Investors enjoy buying shares in businesses that are simple to understand. That is because if you are buying something, it makes sense to understand what your money is being used to purchase. And buying shares, in a very simple sense, is like buying a part ownership stake in a company.
So it is no wonder that shares in a string of well known and highly publicized fast food, fast casual restaurant and coffee chains have spiked in recent years. Buffalo Wild Wings (BWLD) is the latest example of a stock that has benefited from investors “buying what they know” but are there other factors that are driving the share price up?
And with the stock in Buffalo Wild Wings up from 52 week lows of $123, and trading at levels above $200, is the stock a buy for high quality options trading services like Financial Markets Wizard?
Understanding the Business
Buffalo Wild Wings is an owner and operator of restaurants. This is slightly different from the business model of McDonalds(MCD), which is more focused on “fast food”. In contrast Buffalo Wild Wings is a more complete restaurant experience, with a range of menu items as well as alcoholic and non-alcoholic drinks served in store.
The growth of the chain has been impressive, with over 1,100 locations. These are concentrated in the United States, although the company also has international operations in Canada, Mexico, the Middle East and the Philippines. The company operates a dual strategy for expanding their restaurant footprint.
The first option for expansion is to build and operate company owned stores, where costs and profits are “owned” by the company in full. The second option is to sell a territory to a franchisee. The franchisee then gets the right to the profits they generate, as well as logistical and business support from head office. In exchange, the franchisee pays a fee, usually a percentage of sales revenue, to the company. The company then pools these franchisee contributions and uses those funds to invest in research, advertising and promotions to benefit the brand as a whole.
Buffalo Wild Wings also strongly leverages their position in the market as a place to watch sport and eat with friends and family. This differentiation tactic has seen it become a local hub for NFL, Hockey, Baseball, Basketball and even Mixed Martial Arts fans across the country.
Metrics and Measures
This market positioning and attractive menu options meant that the most recently reported results for Buffalo Wild Wings (BWLD) were highly impressive and caught the attention of options trading advisory services.
Revenue was up by almost 20% to an impressive $440.6 million for the quarter, while company owned restaurant revenue improved by even more than 20%, showing that company owned stores were outperforming franchised ones.
Same store sales are a key metric for any retailer or food store, as it removes the “free” growth that comes from store openings. For example, if a company opens dozens of new stores, sales will grow, but profit per store might fall. On the other hand, a company that can grow same store sales can also show the market that demand for their product is increasing regardless of their store footprint.
On this metric, Buffalo Wild Wings outperformed again, sales growing by between 6%-7% per store on average. That means that customers are visiting Buffalo Wild Wings restaurants more often, and are spending more when they do.
Total company earnings improved from $28.3 million to $29.1 million. The reason that profitability did not grow at the same pace as revenue was that prices for some of the input costs (drinks, chicken and staff) rose from in-sustainably low levels last year to slightly higher levels this year.
The Investment Case
The investment case for Buffalo Wild Wings looks at some key factors that options trading advisory services check for before recommending a company. One of the factor is the ability to grow sales.
On this measure, Buffalo Wild Wings ranks highly, as it can continue to grow its store footprint for the foreseeable future. It also is able to improve same store sales through initiatives like an improved lunchtime offering and better tie-ins with sporting events.
Another positive for the company is the ability to export their offering to international markets, although some of those advantages have been eroded by the strong US Dollar which reduces the value of profits earned overseas.
A further opportunity to grow earnings in the next few years is to increase the level of franchised stores in the network. This is an attractive option because selling franchises is less capital intensive and time consuming that building and operating a company owned store. The company can also pursue a hybrid model where it builds and owns a new restaurant for 6 – 12 months to get it up and running, before selling a successful business to a new owner, ensuring that contributions are profitable from day one.
The expansion of the strategy to be a local hub for sports fans from a range of teams and sporting codes is also likely to be profitable if executed successfully. This differentiates Buffalo Wild Wings from other more family or couples focused dining and entertainment options.
Buffalo Wild Wings (BWLD) is the kind of stock that has a natural opportunity to grow earnings and profits over the next decade as it opens more locations and improves its efficiency. Fast food is a competitive market, but the ability of the company to tie itself to the national obsession with sport in its many forms means that it will likely thrive at a time when other fast casual restaurants are struggling, as food and sport are largely immune to swings in consumer spending.
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