Buffalo Wild Wings Challenged By High Costs, Industry Woes

On Aug 14, we issued an updated research report on Buffalo Wild Wings Inc. (NASDAQ:BWLD) .

The company reported lower-than-expected second-quarter 2017 results on Jul 26. This bleak performance was mainly due to the increased costs of traditional chicken wings coupled with higher promotional activity, lower-than-expected same-store sales as well as greater labor and operating expenses.

Concerns

Buffalo Wild Wings’ earnings have missed the Zacks Consensus Estimate in nine of the last 11 quarters due to higher costs. Meanwhile, the company’s revenues have also been lagging the same for the last 10 quarters. Such persistent top- and bottom-line miss raises concerns. In fact, comps have been much under pressure so far in 2017, adding to the woes.

Furthermore, the menu price increases made by the company along with a choppy sales environment in the U.S. restaurant space might continue to affect traffic trends in the near term, thereby weighing on the comps.

Additionally, fluctuation in price of chicken – a key ingredient for the company – might hurt the company’s profitability. Notably, the company expects traditional chicken wing prices to rise in the range of 8% to 10% in 2017, which is likely to dampen profits. Also, Buffalo Wild Wings’ promotion of Half-Price Wing Tuesdays puts pressure on its cost of sales as the high priced wings items are offered at lower prices.

The costs related to company’s other sales boosting initiatives like unit expansion and higher labor costs due to the competitive labor market are also estimated to continue to hurt profits in the near-term.

Moreover, while other restaurant chains like Yum! Brands, Inc. (NYSE:YUM) , McDonalds Corporation (NYSE:MCD) and Papa John’s International, Inc. (NASDAQ:PZZA) pursue aggressive global expansion policies, Buffalo Wild Wings seems to be slow on this front. This is because it has just started to expand its reach in international markets and thus lags severely.

Some Respite

Various sales initiatives undertaken by the company like menu innovation and promotional offerings, increased focus on take-out and delivery services, enhancing digital capabilities, roll out of loyalty program, investing in Guest Experience, along with better food presentation and operational efficiency are expected to boost comps. Meanwhile, the company’s cost-saving efforts are likely to drive margins.

Additionally, Buffalo Wild Wings has decided to give something new a shot this summer and started testing small-format stores in the Minneapolis metro area.

Given consumers' increasing shift toward to-go and in-home dining experiences, the company is experimenting with these small, fast food style stores. We believe these options are sure to improve its reach as well as market share potential in the near term.

Bottom Line

Despite various strategic initiatives, the uncertain sales environment and a rising costs scenario could continue weighing on the company’s performance, going forward. It would thus be prudent for investors to remain on the sidelines for some time now.

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