The Fast Growers And A Company That Has Been There, Done That
Whenever I think of Buffalo Wild Wings (NASDAQ:BWLD), there are three competitors that immediately come to mind. Two of these companies, Chipotle Mexican Grill, Inc. (NYSE:CMG) and Panera Bread Co (NASDAQ:PNRA) are connected to Buffalo Wild Wings by growth rate. All three of these companies are expected to grow earnings by 19% to 20% over the next five years.
The other company I can’t help but compare Buffalo Wild Wings (NASDAQ:BWLD) to is Brinker International, Inc. (NYSE:EAT), the home of the Chili’s chain. The reason is, Buffalo Wild Wings is heavily reliant on chicken wings to bring in diners. Years ago, Chili’s used to be known for its burgers and not much else. I guess I look at Brinker as what Buffalo Wild Wings could become.
The Company Met All Of My Expectations…And That’s Not A Good Thing
I feel like the Buffalo Wild Wings story is on permanent repeat. The company seems to report great results one quarter, and then disappoints investors three months later. In their quarterly report prior to this one, the company reported an almost 38% increase in revenue, same-store sales were up 5.8%, and EPS increased nearly 22%.
However, there were warning signs that this quarter might not be as good. The first reason to consider avoiding the shares is, Buffalo Wild Wings results are heavily influenced by sporting events. In the prior quarter, the company had the benefit of the NFL schedule, and in particular the playoff chase for fans to follow. This was a major contributor to the company’s strong same-store sales, and the absence of the NFL for the majority of the first quarter hurt sales.
In fact, in the first quarter of this year, the company reported the weakest same-store sales results since the first quarter of 2010. In both 2011 and 2012, same-store sales were routinely up 5% or more. In the last three months, they were up just 1.4% at company-owned restaurants, and 2.2% at franchised locations.
When you compare these results to the 3.3% increase at Panera Bread, the 1% increase at Chipotle Mexican Grill, Inc. (NYSE:CMG) or the 1.1% decline in same-store sales at Brinker, Buffalo Wild Wings (NASDAQ:BWLD) looks okay. However, when a company can’t control their same-store sales increase, and instead has to rely on the strength of sporting events to draw crowds, I would be concerned.
The second concern I have about Buffalo Wild Wings is, their diluted share count is continually increasing. Specifically, the company’s diluted share count is up 0.89% year-over-year. If we look at their competition, they are all clearly committed to retiring shares to return value to shareholders. In the last year, Panera Bread Co (NASDAQ:PNRA) retired 0.45% of their diluted shares, and Chipotle Mexican Grill, Inc. (NYSE:CMG) retired 1.94%. Brinker International is on a different playing field, and retired just over 8% of their outstanding shares. If Buffalo Wild Wings (NASDAQ:BWLD) continually increases their share count, it will be more difficult to meet EPS growth expectations in the future.
Part of the reason that Buffalo Wild Wings isn’t retiring shares is because their margins have taken a serious hit in the last year or so. This is the third reason to avoid the shares, the company’s operating margin seems to get worse every quarter. Just for point of reference, Panera and Chipotle reported operating margins of 13.58% and 13.4% respectively. Brinker International, Inc. (NYSE:EAT) is more of a standard sit-down restaurant chain, but still reported an operating margin of 10.68%.
By comparison, Buffalo Wild Wings (NASDAQ:BWLD) reported an operating margin of just 7.2% in the last three months. This could be seen as an opportunity, except this number is getting worse. A year ago, the company’s operating margin was 10.68%, last quarter it came in at 7.7%. To see a company’s margin reduced by over 30% in a year means there is a serious problem. The problem is, the company’s narrowly focused menu of chicken wings hurts the bottom line. The company must expand its menu if it wants to address this issue.
Last but not least, Buffalo Wild Wings (NASDAQ:BWLD)’ lower margins are leading to either negative or barely positive free cash flow. I use a measure I call core free cash flow, which eliminates the accounting changes to assets and liabilities on the cash flow statement. Core free cash flow is net income, plus depreciation, minus capital expenditures. Buffalo Wild Wings core free cash flow was negative last quarter, and just $747,000 positive in the current quarter. For a company with over $300 million in sales, this is far too little. Considering that all of their peers generate positive core free cash flow, this is yet another challenge for the company.
In the end, Buffalo Wild Wings (NASDAQ:BWLD) is expected to grow EPS by over 19%, but so are Panera Bread Co (NASDAQ:PNRA) and Chipotle. While Chipotle is a bit expensive at over 35 times forward projections, Panera sells for nearly the same multiple as Buffalo Wild Wings, yet is a far more consistent performer. For investors who want yield, Brinker International, Inc. (NYSE:EAT) offers a better than 2% yield, and a side of 14% expected earnings growth. With other companies offering much more tasty results, I wouldn’t play chicken with Buffalo Wild Wings stock.
The article 4 Reasons To Not Play Chicken With This Stock originally appeared on Fool.com and is written by Chad Henage.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
