• It's Here!

    Etf Pro

    Get the big financial market moves right, bullish or bearish with Hedgeye’s ETF Pro.

  • It's Coming...

    MARKET EDGES

    Identify global risks and opportunities with essential macro intel using Hedgeye’s Market Edges.

And BWLD lost it….

According to senior management, all of the company-owned locations entering the comp base in the last four months are negative.  Importantly, all these are units that opened in 2008 and have trended down from their opening volumes, and are “continuing negative on a year-over-year basis as they enter their 16th month of operation when they become a part of our same-store sales calculation.” On top of that, they have identified about a dozen restaurants that are not meeting sales expectations.

What is the significance of 2008?  In that year capital spending was $67 million, up 63% year-over-year on top of 74% growth in 2007.  In order to deliver on the street’s expectation of such rapid growth in a short period of time, site selection had to be compromised and the company was not opening “A” sites.  This is what we call “sustainability.”  It’s never about whether or not concepts can grow, but it is the “sustainable” rate of growth that produces the highest return on incremental invested capital - ROIIC.

Unfortunately, a bad unit will always be a bad unit until it is not.  What is making bad site selection even worse is a more competitive landscape. 

Management also noted last night that the company has experienced a decline in its alcohol sales, which “we believe is a result of aggressive competition and advertising for our bar business, as competitors, both local and on a national level, are offering significant discounts for both food and alcohol.”

BWLD is positioned as a growth company and as such, has “growth” related costs running up and down the P&L.  Going forward, as same-store-sales remain under pressure, these costs will become more evident. 

As the saying goes, “in a drought when the water goes down in the lake you can see all the stumps.”  For BWLD, the only fix is to slow growth and cut costs.  Last night management gave us no reason to believe that these measures are forthcoming.  In an effort to explain the weakness in 1Q10 and April same-store sales trends, management stated, “And we estimate the effect of planned cannibalization as we built out company-owned markets to be about 40 basis points in first quarter and in April.”  Companies that are growing too fast expect cannibalization.  Once they start openly communicating it and trying to explain it away, it is typically a sign of pending disaster.  SBUX used to say that cannibalization was not a problem before it had to close about 800 units in the U.S.

As we see it, the fix is not in…..

EARNINGS CALL NOTES

BWLD has opened 86 new restaurants in the past 12 months, a 14.9% growth rate. 

1Q SSS were at 0.1% company and 0.7% franchise

  • Increased bar competition
  • Weather
  • Event fluctuation

Highlights

  • Guest feedback is strong
  • Successful flat bread flips became a favorite and will be added to core menu
  • Began new LTO, the new Southwest Steak Slammer
    • Providing over a 25% increase in burger capacity
  • March madness deep fried pickles are doing well
  • TV campaign

Revenue

  • Increased by 15.7% yoy
    • Company increased 15.5%
  • SSS increased 0.1% for the quarter
    • Price was 2%
  • AWS decreased 5.6% in the quarter
  • AWS volumes were less than 4Q
  • 1Q10 AWS was 70 bps less than SSS
  • 5 new restaurants
    • Initial weeks are outperforming average
  • Royalty and franchise fee grew 18%
    • Franchise locations has a 0.7% SSS increase
    • 57 additional units vs 2009 in operation

Company owned

  • 30.6% cost of sales
    • Increase in wing price, up 17%, is the net cost
    • Wings as % of sales were the same as last year
  • Labor
    • Efficiency and favorable insurance costs offset by workers comp
    • Benefit from lower utilities continued but was offset by higher credit card fees and benefit in prior year
    • Restaurant level cash flow was 24.7m/17.9% of restaurant sales vs 18.5% last year
  • D&A was 6.3%, up 60 bp from last year
    • Accelerated depreciation in 1Q for the additional quarters targeting to close in future quarters
  • G&A
    • 7.1% of revenue
    • 100 bps down
    • Lower cash incentive plan expenses

Opened 5 new locations versus 10 new a year ago

  • 1.1m in preopening expenses

Other

  • Investment income totaled 185k for 1Q compared to 76k in 2009
  • 324m in assets
  • 221m stockholder’s equity
  • CFFO 24.7m for quarter

Trends and details

  • First 4 weeks
    •  
    • -2.4% franchise SSS
  • Expected food and alcohol costs benefit slightly less than 2% for company restaurants
  • 2 restaurants in 2Q but 4 closures
  • Opening 11 franchise units this year
  • Price of chicken wings expected to be $1.58 vs $1.69 last year
  • Leverage on labor line is expected
  • Expect operating expenses to be higher than last year
  • G&A expected to be 11.5m excluding stock based comp

