Analysts upbeat on Buffalo Wild Wings

Investors have signaled upbeat expectations for Buffalo Wild Wings Inc.’s stock the past few weeks as easing commodity pressures, a second location of the chain’s “Stadia” prototype and the company’s recent investment in three-unit PizzaRev have converged.

In morning trading on Tuesday, Minneapolis-based Buffalo Wild Wings’ stock opened at $90.35 per share and rose to $92.11, a high for the past year. Several securities analysts have now revised their price targets for the brand’s share price to $100 or above.

Jeffrey Bernstein of Barclays Capital wrote in a research note released Tuesday that his firm is raising estimates for first-quarter earnings at Buffalo Wild Wings to $1 per share, up 2 cents from the firm’s prior estimate. "Comp growth remains industry leading, which, coupled with signs of easing wing prices, leave us bullish in 2013,” he wrote.

Because Buffalo Wild Wings is in its “quiet period” before it is scheduled to report first-quarter earnings April 29, the company could not comment on commodities market fluctuations, performance of its new prototype or the PizzaRev investment, a spokeswoman confirmed. But comments in recent research notes from Bryan Elliott of Raymond James & Associates Inc. and Conrad Lyon of B. Riley & Co. echoed Bernstein’s assessment that Buffalo Wild Wings stands to benefit in the near term and long term from its recent investments and the retreat of record-high prices for chicken wings.

Wing prices begin their descent

Record-high prices for jumbo chicken wings were the story for much of 2012 for Buffalo Wild Wings, which still managed to grow full-year net income by 13.6 percent to $3.06 per share in 2012, despite restaurant margins falling around 2 percent last year.

In the fourth quarter, for instance, margins decreased to 17.3 percent, compared with 19.3 percent in the fourth quarter of 2011, due in large part to higher food costs from inflation for bone-in chicken wings, which typically account for 20 percent of Buffalo Wild Wings’ sales mix.

In Lyon of B. Riley's note, in which Buffalo Wild Wings’ share price target was raised from $94 to $100, he wrote that wing prices peaked in late January this year, at $2.12 per pound, and since have declined more than 60 percent to the low-$1.30-per-pound range.

“Undoubtedly, a weak consumer and seasonality hurt the demand side, but we believe much of the weakness resulted from abnormally high cold-storage inventories that were piled up by bar-and-grill operators fearing a supply shortfall,” he wrote. “That shortfall never arose, and that supply continues to get worked through the system.”

In setting a new target price for Buffalo Wild Wings’ stock at $100, Elliott of Raymond James & Associates noted the same factors leading to an ease in chicken wing prices and that he was “optimistic that these supply-demand dynamics can sustain, which could lead to further wing price declines and upward estimate revisions [for Buffalo Wild Wings’ earnings].”

He added that a reversal in recent price declines for corn could drive prices back up for chicken wings because many suppliers feed their flocks corn.

A rumored nationwide limited-time launch of chicken wings at McDonald’s might also pose a risk to Buffalo Wild Wings’ commodity relief, Elliott wrote. However, he conceded, “we believe McDonald’s inventory build has been largely reflected in market prices over the last several months and thus should not be a material risk once the product is launched, assuming typical LTO duration.”

Pizza could rev up expansion

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Because the three locations of PizzaRev, the Los Angeles-based fast-casual chain in which Buffalo Wild Wings bought a minority stake in March, were located near B. Riley’s offices, Lyon and his associates made several unit visits to the brand and came away with the impression that PizzaRev is “much more than a hit-or-miss private-equity-like stake” for Buffalo Wild Wings.

“We believe this investment was more of a strategic partnership aimed at leveraging Buffalo Wild Wings’ existing infrastructure of distribution, real estate, franchisees, and potentially marketing,” Lyon wrote.

He estimated average unit volumes to run between $1.2 million and $1.8 million at the PizzaRev locations he visited, and disclosed that he heard speculation that margins could be as high as 30 percent for the nascent brand.

“If such unit economics are true and early success continues — each time we visit we see a constant flow of traffic — we can certainly see the attractiveness of franchising the concept,” he wrote.

He conceded that the fast-casual “better-pizza” space may be getting overbuilt, especially in Los Angeles, with 800 Degrees, Fresh Bros., Pieology and Pie Five Pizza, but Lyon argued that no one brand has yet grabbed a dominating market share or scaled up to the size of what Buffalo Wild Wings could do.

“This is where PizzaRev has an advantage with Buffalo Wild Wings,” he wrote. “Conceivably, PizzaRev has the ability to scale fast and first to attain a dominant position and brand awareness with the support of Buffalo Wild Wings.”

'Stadia' prototype just the ticket

Reflecting upon a visit to Buffalo Wild Wings’ second location of the Stadia prototype, which opened April 1 in San Diego suburb Santee, Calif., Lyon wrote that the new restaurant, which is designed to mimic the scene of a giant sports stadium, “is a massive improvement over the existing prototype with respect to evolving the guest experience by adding more authentic sports elements.”

“While early,” Lyon wrote, “we think the prototype appears an excellent vehicle not only to enhance the guest experience but to increase Buffalo Wild Wings’ dominant position in the category.”

He pointed out several features that improved the flow of the front- and back-of-the-house. Those include a more centralized bar area that becomes the focal point of the dining room, seating zones broken up that allow guests to choose an optimal level of noise, and a stadium-like giant plasma screen over the bar that is “an in-your-face, unmistakable fixture adding to a more authentic live-game experience.”

Buffalo Wild Wings opened the first Stadia prototype near Cincinnati last December.

The company operates or franchises more than 900 casual-dining restaurants in the United States and Canada.

Contact Mark Brandau at [email protected].
Follow him on Twitter: @Mark_from_NRN