Buffalo Wild Wings (BWLD) Down 12% on Cautious Full-Year Outlook

by Ryan Fitzwater, Director of Research, The Oxford Club
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Buffalo Wild Wings (Nasdaq: BWLD) gave plenty of positive news after the closing bell yesterday when the company announced second quarter results. But the updated full-year guidance left Wall Street with a bad taste in its mouth, sending shares down over 12% this morning.

The sports bar chain served up earnings of $1.25 a share, a 42% jump over last year, and beat forecasts by $0.05. The increase in earnings was aided by lower chicken prices, which also helped boost operating margins 21%, which now clock in at 9.6%.

Sales for the quarter of $366 million beat estimates of $359.5 million, and represented a 20% increase over the same period last year.

On top of positive earnings and sales growth, Buffalo Wild Wings also saw same-store sales increase 6.5% at franchised restaurants and 7.7% at company-owned ones.

Analysts look at same-store sales (also known as S.S.S or comps) frequently in the restaurant industry to measure sales growth at restaurants that have been open for at least one year. It is an important metric to gauge since a company can boost revenue just by opening several new restaurants. It helps us differentiate sales growth that comes from new restaurants versus growth that is a result from improved operations and management at already existing establishments.

CEO Sally Smith attributed much of the quarter’s same-store sales success to the prolonged NHL playoff series and the World Cup.

But even with all this positive news, shares are down today because the company estimates earnings growth of 25% to 30% in 2014, and Wall Street had consensus estimates over 35%.

The overall opinion is that Buffalo Wild Wings tends to be conservative with its outlook numbers. Smith believes chicken prices could start to tick up in the second half of the year and eat into margins. The adjusted guidance in my mind is warranted.

While there currently is no restaurant-specific index or ETF, the PowerShares Dynamic Food & Beverage ETF (NYSE: PBJ) is our best bet on comparing Buffalo Wild Wings to its competitors. Even with today’s dramatic price drop, you can see in the chart below that over the last year it has been crushing the competition.

 

Buffalo Wild Wings isn’t the first company to announce stellar results only to have shares plummet on a guidance update below analyst’s estimates… and it won’t be the last.

But with such a solid quarter overall and stock gains beating the competition over the last year, is now a good time to pick up shares at today’s discounted price?

Let’s help answer that question by seeing how Buffalo Wild Wings performs on our Investment U Fundamental Factor Test:

Earnings-per-Share (EPS) Growth: As we already know, Buffalo Wilds Wings boosted earnings 42% on a 20% increase in sales. Year-over-year growth in the double-digits is what we like to see.

Price-to-Earnings (P/E): The restaurant industry’s P/E ratio is averaging around 27. Even with today’s $20 drop in share price, Buffalo Wild Wing’s P/E ratio of 30.91 is still above its peer average.

Debt-to-Equity A company with no debt is always something to crave, and Buffalo Wild Wings is satisfying our hunger. It has no debt, so its debt-to-equity ratio is 0%. Meanwhile, the restaurant industry is averaging over 79%.

 Free Cash Flow per Share Growth : In the most recent quarter, Buffalo Wild Wings grew free-cash-flow 11.9%. Couple the boost in cash with no debt, and we have ourselves a strong balance sheet.

Profit Margins After hitting two metrics in a row, Buffalo Wild Wings came up short on profit margins. Current margins of 6.48% are slightly below the industry average that clocks in at 9.6%.

 Return on Equity Buffalo Wild Wings was also unable to pull it out on our last metric. Its ROE of 19.14% is well below the industry average 28.40%.

*Why did we look at these specific metrics? Find out more here.

Fundamental Factor Test Score

C: Hold (Hits just three key metrics)

Please note that our fundamental factor checklist is just the first step in performing your own due diligence. There are many other factors you should consider before investing. That's why The Oxford Club offers over a dozen newsletters and trading advisories all aimed at helping investors grow and maintain their wealth. For more details, click here.

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