Same store sales

  • 1Q same-store sales and April same-store sales  are soft
  • Sizeable week-to-week fluctuations
  • Weather had a 50bp impact
  • Planned cannibalization was ~40bp in first quarter and April
  • Nearly all of company locations entering the comp group, are negative
  • About a dozen restaurants are not meeting expectations

Ways to drive sales

  • Launching new wing flavors
  • Return of margarita mayhem

Media

  • Facebook and other social media
    • Coupons on website and Facebook page

Remodels

  • Remodel 12 company locations in 2Q and another 7 in 3Q
  • Franchisees remodeling 12 this year

Q&A

Q: Quantify new unit impact on comp base and alcohol sales, please.

A: Opening strong is our emphasis.  Comp base enters after 16 months and can be lapping honeymoon period.  Should be able to look at how we’re operating in closing months before they enter comp group.  Looking at 1Q of 2010 and 1Q2009, and every quarter really, there’s probably about 1% of SSS impact related to weather or cannibalization or underperfomance of stores

Same-store alcohol sales are down.

Q:  Looking at 20% earnings growth costs.  Extrapolating wing costs, what comp do you need?

A: We have other levers that we can pull but are not sure this far out what comps we will need. Moderate wing costs are a component and we are seeing decline in that market. If the market help where it is we would be under the $1.58 we were assuming.

Q: Looking to take price in new menu?  Costs?

A:  Haven’t decided.  If we kept it where it is now it would be just under 2%.  Boneless wings are locked in for the rest of the year.  Beef and pork are locked for the whole year.

Q: Even given the first 2 months of the quarter, your bias is that you can expand earnings at company owned stores?

A: That was on costs…

Q: G&A, anticipating faster growth in next quarter? Investments?

A: More headcount…back out the stock comp number…when you’re comparing cash G&A related items in 1Q it was 10.7m dollars and that was flat to last year.  Looking at change from 4Q it went down 0.2m.  11.5m is guidance for 2Q. 

Q: One specific region or locations that are getting hit harder?  Newer markets? Midwest? Who is the competition taking away alcohol?

A: Seeing a decline in alcohol same-store sales across markets

Q: On new stores entering the comp base negative…is that something you typically see?  How are those stores measuring up on ROIC?

A: Overall we’re pleased that 18% cash flow on the overall group is still working but we’d like less dip from high weeks.

Q: Which promotions do you think will most help SSS?

How did NCAA additional media go?

A:  March was a positive month, media helped.  Will be looking at about 7 restaurants that are not meeting expectations.  Company is going to emphasize BWLD as a place for happy hour, after work, late night. 

Q: More details on the general remodel costs? Also, where can you get leverage on the labor line?

A: Typical remodel costs 400k.  Remodeled one in the first quarter that was trending negative; after the remodel it was back to flat same store sales. 

Q:  What are the common characteristics of your 12 underperforming stores?

A: There is no specific market that has those restaurants and there are always 12 underperforming stores at any time.

Q: Can you comment on the day part mix?  Is it across the board? All day parts? Geographies? Alcohol? Can you also comment on Easter?

A: Easter was in April in ’09 and ’10.  Nothing stands out as significant from a day parts standpoint.  There is no day part either; it’s kind of across the board and partly because of calendar and restaurants coming into the comp group.  The only thing is that last year Easter fell after the NCAA tournament was over so this year the combination of the two wasn’t as positive.

Q: On the marketing front, do you think it can move the needle as much as it has in the past?

A: TV moves the needle.  We knew we were going to be on TV, on national, FOX Sports in June, when the calendar was signed at the start of the year. 

Q: On accelerated depreciation, will you be through most of that by the end of the second quarter?  Or are we going to continue to see that through the rest of this year?

A: We will be through that by the end of the second quarter.

Q: Looking at future development trends, should we assume that absolute number of stores maybe stay similar or slow down in ’11 and ’12 and beyond?

A: At a certain point there is a law of large numbers.  2011 will be similar but we will have to reexamine for 2012. 

Q: Can you give us your capital expenditure outlook for the year?  How much of that will be due to maintenance and then refurbishment of stores?  Can you also comment a but on what you’re seeing in the lease environment as these stores come up from renewal?  Are you able to lock down more attractive lease costs?

A: That is our goal with lease costs.  For new store openings, it’s averaging 1.8m when you blend in either end caps or free –standing locations.  For maintenance capex, as well as remodels, refreshes, that stuff, it goes to about 20m total

Howard Penney
Managing Director