BWLD | COVERING THE SHORT

After Buffalo Wild Wings (BWLD) earnings call last night we want to cover the short call here and move it to the short bench.

 

Our underlying thesis for the BWLD short was that 2015 earnings estimates were too aggressive.  While that turned out to be correct, the better than feared “miss and cut” is reason enough for the stock to rally.  We would note that management will be raising prices excessively to compensate for increasing costs, an issue that may haunt them in the future.  For the time being, consumers don’t seem to be bothered by the aggressive pricing the company has taken over the past three years. 

 

As we said, last night BWLD announced 2Q15 earnings, reporting EPS of $1.12 versus consensus estimate of $1.27. Restaurant sales came in under estimates at $401.9 million versus consensus of $404.4 million, a ~17% increase YoY including some newly acquired restaurants. BWLD did beat the comps; Company owned stores reported SSS of +4.2% versus consensus of +3.8%, while Franchise locations reported an increase of +2.5% versus consensus of +2.1%. The comps are largely built up by 3.8% pricing at company owned stores (franchisees price at their own discretion). Margins have been under pressure as wing prices are up 26% YoY, and wage rates have been increasing significantly in certain markets.

 

BWLD | COVERING THE SHORT - CHART 1

BWLD | COVERING THE SHORT - CHART 2

 

Margins across the board are worse sequentially. BWLD Cost of Sales increased 3.9% to 29.3%, although slightly below consensus estimates of 29.5%. Restaurant level margins are down 7.4% YoY to 18.8% versus estimates of 19.1% as labor and food costs weigh on the P&L.

 

BWLD | COVERING THE SHORT - CHARt 3

BWLD | COVERING THE SHORT - CHART 4

 

Bottom line, management cannot expect to be able to raise prices at these rates to cover the accelerating costs. Furthermore, it is still unclear whether the addition of the guest experience captain is adding value and making up for the extra expense. We expect the football season may keep this stock afloat in the near term but these rising prices will take its affect in the long run, and we will revisit the short at that time.

 

 


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