With a stellar second-quarter, Buffalo Wild Wings Inc. was expected to enjoy a home run. (Read: Buffalo Wild Wings Beats Q2 Earnings as World Cup Drives Comps) However, shares of the sports bar and hot wings restaurant chain plunged more than 13% yesterday. Let’s find out what’s clipping its wings.
Muted Earnings Guidance
Buffalo Wild Wings expects earnings to exceed 25% for 2014 and even reach 30%. Though the guidance was better than management’s previous expectation of an increase of 25%, it failed to invigorate investors.
We believe that the market was expecting Buffalo Wild Wings to guide much higher after it delivered robust results in the first half.
Moreover, even the higher end of the guided range, i.e. 30% growth, implies that the company is expecting 2014 earnings of $4.93, per share. This is far behind the Zacks Consensus Estimate of $5.10 per share representing a 34.6% rise. So it is the muted outlook that has caused the concern.
Problems Lurking on the Horizon
Rising costs remain a huge concern for Buffalo Wild Wings. The company’s cost of sales in the last quarter was down primarily due to lower prices of chicken wings. However, chicken prices could increase in the second half of the year, due to widespread drought conditions and supply shortage, and dent margins. Higher labor costs can add fuel to fire.
With rising commodity costs, a price hike for the company would only be natural. This might lead to lower traffic, thus negatively impacting comps.
Buffalo Wild Wings operates in an intensely competitive environment. Additionally, being a sports bar, the company depends heavily on major sporting events. During the first half of the year, Buffalo Wild Wings benefited from the Winter Olympics, NBA and the FIFA World Cup, along with the Super Bowl. With fewer global sporting events scheduled in the second half, comps are expected to slow down.
Further, the profitability of PizzaRev remains a major cause of concern in the upcoming quarters. Buffalo Wild Wings made a minority investment in the restaurant concept last year and opened the first location last May in Minnesota. However, the concept is yet to add to the profits of the chain.
However, we believe Buffalo Wild Wings will be able to mitigate the worries and the stock price will turn around as the week progresses. Despite the worries, Buffalo Wild Wings remains one of the fastest growing restaurant chains in the U.S., with solid long-term fundamentals.
The company presently has a Zacks Rank #3 (Hold). Some better-ranked stocks in the restaurant industry include BJ's Restaurants, Inc. (BJRI - Free Report) , Chipotle Mexican Grill, Inc. (CMG - Free Report) and Domino's Pizza, Inc. (DPZ - Free Report) . While BJ's Restaurants and Chipotle Mexican Grill sport a Zacks Rank #1 (Strong Buy), Domino's Pizza carries a Zacks Rank #2 (Buy).