Leading restaurant chain, Buffalo Wild Wings Inc. (BWLD) is set to report second-quarter 2014 results on Jul 29, 2014. In the last quarter, the company posted a positive surprise of 10.4%. Let’s see how things are shaping up for the upcoming announcement.
Why a Likely Positive Surprise?
Our proven model shows that Buffalo Wild Wings is likely to beat earnings because it has the right combination of two key components.
Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, stands at +3.3%. This is very meaningful and a leading indicator of a likely positive earnings surprise for the company.
Zacks Rank: Buffalo Wild Wings has a Zacks Rank #3 (Hold). Note that stocks with Zacks Ranks #1 (Strong Buy), #2 (Buy) and #3 (Hold) have a significantly higher chance of beating earnings. The Sell-rated stocks (#4 and 5) should never be considered going into an earnings announcement.
The combination of Buffalo Wild Wings Zacks Rank #3 and ESP of +3.3% makes us confident of an earnings beat on Jul 29.
What is Driving the Better-Than-Expected Earnings?
Buffalo Wild Wings’ earnings have surpassed the Zacks Consensus Estimate in the past four quarters on the back of menu innovation, promotional offers, better food presentation and operational efficiency. Also, the company has been posting positive comps growth over the past two years. In fact, when the company reported first quarter results in April, second quarter comps at company-owned restaurants and franchised locations had till then registered an impressive 5.7% and 4.4% increase, respectively.
Buffalo Wild Wings offers dozens of projectors and televisions for its guests to view their favorite sporting events while dining at its restaurants. It is open seven days a week for up to 13 hours, providing high-quality entertainment and good food at the same time. As a result, the company kept its guests engaged at its restaurants during major sporting events like the NFL playoffs, the Super Bowl and college basketball through promotional activities. We expect the second quarter to benefit from the FIFA World Cup that ended on Jul 13.
Also, the company expects operating margin to benefit from the continuous shift in sales mix. The company now offers its boneless wings based on weight rather than by the number of wings.
Moreover, the company is expected to gain from the recent limited time offerings like Buffalo Grilled Cheese Sandwich and a Prime Rib Philly and other flavorful sandwiches. Apart from this, we are encouraged by the company’s advertising initiatives, installation of new point-of-sales programs, improvement in supply chain management, remodeling initiatives and its loyalty program to augment sales, which would likely fuel sales going forward.
However, we would like to remind investors that food costs continue to hurt the restaurant industry at large. Though margins of Buffalo Wild Wings are improving, inflation may hurt going forward. Moreover, the company has undertaken several initiatives to bolster long-term growth, including unit expansion, which would lead to higher costs and expenses. Though these will reap benefits in the long term, they will likely hurt the company’s profits in the near term due to higher labor costs and pre-opening expenses.
Other Stocks to Consider
Here are some other companies in the restaurant sector that investors may consider, as our model shows that they have the right combination of elements to post an earnings beat this quarter:
Zoe's Kitchen, Inc. (ZOES), with an Earnings ESP of +50.0% and a Zacks Rank #2 (Buy).
Jack in the Box Inc. (JACK), with an Earnings ESP of +3.5% and a Zacks Rank #3.
Texas Roadhouse, Inc. (TXRH), with an Earnings ESP of +3.0% and a Zacks Rank #3.
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