Commodity inflation curbs 3Q income for Buffalo Wild Wings

Another period of high commodity inflation contracted third-quarter earnings for Buffalo Wild Wings, but company officials said Tuesday that the brand would continue to test and execute several initiatives to protect margins and combat a slight slowdown in traffic that has appeared in October.

Net income for the Sept. 23-ended third quarter decreased 5 percent, despite same-store sales growth in the mid-single digits, and much of that downward pressure came from higher costs of chicken wings, chief financial officer Mary Twinem said during a call with analysts. Chicken wings averaged $1.97 per pound during the quarter — a 70-percent increase over $1.16 a year earlier. Lower commodity yields resulting from larger birds drove the chain’s cost of goods sold even higher, Twinem added.

In addition, officials said, same-store sales at Buffalo Wild Wings’ company-owned restaurants are running 3.8 percent ahead of year-earlier levels through the first four weeks of the fourth quarter, but with 6 percent of menu price increases in effect, the brand’s traffic is already slightly negative for the quarter.

“We’ve focused on things we can change,” Twinem said, referring to a different promotional menu for lunch, increased advertising planned in November and December after the election, and a new service initiative involving “guest experience captains” on the floor. The chain also will continue testing a flexible-pricing menu for its chicken wings, in which orders are sold not by number but by descriptors like “snack,” “meal,” “platter” and “feast.”

New pricing structure in test

Costs for chicken wings were running $2.07 per pound in the first part of the fourth quarter, rising from $1.42 in the same period a year earlier, and are not expected to moderate until after the Super Bowl next February. As such, Buffalo Wild Wings is continuing to test its new pricing model at 60 restaurants with a goal of putting it in place systemwide next year.

“It’s going to take us through the end of the fourth quarter to get a feel for trends,” Twinem said, “but you have to have multiple visits for somebody to really understand how it’s going to affect their behavior.”

Chief executive Sally Smith said Buffalo Wild Wings is committed to taking the plan to all its restaurants, but have not set a definite timetable for the rollout in order to train its staff on the new pricing structure correctly and to figure out the best weight per portion of wings.

“It’s a go regardless, and I don’t think we’re going to get pushback on it from our guests,” Smith said. “Our goal is to recoup some of the lost margin on cost of goods by moving to this flexible portion.”

The new menu structure, in which the normal six-wing smallest order is now called a “snack” order and could have as few as five or as many as seven, depending on the weight of each wing, is expected to be neutral to the average check.

“We did leave the menu pricing similar,” Twinem said. “In the future you could make a menu price increase on that if you chose to, but the test is being done more from the cost of sales side, not menu price side. … I don’t believe we’ll see an average check lift, unless we see it change people’s buying habits.”

Buffalo Wild Wings took a systemwide increase in July, and then rolled out an additional price increase at different points in different markets in August. The company then raised the price of the Wing Tuesdays promotion from 50 cents per wing to 60 cents per wing.

“It’s not driving traffic out of the restaurants,” Smith said. “The sales on our wings exceed the price increase by a significant amount. Our operators and managers in the store are the first ones to raise their hands if they hear comments about pricing. The fact that we rolled it over time and didn’t feel pushback gives us confidence that [the slowdown’s cause] wasn’t and isn’t price.”

Other initiatives take flight

Though guests are tolerating Buffalo Wild Wings’ price increases and the new menu structure for wings is still in test, the brand has several other sales-driving programs ready to roll out in the fourth quarter and early in 2013.

The chain will switch out an ineffective promotional menu insert this November, as the current insert this fall failed to drive sales of higher-margin appetizers and shared entrees as much as the promotional menu did a year earlier.

Buffalo Wild Wings also will begin its holiday gift card initiatives earlier this year and has added a new channel for selling those cards. A deal with several grocery store chains will put Buffalo Wild Wings gift cards into 11,000 more stores this winter.

The first location of the chain’s new prototype, which will be the basis for new builds and remodels in 2013, is scheduled to open in the fourth quarter. Smith said Buffalo Wild Wings’ expansion pace has the brand on track to open its 1,000th unit by the end of next year.

The company also announced the introduction of "guest experience captains," a major service initiative that is currently is in test in 100 locations. Under the new program, units will still have a front-of-the-house manager on the floor, but depending on daypart and day of the week, one or more guest experience captains would be tasked with handling guest needs beyond food and beverages.

“If you think about Buffalo Wild Wings, people come in to watch the game, and there are different games they want to watch, and by asking our servers to attend to the games or change the channel, or explain Buzztime Trivia to the guests, we find it takes them off the things they’re best at, which is taking orders, getting drinks, and all those things that make for a great experience,” Smith said. “So we’ll have anywhere from one to four guest experience captains that will be in the restaurants to assist with whatever the guest needs. We’re doing some interactive programming, so the need for that became very evident.”

After the election, when media buying becomes less expensive and easier to secure, Buffalo Wild Wings will increase its advertising spending. “With back-weighted advertising spend in the fourth quarter…we’re anticipating positive comps,” said Smith.

For the third quarter, Buffalo Wild Wings’ net income fell 5 percent to $10.7 million, or 57 cents per share, compared with $11.3 million, or 61 cents per share, a year earlier.

Revenue increased 24.8 percent to $246.9 million, reflecting same-store sales gains of 6.2 percent at company-owned locations and 5.8 percent at franchised restaurants.

Buffalo Wild Wings operates 343 company-owned stores and franchises another 511 restaurants in 48 states and Canada.

Contact Mark Brandau at [email protected].
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