Buffalo Wild Wings 2Q results positive despite inflation

Buffalo Wild Wings officials told securities analysts Wednesday they were “very pleased” with financial results for the second quarter despite excessive commodity inflation for chicken wings that shrunk restaurant-level margins 3.4 percent in the quarter, a headwind that the chain will fight the rest of the year through menu price increases and new marketing initiatives.

During the June 24-ended second quarter the company began to feel the brunt of commodity inflation as higher chicken wing prices drove a 31.6-percent cost of goods, compared with 27.2 percent in the year-earlier quarter. Traditional wings cost $1.90 per pound in the quarter, compared with $1.02 per pound a year earlier.

Chief financial officer Mary Twinem said 4.1 percent of that 4.4-percent increase in food cost was due to wing prices, and more than half a percentage point of that resulted from the fact that the wings are larger. Because the chain buys these wings by the pound but sells them individually, larger wings will make food inflation that much harder to mitigate.

As a result, Buffalo Wild Wings’ restaurant-level margins in the quarter fell to 17.5 percent of sales compared with 20.9 percent of sales in the year-earlier second quarter. However, the company's net income still rose 9.3 percent to $11.7 million, or 62 cents per share, compared with $10.7 million, or 58 cents per share, a year earlier.

In addition, revenue increased 29.7 percent to $238.7 million, benefiting from same-store sales gains of 5.3 percent at company-owned restaurants and 5.5 percent at franchised locations, as well as the performance of new units and 17 franchised restaurants that Buffalo Wild Wings purchased during the past 12 months.

Room for continued pricing increases

Buffalo Wild Wings officials said the brand had the flexibility to implement menu price increases this year to bring its food cost closer to its traditional range of between 29 percent and 30 percent.

The chain’s new-menu rollout in July contained a price increase of about 1 percent, which combined with earlier increases from January produced prices about 3 percent higher than a year earlier, Twinem said. The brand likely would take another 1-percent price hike in September when a menu extension rolls out.

Chief executive Sally Smith added that almost all company markets raised the price of the chain’s Wing Tuesday promotion from 45 cents per wing to 50 cents this year.

“We have not seen any resistance to that price increase at all,” she said, “which gives us some confidence that, should wings remain high, there’s a possibility for Wing Tuesdays [to] take another price increase.”

A longer-term strategy for managing through high wing prices would be tested this year, Smith said, in which the menu descriptions for orders of wings would convert from the specific number of wings — six, 12, 18 and 24, generally — to some new grouping like “single,” “double” or “triple.”

“So if yield becomes an issue, you can modify the quantity going into that ‘single,’ ‘double’ or ‘triple’ order,” she explained. “Although the wings are larger, they also provide additional proteins to the guest. So having five wings versus six wings, you may actually be getting more value, if you were to call it that.”

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She said in a follow-up interview with Nation’s Restaurant News that Buffalo Wild Wings’ first location in Calgary, Alberta, would open soon with this “non-numerical” menu description, and several franchisees and some corporate markets will begin testing it immediately. The goal is to have all testing complete by the time Buffalo Wild Wings prints its next new systemwide menu in January 2013, she said.

Sports schedule to prove favorable

Commodity pressure caused Buffalo Wild Wings to temper its full-year outlook for earnings growth, from a 20-percent target to a range between 15 percent and 20 percent. However, brand officials said the chain’s prospects for the top line would remain robust.

“We’re very confident in our ability to drive sales into our restaurants,” Twinem said. “We’re just not sure that commodities are going to work in our favor.”

Smith concurred, citing branding and sales-driving initiatives like the chain’s title sponsorship of the Buffalo Wild Wings Bowl, to take place during college football’s championship season in late December. The brand also will take advantage of the Summer Olympics by rolling out three new varieties of flatbread sandwiches for sharing.

During football season, the National Football League will air more Thursday night games, which officials said would benefit Buffalo Wild Wings’ traffic. The chain will bulk up its marketing spending through a 50-percent increase in the number of Fantasy Football Draft Party promotions offered at its restaurants, as well as several new radio and TV spots, and a Facebook promotion offering tickets to the Buffalo Wild Wings Bowl as a prize.

“We’ve set strategies in motion to evolve our brand and ensure we remain compelling for our guests well into the future,” Smith said. “We believe that with our dedicated focus on our guest experience and our concentrated efforts on operational excellence and profitability, we will continue to expand the Buffalo Wild Wings brand across the globe.”

To that end, Buffalo Wild Wings also announced its first international-development deals outside North America, including one 22-unit agreement for Saudi Arabia and the United Arab Emirates, with options for four additional Middle East countries, over the next six years. Another pact for four locations in Puerto Rico by 2016, the first of which is scheduled to open next year, also was announced.

Minneapolis-based Buffalo Wild Wings operates or franchises 837 restaurants in the United States and Canada.

Contact Mark Brandau at mark.brandau@penton.com.
Follow him on Twitter: @Mark_from_NRN