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BuffaloWild Wings Inc.’s (BWLD - Analyst Report) third-quarter 2013 earnings of 95 cents per share beat the Zacks Consensus Estimate of 86 cents by 10.5% and the comparable year-ago quarter’s earnings of 57 cents by 66.7%. The company’s higher top line and lower cost of sales percentage backed the earnings growth.

Total revenue increased 27.9% year over year to $315.8 million, surpassing the Zacks Consensus Estimate of $312 million by 1.2%. Higher restaurant sales and solid unit growth drove the revenues during the quarter.

Behind the Headline Number

During the third quarter, sales at the company-owned restaurants were $295.7 million, up 29.5% year over year, driven by 21% company-owned unit growth and comps growth.

Buffalo Wild Wings, which is popular among sports fans for its dine-and-watch-games facility, registered company-owned comps growth of 4.8% in the third quarter, lower than the year-ago quarter’s same-store sales of 6.2%. However, comps in the quarter were higher than the second quarter’s comps of 3.8%. Franchise royalties and fees increased 9% year over year to $20.1 million, led by 23 new restaurants in operation by the quarter-end and 3.9% rise in franchise same-store sales.

Buffalo Wild Wings’ cost of sales, as a percentage of revenues, declined 120 basis points (bps) to 30.0% in the third quarter, benefiting from lower traditional chicken wing costs. The restaurateur’s recent effort of serving wings by portion also helped lower cost of sales percentage by 40 bps.

The price of chicken wings has started to ease from the beginning of the second quarter. Traditional wings prices were $1.71 per pound in the second quarter, down 13% year over year.

Buffalo Wild Wings’ operating margin expanded 200 bps to 8%, driven by top-line growth and cost controlling initiatives.

Store Update

During the quarter, Buffalo Wild Wings opened eight company-owned restaurants and nine franchised restaurants. The company currently operates 415 company-owned restaurants and 534 franchised restaurants across 49 states in the U.S. and Canada.

For the fourth quarter of 2013, Buffalo Wild Wings plans to introduce 22 company-owned restaurants in the U.S. The company also expects to launch 22 franchised units in the quarter in North America. Apart from this, the company expects to introduce two franchised units in Mexico.

Outlook

The company expects net earnings growth of 20% in 2013, higher than the prior estimate of 17%. Solid top-line growth, higher comps and lower cost of sales percentage is expected to boost earnings in 2013.

For the first four weeks of the fourth quarter, comps growth was 5.3% and 3.0% at the company-operated restaurants and franchised restaurants, respectively.

Buffalo Wild Wing expects to cross the 1,000 restaurants landmark in the first quarter of 2014. Further, the company intends to unveil 45 company-owned and 40 franchised units in the domestic market in 2014. The company expects to record an earnings growth of 20% in 2014.

Our Take

Buffalo Wild Wings has succeeded in posting double-digit top-line growth and higher earnings for the past two quarters. We are encouraged by the company’s strong market standing, new menu launches, unit expansion and increased media exposure. Moreover, Buffalo Wild Wings’ association with NCAA will help it to increase its visibility as a brand and attract customers through digital and social media platform.

However, a limited consumer-spending environment continues to be an overhang for the company.

Buffalo Wild Wings currently carries a Zacks Rank #3 (Hold). Some other players in the restaurant industry which look attractive at the current level include Red Robin Gourmet Burgers Inc. (RRGB - Analyst Report), Cracker Barrel Old Country Store, Inc. (CBRL - Snapshot Report) and Bob Evans Farms, Inc. (BOBE - Snapshot Report). All of these companies carry a Zacks Rank #2 (Buy).

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