“We faced challenges last year, but we maintained a disciplined approach to ensure our long-term success,” chief executive Sally Smith said during a fourth-quarter earnings call with analysts. “Even as we dealt with higher-than-expected cost of sales, we continued to invest in our future success.”
For the quarter ended Dec. 30, 2012, Buffalo Wild Wings’ net income grew 22.3 percent to $16.7 million, or 89 cents per share, compared with $13.6 million, or 73 cents per share, a year earlier.
Revenue increased 37.8 percent to $303.8 million, reflecting same-store sales gains of 5.8 percent at company-owned locations and 7.4 percent at franchised units.
Full-year net income grew 13.6 percent to $57.3 million, or $3.06 per share, compared with $50.4 million, or $2.73 per share, in fiscal 2011. Full-year revenue rose 32.6 percent and broke the 10-figure milestone for the first time at $1.04 billion, compared with $784.5 million a year earlier.
Same-store sales rose 6.6 percent at company-owned restaurants and 6.5 percent at franchised locations for the year.
Restaurant margins fell to 17.3 percent of sales on a comparable 13-week basis with the fourth quarter of 2011, when margins were 19.3 percent. Higher costs for food and labor in large part caused the contraction, said chief financial officer Mary Twinem.
Food costs rose 2.6 percent from a year earlier to 32 percent of sales in the fourth quarter, Twinem said, driven by a 70-percent increase in the brand’s cost per wing from a year earlier. Traditional wings cost $2.07 per pound, an increase of 65 cents from the prior year, but larger wings also yielded fewer wings per pound, she said. For the first two months of 2013’s first quarter, wings are averaging $2.13 per pound.
Fourth-quarter labor costs also rose slightly, an increase of 0.3 percent from a year earlier to 30.2 percent of sales, Twinem said.
Managing through menu, pricing
To help manage higher food costs, Buffalo Wild Wings is changing the way it sells wings, which it procures from suppliers by the pound but currently sells in discrete quantities on the menu.
The chain’s test of a new pricing system, which serves wings in variable-size portions based on weight rather than a fixed number of wings, is in place at 64 locations, including both company-owned and franchised units, Smith said. Instead of emphasizing the number of wings in each order, according to Smith, orders might be described as “single, double and triple” or “snack, platter and meal.”
The process of assessing the system is taking slightly longer than anticipated, but Buffalo Wild Wings likely would makes its final decision on the pricing structure some time in the second quarter, ahead of a new menu rollout set for August.
“We just want to get that right,” Smith said. “We haven’t been getting pushback [in test marketing]. I think a lot of it has to do with how we explain to our guests … whether we’re serving five wings for a small order or six wings and making sure that the guest understands.”
The chain did not increase menu prices early last year, when 2012’s record-high wing costs followed record lows from 2011, but by the third quarter, “there was no other way to cover the cost of the product,” Smith said. The brand ended up taking about 6 percent of pricing increases for all of 2012.
For 2013, “we need to be able to highlight [wings] as a premium product” in menu descriptions, Smith said, in order to head off more significant price hikes.
“We’re looking at how we describe it as a fresh product, never frozen, educating the guests on the attributes of a fresh product and highlighting our sauces, so that it’s still seen as a value — but if they’re coming for wings, they’re getting a really great wing,” she said. “So I think we have some opportunity there.”
The chain’s new service model, which relies more on teamwork among servers and features a “guest experience captain” who oversees the sports-watching aspects of a guest’s visit, is in place at 100 company-owned restaurants, Smith said.
“While we are confident this service strategy builds incremental sales, we did experience higher labor costs in the fourth quarter,” she said. “We’re continuing to refine this model to make it scalable before we proceed with a systemwide rollout.”
Refinements principally involve tweaking the number of hours employees work as the locations adopt the new service model, some interactive gaming and a permanent promotion like the Blazin’ Challenge, where a guest can attempt to eat 12 wings covered in Blazin’ sauce in six minutes.
Another investment made throughout 2012 that inched labor costs up because of training was a rollout of a new point-of-sale system to all company-owned stores. However, Twinem said it should pay dividends in the future not only for its back-office reporting for regional managers but also for its eventual guest-facing qualities.
“It was key to get that infrastructure in place so we can integrate online ordering, so that we can use tableside ordering, either by the guest or by our servers, get tableside pay, and start using tablets in a way that we can incorporate both ordering and gaming together,” Twinem said.
Smith also said Buffalo Wild Wings would be open to making small investments in one or several outside restaurant companies as a way to acquire another growth vehicle for corporate employees and franchisees, but she reiterated that Buffalo Wild Wings would not be interested in a turnaround situation or a medium-size chain.
“We think we can invest in several different emerging brands and hopefully look for passionate founders that are interested in growing their brand,” she said. “But [we require] that it works within the guardrails of being franchise-able, [having] the ability to grow nationwide and being in segments that are not quick service and not fine dining.”
At the end of the fourth quarter, Buffalo Wild Wings operated 381 restaurants and franchised another 510 locations in 49 states and Canada.
Contact Mark Brandau at firstname.lastname@example.org.
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