Buffalo Wild Wings: It’s Time to Go Whole-Chicken

Chicken wings are hot – and not just because of the spices eateries slather all over them. They’ve become one of the country’s favorite snacks, flying out the doors of chains like Buffalo Wild Wings (BWLD). Superbowl weekend alone, some 1.23 billion – yes, that is billion with a “b” – wings were consumed at restaurants and parties nationwide.

Oh, but there’s trouble in Wing Land, we’re hearing. Rising demand from sports fans, combined with the impact of last summer’s drought on the price of chicken feed, sent the price of chicken climbing as well. Buffalo Wild Wings saw the average price of wings it bought hit $2.07 a pound, up from $1.42 a pound in 2011. There go the profit margins, you’re thinking, or there goes sales growth if Buffalo Wild Wings jacks up prices and angers its customers.

BWLD Chart

BWLD data by YCharts

So far, actually, there’s no wing crisis. Buffalo Wild Wings profits have continued to grow; most recently, it reported fourth-quarter earnings of 89 cents a share, up 22%, or 16 cents, from year-earlier levels. Analysts had been projecting earnings of 96 cents a share, so the stock took a walloping. It remains, however, above the lows it recorded at the height of the summer drought. But it’s a growth stock, trading at a high multiple, or PE ratio, so bad news is going to take its toll.

But let’s stop and think about chicken for a minute. Slaughterhouses and wholesalers slice it up into its various parts, sort of like Wall Street does with mortgages, and then sell breasts to McDonald’s (MCD) and dark meat to Asian countries and wings to Buffalo Wild Wings. Overall, the wholesale price of chicken roughly tripled since 1980, which is to say it merely kept pace with inflation. Turns out, despite booming demand, chicken farmers and processors got more and more efficient. And businesses that sell chicken dishes to consumers have learned how to substitute one chicken part for another (notice the boom in chicken thighs in fancy, small-plates restaurants in recent years?).

Buffalo Wild Wings, too, is tweaking of the menu. Yes, per-wing prices are up at the chain, and likely nobody is fooled by menu listings that don’t quantify how many wings one gets. But plenty of people aren’t so wedded to sucking wing sauce off bone and skin – the wing experience – and for them newer menu items made out of chunks of chicken breasts, called boneless wings, are just fine. Maybe better, even.

BWLD Forward PEG Ratio Chart

BWLD Forward PEG Ratio data by YCharts

If Buffalo Wild Wings can adapt, maybe the stock’s actually cheap. As the chart above tells us, the forward PEG ratio – which expresses the company’s valuation relative to its estimated future growth – has plunged in recent weeks. Indeed, even as it released the disappointing earnings, Buffalo Wild Wings reiterated that it expects its profits to climb 25% this year, higher than the 20% earnings growth it forecast last October (on a comparable store basis). Company-owned stores reported an impressive 5.8% jump in same-store sales for the fourth quarter, significantly better than the 3.7% increase analysts had been expecting.

That same-store sales gain is important. It suggests consumers view chicken wings – despite higher payroll taxes and gasoline prices taking a bite out of disposable income – as an indulgence worth keeping while buying a new flat-screen TV at Wal-Mart Stores (WMT) might best be postponed.

Buffalo Wild Wings occupies a sweet spot in the restaurant industry. While many of its diners may have lower incomes, they are both able and willing to pay for a dining experience that is a definite notch above McDonalds or other fast food joints. That means Buffalo Wild Wings has a bit of a cushion; while its chicken prices may be rising, it can keep a lid on its other costs. And while other companies struggle to show any growth in revenue in the current slow-growth environment, Buffalo Wild Wings just announced that its fourth quarter revenues climbed nearly 38% over the previous year’s level, as it opens many new outlets.

This probably isn’t the time to turn up your nose at chicken wings – or Buffalo Wild Wings – even if the stock remains volatile as the company figures out how to boost its margins and generate a higher rate of earnings growth out of those revenues and sales.

Suzanne McGee, a contributing editor at YCharts, spent nearly 14 years as a reporter at the Wall Street Journal, in Toronto, New York and London. She is also a columnist for The Fiscal Times, and author of "Chasing Goldman Sachs", named one of the best non-fiction books of 2010 by the Washington Post. She can be reached at editor@ycharts.com.



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