Buffalo Wild Wings Inc. (BWLD) posted better-than-expected third quarter 2014 results with earnings and revenues beating the Zacks Consensus Estimate. Anticipating increases in chicken wing costs and labor costs, the company announced that it intends to increase menu prices at the end of November.
Adjusted earnings of $1.14 per share in the third quarter beat the Zacks Consensus Estimate of $1.06 by 7.5% and grew 20% year over year. Solid top-line growth and lower food costs backed the upside. However, it was partially offset by a rise in labor expenses.
Buffalo Wild Wings is a leader in the sports bar and wings segment. The football World Cup and Fantasy football draft parties helped to continue the sales momentum. Total revenue increased 18.3% year over year to $373.5 million and beat the Zacks Consensus Estimate of $371.0 million by 0.7%.
Behind the Headline Numbers
During the quarter, restaurant sales amounted to $350.5 million, up 18.5% year over year, driven by unit expansion and comps growth. Comps growth was driven by higher guest count owing to football tournaments and beginning of the college session.
Buffalo Wild Wings registered company-owned comps growth of 6.6% that compared unfavorably with the prior quarter comps growth of 7.7%. However, it was far better the year-ago comps growth of 4.8%.
Franchise royalties and fees increased 14.1% year over year to $22.9 million, thanks to unit expansion and comps growth. Comps growth at franchise locations was 5.7%, lower than the prior quarter comps growth of 6.5%. However, it was far better the year-ago comps growth of 3.9%.
Buffalo Wild Wings' cost of sales, as a percentage of revenues, improved 90 basis points (bps) to 29.1%, benefiting from lower chicken wing costs.
Labor expense ratio was up 160 bps to 31.9% due to hourly wages as the company added Guest Experience Captains. Also, wage rate increases in California and Minnesota and higher bonus payout resulted in the increase. Excluding stock-based compensation, general and administrative (G&A) expenses ratio was 6.7%, down 10 bps year over year.
Comps Update for Fourth Quarter To Date
Since the beginning of the fourth quarter, the company has posted comps growth of 5.4% at company-owned restaurants and 5.1% at franchise locations that compare favorably with 5.3% growth at company-owned restaurants and 3% growth at franchise locations in the year-ago period.
Higher Costs to Result in Menu Price Increase in Fourth Quarter
The company expects cost of chicken wings for the first two months of the fourth quarter to average about $1.88 per pound, up from $1.64 in the year ago period. Also, it expects higher labor costs for the upcoming quarter. It expects labor costs ratio to be 130 basis points higher than labor costs ratio of 30% in the prior year period. Owing to the increase in costs, the company plans to increase its menu prices by 3% at the end of November.
Guidance for 2014
Taking into account costs and menu price increases, the company expects earnings growth to exceed 28% year over year in 2014. The Zacks Consensus Estimate currently reflects a year-over-year growth rate of approximately 31%. During the second quarter earnings call, the company had announced that it expects earnings to exceed 25% for 2014 and even reach 30%.
Guidance for 2015
Buffalo Wild Wings continues to execute its goal of opening 1,700 restaurants in the United States and Canada. The company plans to open approximately 50 company-owned Buffalo Wild Wings restaurants and add 40 franchise based restaurants in the U.S. in 2015. Also, the company intends to open more international franchisees and carry on with Rusty Taco and PizzaRev expansion.
Given the pace of unit expansion and operational efforts it is taking, the company expects earnings to increase 18% year over year in 2015. The Zacks Consensus Estimate currently reflects a year-over-year growth rate of approximately 17.4%.
Our Take
Buffalo Wild Wings has been beating the Zacks Consensus Estimate consistently over the past three quarters owing to the initiatives taken by the company to boost its traffic. The company will continue to implement its “guest experience business model” that is expected to increase traffic during the rest of the year. Apart from this, the company is also focusing on advertising initiatives, installing new point-of-sales programs, improving supply chain management, remodeling initiatives and its loyalty program to augment sales.
However, higher costs would take a toll on the company’s efforts and hurt profits. In fact, given the cost concerns, the company has planned to increase its menu price, which may as well impact traffic.
The company presently has a Zacks Rank #3 (Hold). Some better-ranked stocks in the restaurant industry include BJ's Restaurants, Inc. (BJRI), Jack in the Box Inc. (JACK) and Jamba, Inc. (JMBA). All these stocks sport a Zacks Rank #1 (Strong Buy).
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