR is moderating a bit they see more opportunity to increase their system size.
  • Their RevPAR will start to benefit from their WYN brand growth as well. Thinks that the impact of lower end brand growth in China will start moderating  because they have some full service hotels opening there as well
  • Slower RevPAR growth going forward is due to slightly higher supply growth going forward and that RevPAR has already recovered a lot. 
  • They continue to see a lift in new construction because of their concentration in the economy segment. They have seen a bigger pickup in Urban markets. 
  • Still see a lot of room to keep buying back the stock and that they are nowhere near their intrinistic value
  • WAAM 2.0 going forward:  Don't think that there will be a dramatic ramp up QoQ in 4Q. Have a number of deals that are still in the pipeline. Requirements: desirable location, quality, amenities (basically will their customers find the product attractive). Looked at a 150 deals last year about 50% met the criteria but they only did 2 of them
  • Pacific NW was up about 9% but that has an easy comp in 2011.
  • Mobile is becoming a large portion of the mobile machine. They added an easier click to chat feature on their mobile site. The goal is to make it as easy as possible for customers to book. Lots of customers are driving and looking to book what's closest to them. Likely that the mobile customers are younger. Almost 2/3 of their business is same day. Almost all of their mobile bookings are done within 5 miles of the location.




  • In 3Q, WYN "repurchased 2.6 million shares of its common stock for $133 million. From October 1 through October 23, 2012, the Company repurchased an additional 915,000 shares for $49 million. The
    Company has $608 million remaining on its current share repurchase authorization."
  • 3Q12 "included $3 million of acquisition costs, legacy adjustments and debt transaction fees."
  • "Free cash flow was $682 million for the nine months ended September 30, 2012"
  • Logding segment: "The increase primarily reflected RevPAR gains, revenues associated with the Wyndham Grand hotel in Orlando, which opened at the beginning of the fourth quarter of 2011, and higher intersegment licensing fees for use of the Wyndham brand trade name."
  • "Domestic RevPAR increased 5%... Total system-wide RevPAR increased 2%, or 3% in constant currency."
  • "The development pipeline included approximately 950 hotels and 108,300 rooms, of which 55% were new construction and 47% were international."
  • Vacation exchange and rental: "In constant currency and excluding the impact of acquisitions,
    revenues were flat."
  • "In constant currency, exchange revenues were flat, as a 2% decline in the average number of members was offset by a 1% increase in exchange revenue per member. The decline in the average number of members was due to the non-renewal of an affiliation agreement at the beginning of 2012."
  • "In constant currency and excluding acquisitions, vacation rental revenues were flat, reflecting a 3% increase in transaction volume offset by a 2% decrease in the average net price per vacation rental."
  • Increase in vacation ownership: "primarily reflecting increased vacation ownership interest sales."
  • Increase gross VOI sales primarily reflected "a 5% increase in both volume per guest and tour
  • Higher VOI EBITDA "primarily reflects the revenue increases, partially offset by higher sales and marketing expenses related to the increase in VOI sales and higher intersegment licensing fees for use of the Wyndham brand trade name."
  • Balance sheet items:
    • Cash: $230MM
    • VOI contract receivables, net: $2.9BN
    • VOI & other inventory: $1.1BN
    • Securitized VOI debt: $1.9BN
    • LT debt: $2.5BN

ENERGY: Counting Rigs

The Marcellus shale is one of Pennsylvania’s natural gas wonders. It’s a massive natural gas play that has the best economics of any gas play in the US and watching the rig count in Pennsylvania can tell you where natural gas is headed. The Marcellus rig count was the last to fall, and will be the first to come back.


ENERGY: Counting Rigs  - 1 normal

investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

Remember November






Our #EarningsSlowing theme kicked into gear yesterday as more companies continued to disappoint on earnings through not beating Street consensus and/or offering lower guidance for the rest of 2012 into 2013. This is one thing that can’t be easily fixed by actions from the Federal Reserve. Thus, investors are realizing how bad things are actually getting out there and that is one of the explanations for yesterday’s sell off. Expect more reports to come in looking less-than-perfect over the remainder of the week.



With the election less than two weeks away, the polls and major media feedback show that Romney and Obama are tied with Romney making the occasional jump ahead. But the fact of the matter is the race is too close to call right now. There’s still plenty of time for bombshells to come out and hit each candidate hard and Donald Trump may be doing just that today. Just keep in mind that whoever is elected will have a major impact on the market on the long-term side of things.






Cash:                UP


U.S. Equities:   Flat


Int'l Equities:   Flat   


Commodities: Flat


Fixed Income:  DOWN


Int'l Currencies: DOWN  








Remains our top long in casual dining as new sales layers (pizza) and strong-performing remodels (~5% comps) should maintain sales momentum. The company is continuing to enhance returns for shareholders through share buybacks . The stock trades at a discount to DIN (7.7x vs 9.3x EV/EBITDA) and in line with the group at 7.3x.

  • TAIL:      LONG            



Emissions regulations in the US focusing on greenhouse gases should end the disruptive pre-buy cycle and allow PCAR to improve margins. Improved capacity utilization, truck fleet aging, and less volatile used truck prices all should support higher long-run profitability. In the near-term, Paccar may benefit from engine certification issues at Navistar, allowing it to gain market share. Longer-term, Paccar enjos a strong position in a structurally advantaged industry and an attractive valuation.

  • TAIL:      LONG



While political and reimbursement risk will remain near-term concerns, on the fundamental side we continue to expect accelerating outpatient growth alongside further strength in pricing as acuity improves thru 1Q13. Flu trends may provide an incremental benefit on the quarter and our expectation for a birth recovery should support patient surgery growth over the intermediate term. Supply costs should remain a source of topline & earnings upside going forward.

  • TAIL:      LONG







“over capitalized over produced and under incomed -too much everything” -@fearlicious




“The cure for boredom is curiosity. There is no cure for curiosity.” -Dorothy Parker




Germany's PMI down in October to 45.7 vs 47.4 last month.

Materials for today's call: "VIEW FROM THE BATTLEGROUND STATES"

Today at 1:00pm EST the Hedgeye Macro Team and Healthcare Team will be hosting a View From the Battleground States Expert Call. 


Materials: View From the Battleground States

Please dial in 5-10 minutes prior to the 1:00pm EST start time using the number provided below:

  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 496674#



"Based on our forecasting model, it becomes clear that the president is in electoral trouble"

-Ken Bickers     


Professor Kenneth Bickers of the University of Colorado will be featured on the call. Bickers and his colleague, Michael Berry, have created an economic forecasting model that has accurately predicted the outcome of the last eight presidential elections.


Topics will include: 

  • Electoral College vote set-up, impact and the importance of swing states 
  • Discuss Forecasting Model Factors: including state and national unemployment figures and changes in real per capita income
  • Factors that will make this election different 
  • Voter expectations and turn out
  • Economic impacts following the election (healthcare, fiscal cliff) 

Bickers' Background

  • Joined faculty at CU Boulder in 2003
  • Received his Ph.D. from the University of Wisconsin-Madison and his BA from TCU in Fort Worth
  • Published articles in numerous journals, including the American Journal of Political Science, Journal of Politics, Public Choice, Administration and Society, and the Journal of Conflict Resolution
  • Current research includes;
    • The consequences of devolution of federal policy activities to states and local communities
    • Local Government Elections Project, an ongoing investigation of the recruitment and campaigns of local office holders who populate local and state offices
    • Exploration of the relationship between residential mobility and local politics 


Enter your email address to receive our newsletter of 5 trending market topics. VIEW SAMPLE

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.