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Can Buffalo Wild Wings (BWLD) Grow Despite Cost Headwinds?

Zacks

On May 18, we issued an updated research report on the casual dining restaurant chain, Buffalo Wild Wings, Inc. BWLD.

Last month, the company reported lower-than-expected first-quarter 2017 results, wherein both earnings and revenues missed the Zacks Consensus Estimate. Meanwhile, though revenues grew a 5.2% year over year, earnings plunged nearly 17%.

Notably, shares of the company recorded a decline of 10.6% over the past six months, comparing unfavorably with the Zacks categorized Retail-Restaurants industry’s gain of 10.2%. Estimates for the current quarter and current year have also moved down 15.8% and 3.5%, respectively, over the past month.



Prevalent Headwinds

Traditional chicken wing is one of the key ingredients for the company. Of late, there has been substantial fluctuation in the traditional chicken wing price, which has put Buffalo Wild Wings’ margins under pressure.

Notably, the effect is two-fold. While the company is already experiencing higher commodity cost, one of the company’s major promotional activities – Half-Price Wing Tuesdays – is also facing the challenges. The program has been highly successful in driving traffic since its launch in Sep 2016. However, the promotion is weighing on the company’s margins, as the high priced wings items are offered at lower prices now.

In fact, in the first quarter of 2017, the increase in this promotion mix had an adverse impact of 37 cents on the company’s EPS. Thus, the company is aggressively evaluating other offers in place of this promotion, in a bid to protect its margins. Nevertheless, it remains to be seen if other promotions could boost traffic the way Half-Price Wing Tuesdays did for the company.

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

Meanwhile, while several other restaurateurs, including Yum! Brands, Inc. YUM, McDonald’s Corporation MCD and Domino’s Pizza, Inc. DPZ have opened their outlets in the emerging markets; Buffalo Wild Wings seems to be slow on this front. Though the company is now starting to expand its reach in these markets it still seems to lag behind severely.

Adding to the woes is the challenging retail environment in the U.S. restaurants space. Consequently, the company’s comps have been under pressure of late, and the menu price increases made by the company could further hurt traffic.

Opportunities to Grow

Leveraging on its strong brand name, Buffalo Wild Wings is looking for new investment opportunities in the fast-growing small restaurant chains as well as various international markets, in order to expand its business. Investment in R Taco is a part of its strategy to partner with emerging restaurant concepts that have the potential for significant growth. Also, the company has 27 restaurants across five countries outside of the U.S. and plans to open 20 more in 2017, thereby doubling its presence.

Meanwhile, Buffalo Wild Wings remains better positioned than many of its peers on the back of menu innovation, investment in guest experience, along with better food presentation and operational efficiency.

Already, the company is witnessing a rise in traffic on the back of its initiatives as well as its loyalty program “Blazin' Rewards”. Increased focus on better staffing and improving operational execution in the takeout area, as well as working with third-party delivery providers also bode well.

Further, the company invigorated its mobile app and online ordering platforms to improve the digital user experience. It has started to promote online and mobile ordering for takeout through website and social and digital advertising. The initial results were encouraging with an increase in average check

Additionally, the company’s association with beverage chains and major sporting events has been increasing its brand awareness.

Thus, taking into account the number of sales-boosting initiatives and the company’s cost containment efforts; it remains to be seen if it can report significant improvement in its performance, going ahead.

Currently, Buffalo Wild Wings carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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