Buffalo Wild's EPS Beats Again

Restaurant operator Buffalo Wild Wings Inc. ( BWLD - Analyst Report ) , recently reported first quarter 2012 earnings of 98 cents per share, surpassing the Zacks Consensus Estimate of 95 cents per share and also jumping 21.0% from the year-ago quarter earnings of 81 cents per share. The better-than-expected results were driven by strong top-line and unit growth.

Quarter Performance

Total revenue increased 37.9% year over year to $251.1 million, but was in line with the Zacks Consensus Estimate. Sales at company-operated restaurants rose 40.3% to $232.3 million, fueled by the opening of 64 new restaurants during the quarter compared with the prior-year quarter and higher same-store sales.

Franchise royalties and fees grew 13.1% year over year to $18.8 million, propelled by 17 additional restaurants in operation at the end of the quarter compared with the year-ago quarter and an improvement in comps. Same-store sales spiked 9.2% and 7.3% at company-operated restaurants and franchised restaurants, respectively.

Average weekly sales at company-operated restaurants and franchised restaurants increased 12.9% and 8.6% year over year, respectively, to $55,131 and $57,282.

The Minneapolis, Minnesota-based company’s restaurant operating margin contracted 160 basis points (bps) to 19.9%, aided by a 320-bp hike in cost of sales to 31.1% due to a 57% surge in traditional wings, partially offset by a 70-bp drop in operating costs to 14.1% (as a percentage of restaurant sales), a 70-bp fall in occupancy costs to 5.5% and 10-bp fall in labor cost to 29.4%.

Store Update

During the quarter, Buffalo Wild Wings opened 8 new company-owned restaurants and purchased 7 franchised locations. Buffalo Wild Wings currently operates 327 company-owned restaurants and 505 franchised restaurants.

In the second quarter of 2012, the company plans to open around 4 company-owned restaurants in North America, which includes one location in Toronto. The franchisees are also expected to open another 8 restaurants during the quarter.

Financial Position

Buffalo Wild Wings ended the quarter with cash and cash equivalents of $27.3 million and shareholders’ equity of $335.5 million.

Outlook

Management witnessed comparable sales growth of 6.7% and 6.6% at the company-operated restaurants and franchised restaurants, respectively, for the first four-week period of the second quarter of 2012, which is encouraging for the upcoming quarter. The company is also undertaking various initiatives like menu innovations, remodeling of restaurants, marketing investment and media spending to attract customers. However, higher chicken wing prices will continue to be a headwind in the upcoming quarter, partially offset by menu price increases.

Moreover, management continues to remain optimistic for 2012 based on unit and sales growth and the benefit of an extra week of operation. The company reaffirmed its unit growth target of 12% and net earnings growth of 20% for 2012.

Our Take

We remain encouraged by the company’s long and successful track record, viable business strategy and debt-free balance sheet. The company is also on track to achieve 12% unit and 20% net earnings growth for fiscal 2012. Moreover, the company provides ample growth opportunities given its plan of opening 1,500 restaurants in the United States by the next five to seven years and 50 in Canada by 2015.

However, we remain cautious on the stock based on soaring wingprices, lower consumer spending and intense competition among casual dining restaurants with respect to price, service, location and concept in order to drive traffic.

Hence, the company carries a Zacks #3 Rank, which implies a short-term Hold rating on the stock. We also reiterate our long-term Neutral recommendation.

One of Buffalo Wild Wings’ primary competitors, peer company Chipotle Mexican Grill Inc. ( CMG - Analyst Report ) recently reported first-quarter 2012 earnings of $1.97 per share, surpassing the Zacks Consensus Estimate of $1.93 as well as the year-earlier earnings of $1.46.