After the 30 bp falloff in two-year average same-store sales trends in the first quarter and the reported -4.7% comp in April, I was not expecting too much this quarter and neither was the street.  BWLD, however, surprised to the upside with earnings coming in at $0.50 per share versus the street’s $0.42 per share estimate and company-owned same-store sales growth was down 0.1% relative to the -2.5% street estimate.  Despite the better-than-expected numbers, company-owned same-store sales slowed nearly 200 bps on a two-year average basis from the prior quarter.  Management reported that comps are running positive in July, up 2.2%.  For reference, the company is lapping a +1.2% number from the same period last year, which implies a slight uptick in two-year trends since the end of the quarter.


Going into the quarter, I said that BWLD could potentially move into the “deep hole” (negative same-store sales and declining restaurant level margin) quadrant of the sigma chart shown below if same-store sales trends did not materially improve throughout the remainder of the quarter.  Comps, did in fact, improve after decelerating about 420 bps on 2-year average basis in April from 1Q10.  Restaurant level margin also came in better than I expected, up 120 bps to 18.1%, with food costs as a percentage of sales declining nearly 200 bps, more than I was modeling (lower YOY chicken wing prices for the first time in six quarters).  As a result, BWLD moved from the “trouble brewing” (positive same-store sales and declining restaurant level margin) quadrant to the “life line” (negative same-store sales and growing restaurant level margin) quadrant.  And, given that same-stores sales were just barely negative, the company was operating quite close to “nirvana” (positive same-store sales and growing restaurant level margin).


We will see what the company has to say on its earnings call, but despite the better-than-expected quarterly results, I continue to believe the company is growing too fast and that growth related costs will become more evident as same-store sales remain under pressure.  BWLD needs to slow growth and cut costs and that does not yet appear to be in the plans. 


Relative to the company’s earnings guidance, BWLD’s press release stated, “We have growing confidence that our 20% annual net earnings growth goal is achievable given the recent improvement in same-store sales and the moderation of wing costs."  This compares to last quarter when the company said 20% earnings growth may be achievable but an improvement in same-store sales and moderate wing costs were key to this goal.  So, there seems to be a real shift in management’s level of confidence.




Howard Penney

Managing Director

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