Saturday, March 18, 2006

Buffalo Wild Wings (BWLD) Analysis

Buffalo Wild Wings (BWLD) is a small cap stock in the restaurant business. From BWLD 10K, we get a good description of the business.

We are an established and growing owner, operator and franchisor ofrestaurants featuring a variety of boldly flavored, made-to-order menu itemsincluding our Buffalo, New York-style chicken wings spun in any of our signaturesauces. Our restaurants create an inviting neighborhood atmosphere that includesan extensive multi-media system, a full bar and an open layout, which appeals tosports fans and families alike. Our concept offers elements of the quick casualand casual dining restaurant concepts featuring a flexible service model thatallows our guests to choose among convenient dining options such as quick casualcounter service, casual dining table service or take-out. Our award-winning foodand inviting atmosphere, combined with our guests' ability to customize theirdining experience, drives guest visits and loyalty.

BWLD has about 350 restaurants in about 35 states in the U.S. Management clearly states its operational goal as follows:

Our goal is to continue to grow and develop the Buffalo Wild Wings(R)Grill & Bar concept into a leading national restaurant chain. To do so, we planto execute the following strategies:
o Open restaurants in new and existing markets;
o Offer boldly-flavored menu items with broad appeal;
o Create an inviting, neighborhood atmosphere;
o Enable our guests to customize their dining experience;
o Continue to strengthen the Buffalo Wild Wings brand;
o Focus on operational excellence;
o Increase same-store sales and average unit volumes.

In other words, BWLD is a growth story. One can realize stock appreciation through growth of the company. Let us take a look at the balance sheets to see if this is a worthwhile investment at this time or not.

The company was has grown revenues at 37% rate in 2004 and 25% rate in 2005. The operating income has increased at the rate of 49.4% in 2004 and 22% in 2005. The operating expenses - especially the labor costs increased at a faster pace causing the decline in operating income compared to revenue growth. The EPS increased 33% and 19% repsectively in the last two years. The stock dilution is at 1.22% in 2005 which is pretty reasonable.

Looking at the balance sheets, the companies growth is slowing and EPS is declining. However, the companies shares are trading at a P/E of 38. The next thing to check for is the companies guidance for expansion in the upcoming years to see if the company has enough growth to justify the price.

BWLD's goal is to grow the number of units to 1000 nationally in the next several years with a yearly unit rate growth rate of 20%. The company primarily plans to expand in places where it already has a presence. It also plans to keep an eye on the cost of materials which tends to vary significantly. On the positive side, the operations side of the company doesnt require much expertise and can be learned fairly easily. Food and non alcoholic beverages account for 71% of the company revenues while alcoholic beverages account for 29% of the companies revenues. 25% of the companie's revenues come from the sales of chicken wings. The establishment of new restuarants is not a guarantee for increased revenue growth.

It is a safe bet that BWLD can grow in the 10-20% range for the next few years. Given the P/E, this growth is already factored into BWLD price. The analyst consensus price estimate of $41 for this year doesnt give much upward room at current prices.

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