BWLD: PULLIN’ OUT THE PLAYBOOK ON THE SHORT SIDE

We haven’t officially revisited our BWLD short thesis in over a year.  During that time, we stayed away from the long side because we don’t think the company has the unit economics to survive in the long run.  After last night’s earnings release, we have a few incremental data points to support an emerging secular bear case for BWLD.


We will spend more time pressing our short case over the upcoming weeks, but we wanted to post four critical charts to get the discussion going.

  1. New Unit Sales Performance
  2. ROIIC
  3. CFFO/Net Income
  4. Valuation

NEW UNIT SALES PERFORMANCE

While same-store sales trends (+5.2%) were better than expected, the company missed overall revenues by 2% due to lower-than-expected new unit productivity.  This is the first time since 1Q10 that the growth in average weekly sales was below the growth in same-store sales.  This is a critical leading indicator for future trends.  While we see some underlying issues, we do acknowledge the company is currently benefitting from a few tailwinds.  These include mid-single digit comp growth, lower labor costs, and lower wing costs.  The bottom line is that there is limited visibility toward the future growth of the core BWLD concept.  This factor is reaffirmed by management’s desire to aggressively expand into the fast casual space.

BWLD: PULLIN’ OUT THE PLAYBOOK ON THE SHORT SIDE - bwld aws

ROIIC

BWLD has always been a very low return business and now that new unit performance is slowing, the blue line will likely head lower from here.  We expect the red line to begin to mirror this trend.

BWLD: PULLIN’ OUT THE PLAYBOOK ON THE SHORT SIDE - bwld roiic

CFFO/NET INCOME

CFFO/Net Income is a key metric for any growth company, as it is another measure of the efficiency of capital being deployed.  Simply, it indicates the proportion of earnings that are yielding cash.  A higher ratio relative to the industry can indicate more conservative accounting, signaling a sustainable level of income.  Any ratio that is close to flat or negative is generally a red flag for us.  BWLD is heading in the wrong direction.

BWLD: PULLIN’ OUT THE PLAYBOOK ON THE SHORT SIDE - bwld cffo net income

VALUATION

BWLD is still a great example of the current bubble in casual dining.  On a good day, BWLD should trade at 8x EV/EBITDA – but the market suggests the company is worth 11.2x EV/EBITDA.  Assuming the multiple corrects three turns over the coming months, there could be as much as 30% downside from current levels.

BWLD: PULLIN’ OUT THE PLAYBOOK ON THE SHORT SIDE - bwld ev ebitda

Feel free to call with questions.

Howard Penney

Managing Director