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Buffalo Wild Wings Stays Neutral

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We maintain our Neutral recommendation on casual dining restaurants chain Buffalo Wild Wings Inc. . While we prefer the company’s strong brand potential and ongoing expansion strategy, an uncertain economic condition and cost inflation keeps us on the sidelines at the current level.

Why the Reiteration?

Buffalo Wild Wings, one of the most recognized casual dining has been consistently witnessing positive company-owned restaurants’ comparable store sales (comps) of 0.6%, 6.1% and 6.6%, respectively in the past three years, which validates that it was unruffled by the economic slowdown. Buffalo Wild Wings is well positioned to sustain its comps growth in 2013, driven by improved guest traffic.

Buffalo Wild Wings is continuously investing in its food and beverages lineup to drive traffic as well as sales. In addition, the company’s various proactive initiatives such as menu innovation, increasing focus on Happy Hour, advertising initiatives, operating enhancements, remodeling program and technology upgrades continue to spur growth.

Buffalo Wild Wings also remains committed in its goal to continuously expand its business worldwide. The company opened 85 and 74 new restaurants in 2011 and 2012, respectively and achieved a unit growth of 11.6% in 2011 and 9.1% in 2012 and it plans to unveil nearly 100 units in 2013. Buffalo Wild Wings is also striving hard to expand its presence beyond the U.S.

Currently, more than 57% of the company’s total restaurants are franchised, which is expected to provide a boost to its earnings per share growth and ROE expansion. With its enhanced productivity, the company now expects net earnings growth of 25% in 2013, higher than the prior year growth of 17%.

However, higher food costs and macroeconomic pressure can act as headwinds to its growth story. Continuous increase in wing costs remains a major headwind for 2013, thereby affecting the profitability of Buffalo Wild Wings.

Moreover, consumers in the U.S. are burdened with higher gasoline prices, a 2% payroll tax increase and delayed tax refund checks. These external forces might restrict consumers’ discretionary spending further, which in turn can put pressure on the company’s sales.

Hence, at the current level, we remain cautious and prefer to take a wait and see approach till we find some greater evidence of an outperformance.

Buffalo Wild Wings carries a Zacks Rank #2 (Buy).

Other Stocks to Consider

Some other restaurant industry stocks with a favorable Zacks Rank include Red Robin Gourmet Burgers Inc. (RRGB - Free Report) , Burger King Worldwide Inc. and Cracker Barrel Old Country Store Inc. (CBRL - Free Report) . While Red Robin and Cracker Barrel carry a Zacks Rank #1 (Strong Buy), Burger King carries a Zacks Rank #2 (Buy).

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