Buffalo Wild Wings is screening less conclusively as a short as chicken wing prices have declined dramatically over the last few weeks. We believe that the “conversation” around BWLD’s main input cost has changed significantly and this has important implications for our short thesis.
Hedgeye’s macroeconomic outlook has differed from consensus of late but market prices are vindicating the stance that a stronger dollar, and the lower commodity prices that tend to accompany that, is boosting the purchasing power of the American Consumer.
From Buffalo Wild Wing’s perspective, the implications of this are two-fold:
- Top-line demand should benefit from the stronger dollar, overall consumption growth
- Chicken wing prices should come down as a derivative effect of a stronger dollar, lower corn prices
We believe that issues at the company level preclude us gaining sufficient conviction on the top line to suggest buying BWLD, but some facts pertaining to our short thesis have changed.
Traffic Still a Potential Problem
We retain a healthy level of skepticism that Buffalo Wild Wings will ultimately meet consensus expectations. While the consumer, overall, seems to be holding up well despite the payroll tax increase, casual dining is not a point of strength. We doubt there are any restaurant companies, particularly within casual dining, that have the power to raise prices 6% year-over-year and not see a drop off in traffic growth. Management has implied that tests have “gone well” with the changes in how portions are sized (by weight versus number of wings) but we believe that bulls may be underestimating the sensitivity of traffic to price increases.
Wing Prices Coming Down?
Over the last year we have heard management’s tone on commodity costs change drastically. This thorn in the company’s side may finally be going away as prices seem to be steadily declining. Management is aiming to bring cost of sales down to 30%, from 32% in 4Q12. This is largely dependent on how comps trend but wing prices coming down should make this goal easier to achieve.
At this point, it is difficult to know where wing prices will trend, but if prices were to continue to trend lower, it could have a dual impact of improving sentiment on the stock and supporting EPS expectations.
Call with questions.
Howard Penney
Managing Director
Rory Green
Senior Analyst
