Shares of Buffalo Wild Wings (BWLD: Charts, News) slid this week despite the company’s record fourth quarter earnings. The Minneapolis, Minnesota-based company, best known for its wings and beer, posted earnings of 89 cents per share, or $16.7 million, a 22% increase from the prior year quarter. Revenue rose 38% to $303.8 million.
Its earnings missed the Thomson Reuters consensus 96 cents per share, but its revenue exceeded the forecast of $292.4 million. The company’s annual revenue also exceeded $1 billion for the first time in its history. However, its rare bottom line miss was attributed to higher chicken wing costs – which alarmed investors.
During the fourth quarter, the cost of a pound of chicken wings increased to $2.07, up from $1.42 a year ago. The higher cost of individual wings was caused by producers breeding larger birds for more meat. Feltl & Co. analyst Mark Smith, who has given Buffalo Wild Wings stock a “sell” rating, stated, “It’s just wing prices – they’re killing them.” However, Smith’s pessimistic outlook is a dissenting voice, since most analysts rate Buffalo Wild Wings as a “buy” or “outperform.”
To offset these high chicken wing prices, Buffalo Wild Wings has raised prices by over 4%. So far, the company has been successful at passing on the costs to the customers, and has not seen a sales slowdown yet. That means that the company still has substantial pricing power now, but analysts are concerned that it is might not be able to raise prices much further without impacting sales.
Buffalo Wild Wings has expanded aggressively, opening 62 new locations during the quarter. Same-store sales rose 5.8% at company owned stores and 7.6% at franchised ones.
However, for the first six weeks of 2013, the company posted a same-store sales decline of 2.8% and 1.7% at company-owned restaurants and franchised locations, respectively.
But 2012 included a 53rd fiscal week, which gave the company an extra week in fiscal 2013 – which included several college football bowls and the NFL Super Bowl. Adding this overlapping week into the first six weeks changes things substantially – causing company-owned and franchised stores to report respective same-store sales growth of 2.6% and 1.6%. Those conflicting figures have made its same-store sales hard to analyze for future growth.
Over the past five years, Buffalo Wild Wings has increased its cash and equivalents by 106.7%, and it still has no long-term debt. Meanwhile, it has grown revenue 175.8% while diluted EPS has risen 152.2%. However, revenue growth recently overtook EPS growth, which signals some problems with operating margins. Operating margins have plunged 10.36% over the past twelve months. That’s why rising chicken wing prices are scaring investors away.
Buffalo Wild Wings investors need to watch chicken wing prices and operating margins very closely, since the restaurant’s profit margin is already at a slim 5.67%. Any further price increases in 2013 could stop this growth story cold.
Shares of Buffalo Wild Wings trade at 17.7 times forward earnings with a 5-year PEG ratio of 1.1, which makes it a fundamentally undervalued growth stock. The stock does not pay a dividend.
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