Buffalo Wild Wings Inc.’s second-quarter 2013 earnings of 88 cents per share beat the Zacks Consensus Estimate of 79 cents by 11.4% and the comparable year-ago quarter’s earnings of 62 cents by 41.9%. Earnings in the quarter received a boost from the company’s double-digit top-line growth and lower cost of sales.
Total revenue climbed 27.8% year over year to $305 million, surpassing the Zacks Consensus Estimate of $304 million by 0.3%. The year-over-year rise in revenues was led by solid comparable sales (comps) growth and unit expansion.
Behind the Headline Number
During the second quarter, sales at the company-owned restaurants were $284.4 million, up 28.4% year over year, fueled by 23% company-owned unit growth and comps growth.
Buffalo Wild Wings, which is popular among sports fans for its dine-and-watch-games facility, registered comps growth of 3.8% in the second quarter, lower than the year-ago quarter’s same-store sales of 5.3%. However, comps in the quarter were much higher than the first quarter’s comps of 1.4%. The rise was driven by the company’s increased promotional and marketing activities for some upcoming basketball competitions (National Collegiate Athletic Association (NCAA) Final Four tournament and 2013 NBA Playoffs). The time shift of Easter in the first quarter also positively impacted the company’s same-store sales during the quarter.
Franchise royalties and fees jumped 7.9% year over year to $19.6 million, thanks to 20 new restaurants in operation by the end of the quarter and a 4.1% rise in franchise same-store sales.
Buffalo Wild Wings’ cost of sales, as a percentage of revenue, declined 120 basis points (bps) to 30.4% in the second quarter, benefiting from the decline in traditional chicken wing costs. The price of chicken wings has started to ease from the beginning of the second quarter. Traditional wings prices were $1.61 per pound in the second quarter, down 15.3% year over year.
Buffalo Wild Wings’ operating margin expanded 50 bps to 7.9%, driven by the top-line growth and cost controlling initiatives.
During the quarter, Buffalo Wild Wings opened 10 company-owned restaurants and 11 franchised restaurants. The company currently operates 407 company-owned restaurants and 525 franchised restaurants across 49 states in the U.S. and Canada.
For the third quarter of 2013, Buffalo Wild Wings plans to introduce eight company-owned restaurants in North America. The company also expects to launch 12 franchised units in the quarter in North America.
The company is also expecting to unveil 13 units in domestic market and three restaurants in the international locations in the fourth quarter.
For the first four weeks of the third quarter, comps growth was 1.5% and 1.2% at the company-operated restaurants and franchised restaurants, respectively, much lower than the comparable year-ago period’s comps of 6.8% and 7.3%, respectively. One less Ultimate Fighting Championship’s (UFC) pay-per-view fight event in July adversely affected the comps during that time period.
However, Buffalo Wild Wings expects its comps to get a boost from the NFL and NCAA football series to start later in the third quarter.
Moreover, the company is planning to stress more on advertising for fantasy football draft party which will help attract more guests, thus improving sales in the ensuing quarters.
In Jul 2013, Buffalo Wild Wings changed its traditional menu servings and started to serve wings based on portions, rather than by its numbers. This initiative is helping the company to reduce the risk associated with inconsistent wing yields. The company expects the decline in wing prices and the introduction of this new strategy to further reduce its cost of sales, as a percentage of revenue.
In order to augment its profit, Buffalo Wild Wings is also trying to diligently reduce its labor cost. Additionally, the company continues to expect net earnings growth of 17% for 2013.
Buffalo Wild Wings has started a new initiative, ‘guest experience business model’, to improve guest satisfaction and thereby increase traffic in the upcoming quarters. Currently, the company has implemented this new model in 130 company-owned restaurants and intends to spread it nationwide by early 2014.
After a weak first quarter, Buffalo Wild Wings has succeeded to post double-digit top-line growth and higher earnings in the second quarter. It seems that this Zacks Rank #3 (Hold) company has started to gain from its sales-driven initiatives and promotional strategies which led to a rise in comps. 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. Moderated wings cost is expected to boost Buffalo Wild Wings’ margin, going ahead.
However, the comps growth for the upcoming quarter has not started on a positive note. Moreover, increasing operating costs remains a major headwind.
Some other players in the restaurant industry which look attractive at the current level include Yum! Brands Inc. (YUM - Free Report) , Bravo Brio Restaurant Group, Inc. and Burger King Worldwide, Inc. . All these companies carry a Zacks Rank #2 (Buy).